In case readers haven't heard about Capital Appreciation Bonds (CABs) before, Michael Brady, Assistant Superintendent for the School District spoke about these financing arrangements at the November 16 public meeting on the proposed Alan Harvey Theater renovation to an audience of 30 or so community members.
CABs do not pay investors or charge taxpayers for the initial years after the bonds are sold. Instead, compounding interest charges accrue, and are added to the prinicipal debt owed. At some specified time, property taxes go up and taxpayers start servicing this debt.
This arrangement lets the public benefit from immediate funds for renovations while giving us a tax holiday and consequently deferring payments to the investors. For the priviledge of payment deferrals, investors charge a premium interest rate until maturity.
Think of credit cards. Even if the company offers a "no payment until" teaser, it probably raises the interest rate. And if someone skips the minimum payments, the company would call them financially irresponsible or delinquent and raise their interest rate even more.
How do these bonds compare against the standard Current Interest Bonds (CIB) in which interest charges are paid as they accrue? If one is concerned about the total taxes to be paid for the life of the bond (until maturity), repayment ratios capture this amount as a multiplier of the original bond amount.
Mr. Brady explained that both these kinds of bonds are options for the Alan Harvey Theater renovation, with a CIB repayment ratio being between 1.3 and 1.5. The CAB that PUSD issued in August had a repayment ratio of 5.33 with no taxes owed until year 14!
That August CAB costs 3.55 times the cost of a CIB issued today. If a CIB is an option for the Alan Harvey renovation, why would we not insist upon it?
The School Board will make the decision in early January. Please educate yourself on this issue and voice your opinion to the Board.
I have created a web calculator that could be used to get an estimate of the tax consequences for each of these two types of bonds, see https://HariTitan.com/bond-comparison.pdf for more details.
I've worked in the credit card and related financial products for over 10 years, primarily functioning as a Big-Data Scientist. I'm also the inventor of U.S. Patent #US5745654 used in the Fair Isaac credit card fraud prevention system.