Schools Avoid Costly Error

Palo Alto Daily Post

February, 2013 

Board thanks resident whose advice saved hundreds of millions of dollars

 ANGELA RUGGIERO Daily Post Staff Writer

Palo Alto school board members are praising a resident who helped them avoid making a mistake regarding school construction bonds that could have cost taxpayers hundreds of millions of dollars.

"Todd Collins, I thank you so much," said board member Camille Townsend at Tuesday's meeting, a sentiment echoed by other board members.

The school district ran into trouble a couple of years ago during the recession when property values stopped increasing as fast as the board had anticipated when it sold bonds for classroom and building renovations.

Less tax money was coming in than the board had expected, yet it still needed to repay the bonds. So the board was faced with the choice of raising property taxes to make up for the shortfall or issuing Capital Appreciation Bonds, or CABs - which have been compared to payday loans. To school boards, CABs are attractive because they provide money immediately and the district won't have to pay anything for several years. But that sharply increases the amount of interest the district would have to pay.

In San Diego County, the Poway Unified School District decided in 2011 to issue CABs to borrow $105 million and has now discovered that it owes $982 million to be paid over the next 50 years.

The Palo Alto school board was about to go down the same road as Poway until Todd Collins, a Palo Alto resident who works as a private equity manager, spoke up at a June 2012 board meeting.

He said it didn't make sense for the district to issue long-term CABs that could cost up to 10 times as much in the long run. That would have amounted to hundreds of millions of dollars in additional interest.

"Upon reflection and analysis by (the district's bond consultant) and myself, we came to the realization that it was basically a bad deal, especially if you had the alternative," Collins told the Post.

Tax increase Instead, the board voted in June to raise the tax rate by 35% - from $44.50 per $100, 000 of assessed property value to $60 per $100, 000 of assessed value. It wasn't a popular decision, but it beat paying 10 times the amount owed in interest.

Collins told the Post that the main appeal of CABs was that the board wouldn't have to raise the tax rate. Also, districts don't start repaying CABs for up to 10 years, essentially "kicking the can down the road," as he put it, and leaving the task of repaying the CABs to a future generation.

Board member Melissa Baten Caswell said Tuesday she was able to breathe easier after the board took Collins's advice.

Board president Dana Tom extended his thanks to Collins, too, referring to the harsh criticism some school boards in the state, such as Poway, have received after issuing CABs.

Costly borrowing While the board avoided CABS, the conventional form of borrowing Palo Alto is doing is still expensive. The bonds in question were approved by 77.5% of Palo Alto voters in 2008.

The amount of the bond issue was $378 million, but even with the traditional bond issue the district used, the amount that will have to be repaid is $810 million, a figure that includes interest and principal.

The district didn't sell the entire $378 million in bonds all at once, but in smaller chunks (called "issuances") each year. In March, the district anticipates selling $70 million in bonds. Three more issuances are anticipated after that.

The district is still paying off a 1995 bond issue. It expects to retire that debt in 2024.

Currently, taxpayers pay $95.30 per $100, 000 in assessed value for school bond issues - $60 for the 2008 bond issue and $35.30 for the 1995 bond.

School construction under way Bob Golton, the district's co-chief business official, said the district is currently spending $5.4 million on average per month for construction projects.

Part of those eight large projects include a new gym at Gunn High School for $12.5 million, a classroom and media arts center at Palo Alto High School with 36 new classrooms that will cost $37 million and a renovated football stadium at Paly for $5 million.

 

Paid for by Todd Collins for School Board 2016  (FPPC ID 1384953) | Photos courtesy Felipe Munera Savino (except as noted)

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