An Unholy Intersection Of Good Intentions, Bad Politics And Shady Business
February 18, 2013 - 8:39 pm
The fliers touted new ballfields, science labs and modern classrooms. They didn’t mention the crushing debt or the investment bank that stood to make millions.
In early 2008, residents of Placentia and Yorba Linda approved a $200 million school construction bond after reading those fliers and being assured repeatedly that “their money will be spent wisely.”
What happened instead was that Measure A led to a debt so large and long lasting that it mortgaged the future of their children’s children.
With no public discussion, the school board had hired George K. Baum & Co. and its staff of political strategists to help push the measure through so the district could continue an ambitious building spree.
After the election, the board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount – $280 million – to repay.
Those bonds, known to Wall Street traders as capital appreciation bonds, are like a loan for which no principal or interest payments are made for 35 years. Interest is charged on a growing pile of unpaid interest, causing the balance to balloon.
“It’s another method of pushing debt to future generations,” said state Treasurer Bill Lockyer, who compares the bonds to “payday loans.”
“I just don’t understand how these board members got away with this,” said Alexandria Coronado, a former member of the Orange County Board of Education. “These people need to be recalled.”
This is yet another story of wandering through a bureaucratic labyrinth that ostensibly has rules in place to prevent such a thing but finds people getting lost along the way.
The story of how Baum pushed California schools into complex bond deals that charged payments to future taxpayers is one of naïve public officials, sophisticated financiers, and laws, rules and guidelines ignored:
•It is illegal for California school officials to hire political consultants with public funds to help pass bond measures. Using the bank’s political consultants is not a legal way around that law, according to the state Office of Legislative Counsel.
•Finance experts advise school districts to sell bonds through public auctions to get the lowest interest rate and to employ independent financial advisers to review the details. Placentia-Yorba Linda, like most of Baum’s California school clients, did neither.
•State law requires that donated consulting work on an election be reported as an in-kind, or non-cash, political contribution. Baum did not disclose its consulting role on state campaign filings in three elections the Orange County Register reviewed.
Forget the long term repayment nightmare for a moment, there are already negative consequences.
Since Measure A passed in 2008, Placentia-Yorba Linda officials have struggled to find enough money to operate classrooms.
Later that year, the district eliminated some elementary music programs. It has repeatedly forced teachers to take days off without pay. And it has increased class sizes. Before the election, there were enough teachers to have 20 students in each first- and second-grade class, according to budget documents. Now those teachers have 30 students.
The district made those cuts to cope with reduced state funding even as construction firms continued with what officials call a “massive modernization program.”
The district has built four new schools since 2008. Still under construction is a $12 million concert hall that will feature a glass lobby and stage large enough for a 230-member choir.
Daily costs are eating up the district’s general fund balance, its reserve for operations. In December, the district told the state it may not meet its bills in the next two years.
No bond money can pay for teacher salaries and other operating costs.
The district superintendent who is currently refusing interviews issued a statement telling everyone not to worry.
Yeah, that should help.