Taxpayers bite back on school bonds. Voters resist increased school debt despite bankers' favorable ratings
`IT was depressing,'' says Sandi Burgoyne, an employee of the Poway Unified School District in the San Diego area, recalling what happened this past April when voters turned thumbs down on a $58.4 million school bond issue. In fact, as Ms. Burgoyne notes, to say ``voters'' turned thumbs down is almost a misnomer: Rather, she says, some 90 voters - out of some 18,000 votes cast - were responsible for rejecting the issue, since a two-thirds affirmative vote was needed for approval. In Poway's case, 65.9 percent of the voters - more than 11,000 people, far more than a majority - had said yes to the measure.
So if there's a slight gnashing of teeth around Poway school offices these days, it's easy to understand why. The bond issue would have provided for a new high school and a new middle school to ease overcrowding. The bond defeat has complicated planning. Among options now being discussed there: double sessions and year-round classes. Meantime, the district, like others in California, is standing in line for additional state funding.
The Poway situation, financial experts say, is not unusual. Tempers can flare. Neighborhoods polarize. And for school officials, bond issues represent a tremendous expenditure of time and emotional resources. Thousands - indeed, hundreds of thousands - of hours can go into preparation of a bond issue: planning the campaign to win a favorable financial rating for the bond and taking the case to the public during an election.
During 1987, according to Joseph Kelly, a municipal bond expert and vice-president of Securities Data Company, of New York, some $9 billion in new primary and secondary long-term school debt issues were sold and actually came to market. That is down slightly from the $11 billion in new debt issues that came to market in 1986. Some $5.4 billion in new issues were sold during the first half of 1988.
Many financial experts continue to question the reliance on the property tax and bond issues for school funding purposes in much of the United States. Such a reliance imposes a heavy financial burden on homeowners, regardless of whether they have school-aged children. Moreover, the assessments can vary enormously from district to district.
That said, school authorities in Poway, as elsewhere, continue to plan for more and larger bond issues. They seek to win the highest possible rating for their bonds, since a good rating (preferably the gilt-edged triple A, or AAA variety) usually wins good backing from the underwriting investment community, which, presumably, helps sell the bond issue to the general public (see box).
What if the deck seems to be stacked against a school district, in terms of all the financing and sociological variables? What if the long-range economy looks dubious, or the school system is not known for quality? What if it looks as though the district might not be able to pay back the bond issue at some point down the fiscal roadway?
That, says Maury Cooper of Standard & Poor's, is where special state withholding mechanisms come into play. At least nine states provide special funds if a district has trouble with debt servicing: Indiana, Kentucky, Michigan, New Jersey, New York, Pennsylvania, South Carolina, Texas, and West Virginia.
``Standard & Poor's,'' Ms. Cooper says, ``acknowledges the value of such state programs.'' Thus, Standard & Poor's will provide a bonus, as it were, in the ratings process for communities in states with a special debt-servicing program.
Given the increasing sophistication about bond issues, given all the years bonds have been issued, are most districts now winning triple-A ratings? The answer comes almost as a surprise: ``As a general rule,'' says Cooper, ``we're not seeing more triple A's these days.''
But as many districts have learned, a fair-to-good rating does not necessarily translate into election-night success.
Take Poway. Poway had received a rating of A+ from Standard & Poor's.
How to grade school bonds
``A bond rating is an assessment of the probability of timely repayment in full,'' says Maury Cooper, a vice-president of Standard & Poor's, New York, which provides bond ratings for many school districts throughout the United States.
Ms. Cooper says four main criteria are used to judge the rating of a community bond issue:
The debt factor in a school district. ``What,'' she asks, ``is the debt burden per capita? How does that debt burden relate to a community's ability to repay?''
School administrative factors. ``Is the city - and the school system - growing, or declining? Is the community low-valued, or high-valued, in terms of its tax assessments?''
Finances. ``How effectively does a community collect its taxes? Does it operate within the confines of legal limits on its property taxes or total taxes, such as under Proposition 2 in Massachusetts?''
The economy of the area. ``We view the economy as the most important factor in determining a bond rating,'' says Cooper. ``And by that, we mean how does the economy measure up as a source of wealth and income to pay back a bond issue, which, after all, takes place over the course of many, many years?''