Tonight: What will new school look like, and how much should it cost?
Original post made on May 28, 2013
Read the full story here Web Link posted Tuesday, May 28, 2013, 7:11 AM
on May 28, 2013 at 11:51 am
After a bit of research.
More important than the construction cost and amount of the bond, is the type of bond, length of the payback period and the full cost of paying off the bond.
Many districts are using Capital Appreciation Bonds(CABs) rather than the normal municipal bonds. CABs are similar to zero coupon bonds and not the more typical current interest bond. They are issued for periods well in excess of the normal 25 year municipal bond. A normal payback for a municipal bond is 2 to 3 times the amount borrowed by the municipal bond issuer. Capital appreciation bonds are usually for 40 or more years with th compounding deferred interest resulting in a payback of 3.5 to 23.4 times the amount borrowed. Effectively this passes on the debt to a new generation and imposes on that generation the consequences of a possible default.
Currently the Menlo Park City School District has two Capital Appreciation Bonds. The first is for a principal of about $13 million with a total debt service of about $55 million. The second CAB, is for a principal of about $24 million with a total debt service of about $90 million.
If the O'Connor site bond principal is $30 million then the total debt service on a CAB would be a minimum of about $120 million.
CABs usually are not callable nor do they require a sinking fund**, so once issued they are a permanent fixture in the school district, creating a serious problem for a future generation of homeowners. They are carried on the books of the school district at their principal value: the discounted amount for which they are first issued, not their payoff costs. The true cost of the bonds would not show on the school district's balance sheets.
**With a sinking the issuing school district is less likely to default on the repayment of the remaining principal upon maturity since the amount of the final repayment is substantially less.