McKinleyville Union Superintendent Michael Davies-Hughes sends the following statement to the Lost Coast Outpost. It’s a response to a story we ran Friday about the district’s use of capital appreciation bonds, a risky, high-interest type of debt that has swept California school districts over the last few years and is the subject of a great deal of outrage from legislators and the public all over the state.

You can find McKinleyville Union’s actual bond issue here.

Davies-Hughes writes:

Over the past several months there has been increased scrutiny for the use of Capital Appreciation Bonds (CABs) by school districts and other public entities in financing school construction projects. The information below reflects the general obligation bond program of the McKinleyville Union School District.

In June 2008, voters approved the passage of Measure C - a general obligation bond with an authorization amount of $14,000,000. Proceeds from the bond issuance were to be used for much-needed improvements to the three schools within the McKinleyville Union School District (MUSD). At that time the State of California provided limited funding opportunities for school capital improvements, and a bond measure was a logical step in ensuring that the District could modernize the aging buildings and upgrade other infrastructure within the District.

When the first series of bonds ($7,000,000) were issued in March 2009 the California housing market was healthy and the municipal bond market was stable. In this environment it was prudent to use a 25-year Current Interest Bond (CIB) at an interest rate of 5.5%. Unfortunately, by the time the Series B bonds were issued in March 2011, the housing crisis had put such strong downward pressure on assessed values the remaining MUSD projects’ needs were more than the tax base could support. Additionally, interest rates were on the rise as the bond sale date neared. The credit rating of the State was poor, and the bond market environment was unstable.

With the bond projects in the District well underway (both Morris Elementary School and Dow’s Prairie School completed, and McKinleyville Middle School ready to begin) the board recognized the need (for necessary capital to complete the projects) to move forward with assumptions that allowed for the full $7,000,000 second series of bonds to be issued. Only $4,000,000 would have been authorized at that time using Current Interest Bonds (staying under the $30 per $100,000 assessed value tax rate limit required under Prop 39) - an amount insufficient to complete the projects. Therefore, on February 9, 2011 the MUSD Board of Trustees took action to approve the issuance of a 40-year Capital Appreciation Bond (CAB). The board recognized that these CABs had a high interest rate (8%), but also understood that these bonds could be restructured well before the debt service escalation would be realized.

McKinleyville Union School District intends to be a responsible steward of the monies generated through the passage of Measure C and its tax burden on the residents of McKinleyville. To this end, it will seek restructuring of the bonds to stop the accretion of interest and reduce the debt service payments in the long term.

Numbers at a glance:

Series A Bonds                                                 

  • Authorized Amount:  $7,000,000                      
  • Term:  25 Years                                                
  • Interest Rate: 5.5%                                                
  • Debt Service Total: $14,353,212                        
  • Debt Repayment Ratio:  2.05:1                        

Series B Bonds

  • Authorized Amount:  $7,000,000
  • Term:  25 40 Years
  • Interest Rate: 8%
  • Debt Service Total: $71,626,331
  • Debt Repayment Ratio:  10.2:1

Bond Program as a Whole

  • Authorized Amount: $14,000,000
  • Debt Service Total: $85,979,543
  • Debt Repayment Ratio: 6.14:1