Q/A Regarding Capital Appreciation Bonds

In recent months, both local and national media outlets have reported on the use of long-dated Capital Appreciation Bonds (“CABs”) by California school districts. Placentia-Yorba Linda Unified School District (“School District”) has had a very successful General Obligation Bond (“GO Bond”) program that includes the use of long-dated CABs along with several other types of bonds.

In an effort to inform the public relative to PYLUSD issuance of CABs, PYLUSD staff and financial team have prepared an introduction on this subject with the following questions and answers. 

1. What is the difference between the various bonds the district has issued?

To fund the modernization and new construction that has occurred on every school campus in the district, the Placentia-Yorba Linda Unified School District has issued a combination of Current Interest Bonds (CIBs), Qualified School Construction Bonds (QSCBs), Build America Bonds (BABs) and Capital Appreciation Bonds (CABs). 

• CIBs begin paying interest immediately after issuance—similar to a mortgage payment which begins the month after the closing of a home purchase—and typically have a lower interest rate. 

• QSCBs are bonds in which the federal government provides a federal interest subsidy which has effectively lowered the interest rate to below 1%. 

• BABs also provide a federal subsidy like QSCBs of 35% of the interest cost.  

• CABs require no payments until the maturity date, at which time both accrued interest and principal are repaid.  CABs typically have higher interest rates than CIBs or federal subsidy bonds.

This combination of all types of bonds, including CABs, made it possible to receive bond funds in a short amount of time and provided the District the opportunity to take advantage of low construction costs and low-interest rates and capture State Matching Funds.

Without the use of CABs, the District’s facilities program would have had to essentially shut down until additional funding could be made available through CIBs.  This would have left several projects incomplete or never started.  The issuance of CABs enabled to the District to sell QSCB and BABs so that the combined bond program saved $100 million of interest as compared to issuing just tax-exempt CIBs and CABs.

Below is a list of the School District’s General Obligation (GO) Bonds detailing all of the School District’s 2008 GO Bonds that have been sold (excluding any refinancing).

 

Table 2: Breakdown of all GO Bonds Sold – Election of 2008

 

 

Issue	CIBs	CABs	BABs	QSCBs
2008 Election GO Bonds, Series A	$80,000,000	-	-	-
2008 Election GO Bonds, Series B and C(1)	-	$26,493,547	$28,500,000	-
2008 Election GO Bonds, Series D and E(2)	$5,150,000	$22,128,918	-	$12,725,000
2008 Election GO Bonds, Series Q	-	-	-	$25,000,000

 

(1) CABs were sold for Series B only. Series C did not include the sale of CABs.

(2) CABs were sold for Series D only. Series E did not include the sale of CABs

2. What are the reasons the School District would choose to issue CABs?

School facilities will be used for many generations.  CABs allowed the District to spread part of the impact of paying for school facility improvements out to the future.  This gives us some relief to current taxpayers who might otherwise pay what could be considered more than their fair share and result in an inflated tax rate.

CABs allowed Placentia-Yorba Linda Unified School District to:

• Leverage CAB dollars in order to access recent state bond funds, Build America Bonds, and federal government interest subsidies
• Avoid delays in needed construction projects which are subject to inflationary cost increases. Inflationary construction costs are estimated at 3.54% (10 years) and 3.23% (20 years) according to Marshall & Swift Index
• Take advantage of low interest rates
• Apply an evenly distributed tax rate over time

 3. Why didn’t the School District issue more CIBs instead of CABs?

Had the District only issued Current Interest Bonds, the tax rate for this issuance would have been significantly higher and many projects would not have been initiated and completed for our students.

 

4. What are the repayment ratios for the School District’s GO Bonds?

The chart below details these repayment ratios:

 

Repayment Ratios for all bonds sold

Issue	Construction/Escrow Proceeds	Principal and Interest Payments	Repayment Ratio
2008 Election GO Bonds, Series A	$80,000,000	$148,518,013	1.86
2008 Election GO Bonds, Series B and C(1)(2)	$54,993,547	$212,731,044	3.87
2008 Election GO Bonds, Series D and E(2)(3)	$40,003,918	$304,242,770	7.61
2008 Election GO Bonds, Series Q(2)(4)	$25,000,000	$25,089,600	1.00
		Weighted Average	3.45