Recently, there has been press about capital appreciation bonds (CABs), and the cost of these bonds to taxpayers. CABs accrue interest which is paid in full at the time bonds mature, similar to federal government savings bonds. The Monrovia Unified School District was featured in a Los Angeles Times article focusing on this issue, and because of this, we would like to provide our local bond supporters with information regarding the status of Monrovia’s bonds. We are extremely grateful to the voters in our community for their support of bonds that have funded recent student housing projects. We take our responsibilities seriously; not only as educators of the students we serve, but also as stewards of local bond dollars.
The following provides answers to some of the most commonly asked questions about CABs.
What are Capital Appreciation Bonds and why use them?
Capital Appreciation Bonds, or CABs, are bonds in which all accrued interest is paid at the time the bonds mature, similar to a Federal government savings bond. The one-time payment at maturity includes all of the interest accumulated over the life of the bonds. Given that investors of municipal bond CABs do not receive any payments until the maturity date, they require a slightly higher interest rate to compensate for the delayed receipt of semi-annual payments.
In the case of a typical 30 year home mortgage, a buyer usually ends up paying much more than the purchase price; usually two to three times the original amount over the life of the loan, depending on the interest rate. Similarly, the repayment amount of bonds generally ends up costing two to three times the amount for which they were originally issued. In Monrovia’s case, that repayment calculation for the 1997 bond election is 2.90 and the 2006 repayment ratio is 2.40.
Districts choose CABs for several reasons:
1) School facilities will be used for many generations. CABs allow the District to spread part of the burden of paying for school facilities out to the future, giving some relief to current taxpayers who might otherwise pay what could be considered more than their fair share given the future use of these buildings to generations that will follow.
2) CABs allow schools to make the most of their General Obligation (GO) bonds by accessing dollars at the time the bond is passed, and therefore making use of the current construction costs. If it were not for the CAB portion of a District’s portfolio, construction would have to wait until bond dollars were available. In our case, it is estimated we would have had to wait years longer to access the dollars and begin construction than we were able to access using CABs. In many cases, during that delay, inflation can rise and construction costs can increase.
3) The voters in a given area likely passed the bond for student housing reasons, as was the case in Monrovia. CABs allow students to be housed in effective classroom buildings, providing a boost in the academic experience for current students, rather than waiting years to commence construction.
What is the status of Monrovia’s bonds relating to capital appreciation bonds?
The District has always been attentive to the costs associated with bond dollars. The LA County Treasurer's office participated in all the District's bond sales and approved both the interest rates and the structure (including the issuance of the CABs). In both bond programs (1997 and 2006) the District had a combined repayment ratio of 2.62 to 1 (principal and interest repaid as a ratio of the amount of principal borrowed). Our District has prudently managed its 1997 and 2006 bond election financings to take advantage of all available options to save taxpayers money.
What are the bond repayment ratios for Monrovia?
The 1997 Bond Election had an overall repayment ratio of 2.90 to 1.
The 2006 Bond Election had an overall repayment ratio of 2.40 to 1.
Combined, all of the bonds issued by the District had a repayment ratio of 2.62 to 1.
What is the media focusing on?
The LA Times story focused on the repayment ratio, which measures the combined interest and principal repayment compared to the original bond amount issued. As noted in the story, the CA Treasurer has recommended that the ratio not exceed 4.0. With the exception of the 1997 Election Series B Bonds that were sold in 2000 with a repayment ratio of 4.8, none of the District's bond series has exceeded a 4.0 repayment ratio.
One misleading and deceptive aspect of the story is that the list focused only on the CAB portion of the bond issuance, as opposed to the total repayment of each bond series. What impacts taxpayers is the overall repayment of the bonds when taking into account every aspect of the bond program, including the other bonds issued. Picking out the CABs, as in the LA Times story, is comparable to evaluating a 30-year home mortgage after the first three or four years and asking “why did you pay over 80% in just interest during these years?" without looking at the overall repayment of the mortgage. What impacts taxpayers is the overall repayment of the bonds when taking into account every aspect of the bond program, including other bonds issued.
We thank you for your support of the new facilities at Monrovia High School. They are making a positive difference each and every day for Monrovia High School students, and will for generations to come.
--Linda Wagner
