Our View: Yuba trustees must know fine print on bonds
• If you were borrowing for a home and you took out a $200,000 mortgage to be paid over 40 years at 4 percent, you'd end up paying just a hair more than twice the amount, or just more than $400,000.
• If you borrowed the same amount for the same number of years at 8 percent, you'd pay just over three times as much.
• At 13 percent, you'd pay just over five times what you borrowed.
• You'd have to want a house pretty badly to borrow $200,000 at 33 percent over 40 years — at that rate you'd pay 13 times what you borrowed.
Almost 13 times the money borrowed.
That's what the Yuba Community College District will end up paying back over 40 years for 2011 capital appreciation bonds.
Thanks to a $190 million voter-approved measure in 2006, the trustees in April 2011 agreed to borrow $4.6 million, which will cost the district $58 million once it is paid off. The $4.6 million was just a small part of a $35 million bond sale approved by the board at that time. The additional $30 million will cost the district $44.8 million in interest.
A loan shark couldn't make a better deal. What's frustrating is that trustees aren't making a very public effort to rectify the situation. They made a costly, shortsighted error and taxpayers will be paying quite a price. They should take responsibility.
We don't think anyone on the board of trustees read the fine print. Yuba County Treasurer-Tax Collector Dan Mierzwa said he voiced his opposition to the capital appreciation bond with the district's financial adviser and Trustee Jim Kennedy before the sale was completed. The conversation ended, he told the Appeal-Democrat, with the understanding the capital appreciation bonds would be removed from the sale. They were not.
We sympathize with the Yuba College board wanting to get projects done — borrowing money for big purchases is a fact of life almost every home or car buyer can appreciate. The college district wants to take care of business and the needs of students — investing through bonds is expected. But not at those kinds of rates.
Yuba College wasn't the only public entity to go for this capital appreciation bond ride. According to the Los Angeles Times, 200 school districts across the state took out these types of bonds since 2007, to the tune of $2.8 billion. Collectively, to pay off these bonds, it will cost $16.3 billion in principal and interest.
We're curious about the reaction voters may have when the college board comes asking again for money. And we won't blame voters for being wary of ever again giving an open-ended approval.
The district in future bond requests, should spell out the terms and state the maximum rate the board will agree to pay on bonds.
Also, our college and school boards must have some objective third parties read and interpret the fine print, understand the costs and clearly explain the terms. The current mix of trustees has changed little from the board that approved the $4.6 million bond. They are intelligent people. It includes a businessman or two and a former county supervisor. The majority are either current or retired educators at either the community college or state university level. Still, clearly, they need advice. (The college district's financial adviser, Jeff Small, said he explained it all. Trustees say he didn't.)
Board chairman Brent Hastey said in September that trustees placed their faith in staff to get as much money as possible from the sale of the bonds. Perhaps they have become too reliant on what they are told and don't believe they need to read the fine print. Unfortunately, that's where the devil hides. They had better have a good adviser. Even Chancellor Douglas Houston, who was hired as the bond sale was occurring, admits he didn't read the documents, relying instead on analysis prepared by his predecessor.
We're not looking to bash the board, because we believe they're looking to help our community thrive. But they are compensated for their public service: taxpayers pay $4,000 per year for each of the seven board members, and each is also eligible to receive district health and life insurance benefits worth up to $15,000 annually.
The board must know that it has to do its due diligence, and if necessary, pay extra for an outside financial adviser who will be able to warn board members they may be on the verge of making a financial mistake.