There’s a temptation to think of bonds that the government floats to pay for big-ticket construction projects as “play money.” You get a $20 million building and you only pay for a fraction of it — this year, at least. What a deal!
Anyone who’s voted in a municipal election has probably been asked to approve a referendum to issue bonds — which are, to put it simply, a financing arrangement in which a government agency goes into the marketplace to borrow from investors. The investors typically receive no collateral other than a promise of repayment — though defaults are extremely rare, since failing to make good on a bond would destroy the government agency’s credit rating for future borrowing.
Schools and colleges are avid users of bond financing, because they’re among the government’s most frequent builders. Colleges, in particular, never seem to run out of building money even during the worst economic downturns, believing that they must upgrade dorms, food services and fitness facilities to stay competitive for top recruits.
Bond financing is — deservedly — coming under greater scrutiny. The prolonged recession has left government agencies at all levels scrambling for funding sources; in such a climate, unsound business deals may start to look tempting.
Exhibit A: One California school district, desperate for money to upgrade aging school facilities, turned to a controversial funding instrument called “capital appreciation bonds” that greatly postpone the obligation to pay — with the tradeoff of a greatly inflated rate of interest when the bill finally comes due. Over the next 40 years, taxpayers in the Poway Unified School District are on the hook for more than $980 million to pay off bonds with a face value of $105 million — an arrangement that one local critic called “absolutely insane” and compared, unfavorably, with loansharking.
The rate of interest and the payment terms of government bonds are indisputably matters of public record, information that should be made readily available on request from the agency. For a bigger-picture statewide perspective, state comptroller’s offices generally keep track of the overall level of debt carried by government agencies and how it is trending (almost always, up).
Just as with taking out long-term, high-interest loans for personal household expenses, increased reliance on bonds carries a cost. The Houston Chronicle recently reported that the City of Houston spends more than $800 million a year — 18 percent of its annual budget — just paying off bonds.
(At the college level, bonds typically aren’t floated at the local campus level. They’re approved either by the state legislature or by regional boards of trustees, and it’s their records that will tell the story of how much debt is being incurred, what the annual payments amount to, what interest rate is being paid, and how the proceeds are being spent. To get at that information, the budget offices advising the governor and legislature are go-to sources, as well as the state auditor’s office.)
If you’re writing about K-12 schools in California, a huge amount of legwork has already been done for you by the staff of a terrific nonprofit news site, Voice of San Diego. Reporter Will Carless and the Voice team have put together a very easy-to-follow tutorial on how to locate high-interest bonds floated by your district — and have already gathered the last 12 years’ worth of results from California in a searchable Google spreadsheet.
In addition to asking just for dollar amounts, look at how bond-issue proceeds are being spent. Bonds are meant to pay for “capital improvements,” long-lasting assets like buildings. It may be fair and financially sensible to take out what amounts to a 30-year loan to pay for a library that’s going to be used for decades — why make today’s taxpayers absorb 30 years of benefit in one giant gulp? But financial desperation is causing some schools and colleges to put much more routine expenses — like school buses — on the high-interest credit card. And that raises legitimate questions: Should taxpayers in the year 2034 still be paying for a bus that stopped running in 2029?
Part of keeping watch over government agencies’ use of bonds is knowing who stands to profit. Bond issues are a lucrative business for the investment banks that help issue them, as well as the law firms that advise those bankers. It’s like closing on the sale of a house — on steroids. There’s a roomful of people all walking out the door with checks for reasons that aren’t entirely clear. One leading banking firm, Piper Jaffray, recently reported yearly revenues of $52 billion on municipal bonds, averaging more than $550,000 per transaction.
While many of these deals are honest and above-board, there’s at least the potential for government agencies to steer profitable transactions to politically connected bankers and law firms. The practice of awarding underwriting business to banks that help pay to get bond issues passed by the voters is so institutionalized that it even has a name: “Pay to play.”
The amount of “debt service” that a school district or college is paying out each year — which should be readily apparent from the agency’s budget — is a good starting point for a beginning reporter to ask about how bonds are being used and whether borrowing is getting out of hand. For deeper and more advanced reporting, consider also asking how much is being paid out to bond counsel (outside law firms) and to underwriters (banks), and find out who they are and how they were chosen.