Swelling Districts Find Costly Way to Grow Campuses

Aug 31, 2014 by

In 1994, the Leander school district had 7,200 students and was growing fast. To handle the hundreds of additional students expected in the coming year, the Central Texas district embarked on a building binge, including the construction of its sixth and seventh elementary schools.

Twenty years later, the district remains one of the most popular destinations for students in Texas. Enrollment has more than quintupled to 36,750 and is projected to top 50,000 by 2023. The district now has 24 elementary schools and, officials say, needs at least five more.

“We’re growing by 1,000 to 1,200 children every year, which, if you think about it, is pretty much a middle school every year, or an elementary school and a half, or half a high school,” the assistant superintendent for business and operations, Ellen Skoviera, said.

Handling this growth is not cheap. Leander has $1.7 billion of debt, more than would normally be allowed under state law. To get around the limit on debt, Leander and other districts have relied heavily on a controversial financing tool called capital appreciation bonds. Their upside: No payments are required for years, even decades. Their downside: They cost more and may saddle taxpayers with a massive IOU far into the future.

“It’s getting the benefits now, but not making any kind of sacrifice,” state Sen. Juan “Chuy” Hinojosa, D-McAllen, a critic of the bonds, said. “It is bad public policy to commit that kind of debt to future generations. It’s speculation.”

The difference between more traditional bonds and capital appreciation bonds is principally about timing. With a traditional bond, a local government can borrow money, then pay off the principal and interest in installments until the debt is retired. With a capital appreciation bond, installment payments are not required for the duration of the bond. The district must, however, pay the entire principal plus years of compounded interest when the bond reaches maturity in 30 or 40 years. The avoidance of installment payments comes at the cost of higher interest, potentially as much as 10 times the amount borrowed compared with a traditional bond, according to public finance officials.

“Meryl votes it in today, and then Tom, Dick and Harry comes in and, boy, are they in for a surprise,” Comptroller Susan Combs said, explaining her dislike of the bonds.

School districts that have used capital appreciation bonds say they are hamstrung by what is known as the “50-cent test” — a state law that limits the amount of property taxes districts can assess to cover debt service costs to 50 cents per $100 of assessed value. By pushing required payments far into the future, capital appreciation bonds allow districts at or near the cap to issue more debt without having to increase their tax rates.

“I think if the 50-cent limit wasn’t there, we could have found some alternative routes,” said Michele Trongaard, chief financial officer of the Wylie school district, which issued $79.4 million in CAB debt in the 2013 fiscal year, more than any other Texas school district that year, according to state records. The North Texas district’s tax rate is $1.64, with 47 cents tied to debt service, very near the state cap.

Public entities in Texas have used the bonds for decades, often to refinance existing debt and avoid abrupt spikes in the tax rate. But in recent years, critics have raised concerns as some fast-growing school districts have used the bonds to sidestep the 50-cent test and sharply increase their overall debt.

“We do have a small number of districts where CABs have become a large portion of their debt portfolio, and that’s pretty much because of the 50-cent debt test,” said Michelle Smith, executive director of the Fast Growth School Coalition.

Leander has issued more debt through capital appreciation bonds than any other Texas school district in the last decade. It’s also become the most vocal defender of CABs as prudent fiscal policy for fast-growth districts, though that role has come a bit reluctantly.

“We don’t want to be known as the district with debt,” Skoviera said. “We’ve always been known for our academic excellence, and that’s why people come here.”

via Swelling Districts Find Costly Way to Grow Campuses | The Texas Tribune.

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