Creative Financing for School Renovations

By Hari Titan

This examines the financing options provided to the PUSD School Board on December 11, 2013.

The "no payments until" option charges interest on the unpaid interest, also known as compounding interest. These bonds are known in the industry as Capital Appreciation Bonds (CABs). Bond consultant KNN calls our CAB option a "Wrap-Around Bond" because the first payment in 2018 is set to match the payoff of an earlier bond, to try to keep total debt service tax rate for all school bonds level. These deferred payments result in a higher interest expenses totaling $6.8 million.

One group of Piedmonters would definitely benefit from the CAB option ... those who move out of Piedmont before 2018! The rest of us will pay more in later years to buy the "Wrap-Around."

The most vocal supporters of the CAB option on the Board cite possible advantages to the rest of us: 1) keeping total tax rates level; 2) forecasted inflation making future dollars "cheaper"; 3) paying down high-interest debt; and 4) the possibility of parlaying the deferred taxes into higher yielding investments.

The official rate on the CAB does not include the effect of compound interest. The CAB option charges the same total interest as a conventional 15-year Current Interest Bond (CIB) with a 7.97% interest rate. This suggests that if your investments yield more than this rate or your credit card debt is higher than this rate, it may make sense for you to support a CAB.

However this personal opportunity cost misses the opportunity cost to the School District. By paying an extra $6.8 million in finance charges for the CAB option (thus affording some financial flexibility for a limited time), those funds cannot be used for other renovation projects we will need in the future.

I personally preferred the CIB option but wanted taxpayers to see which option is best for themselves. I modified my web-based tax comparison tool to allow users to enter their property assessments and get a tax comparison: HariTitan.com/bond-tax-comparison.htm

The School Board wants to hear from you on the structure of these debt servicing options. Please email all the School Board members. I've also setup my website to compile community sentiment on this issue. Please complete the survey after registering on HariTitan.com.