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Apodaca: The debt worry du jour

December 15, 2012|By Patrice Apodaca

A media frenzy has erupted over a controversial type of debt financing often used by California school districts, including Newport-Mesa, to pay for construction projects.

So-called capital appreciation bonds, or CABs, have become the debt worry du jour, thanks to dire warnings by some politicians and policy wonks, and to a flurry of recent press reports.

The concern is so great that California Treasurer Bill Lockyer recently said that school boards and staffs that approved CABs "should be voted out of office and fired."

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The main reason CABs are considered so risky is that unlike current-interest bonds, they require no repayment for many years, sometimes decades. All the while, interest accumulates, and the pushed-down-the-road amount owed swells to many times the original sum.

But does Newport-Mesa's issuance of CABs qualify as foolhardy?

Debt financing can be an extremely arcane subject, and it's tough to wade through some of the sticky details. But to find an answer to the above question, it's important to consider the history, as well as those confounding details, of the district's use of debt. After that, you be the judge.

In 2000, voters approved Measure A to help finance $110 million in repairs and upgrades needed at aging Newport-Mesa schools.

Five years later, the $282-million Measure F was passed to pay for new construction.

So far, Measure F has financed a new stadium at Estancia High School, a pool at Costa Mesa High School, the tear-down and replacement of buildings at Newport Harbor High School, and science classrooms at all elementary schools. It is also covering projects underway to build theaters and separate middle-school enclaves at Mesa and Corona del Mar High School, and stadium renovations at Harbor.

Keep in mind that this comes at a time when the state well has run dry. The last state school bond was approved in 2006, and nearly all the $10.4 billion raised has been spent. State Supt. Tom Torlakson said recently that he'd like a new bond on the ballot in 2014.

But even if approved, any amount raised would likely be a small fraction of what's considered needed for renovation and new construction. Districts would still be on the hook for the vast majority of building projects.

Back to Measure F: When it was put to voters in 2005, the district promised that it wouldn't result in increased property taxes. School officials pledged that the same tax rate as that under Measure A — about $19 per $100,000 in value — would hold.

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