Piedmont Unified School District (PUSD) has raised working capital to upgrade and rebuild K-12 school buildings with 30-year bond issuances. To repay bond investors that working capital (a.k.a. “principal”) plus interest, property owners in Piedmont are being charged a debt service line item on their property taxes. Lately, the school district has been exclusively issuing competitively priced current interest bonds to ensure the lowest total repayment cost to the taxpayer and funding new construction with a guaranteed maximum price (GMP).
Last year voters passed Measure UU which authorizes the City of Piedmont to issue bonds for a brand new aquatic facility. I endorsed Measure UU and asked to be on its bond oversight committee. Per conversations with the city finance director, I was told this committee will not be formed in time for public oversight of the structure of the new city bond. This structure will be somewhat different than that used by the school district.
Financial advisors to the city, including Hilltop Securities and the city’s own budget advisory & financial planning (BAFP) committee, recommend utilizing a modified current interest bond, called a Premium Bond. In premium bonds, the “true principal” lent to a municipality is divided into two pieces: 1) a par value of the bond that is charged a high interest rate, and 2) a premium that is not charged any interest. Both pieces can be used as working capital. However, bond legal advisors do not consider the premium as being part of the principal being lent, while financial advisors recommend looking at the “true interest rate” based on the “true principal”.
Why go through the trouble of splitting up the working capital in this fashion? The fine print of Measure UU revealed the aquatic facility was expected to cost $23 million. Issuing a Premium Bond allows the city to raise $23 million in total proceeds (a.k.a. working capital) from a bond underwriter while only disclosing $19.5 million in “principal” to the public. To enhance the aquatic center, the city finance director is preparing to raise as much working capital as the city can while charging annual property taxes $26.20 per $100,000 in assessed valuation. Interest rates have fallen since the election and the city may raise north of $25 million.
Did the public actually consent to service the repayment of as much debt as the city can raise while charging annual taxes at the maximum disclosed to the public? In reading interviews and watching public debates with Measure UU proponents Betsy Andersen and Bob McBain, I was led to believe -- as I believe others were -- that we were voting on a maximum debt of $19.5 million.