Jul 13, 2008

Report: Public should know about bonds

Refinancing added $15 million in taxpayer obligations, jury finds

By Neil Gonzales / Bay Area News Group

A controversial way that seven local districts chose to refinance bonds in recent years has added more than $15 million in taxpayer obligations that people did not directly vote on but should still know about, according to a report by the San Mateo County Civil Grand Jury.

From 2005 to 2007, the report said, the school districts "used cash-out refunding" on $186 million worth of voter-approved bonds to generate an additional $15.6 million.

Of that $15.6 million, the report said, $12.5 million paid for building improvements while the remainder covered bond fees and other costs.

The practice is similar to refinancing a home mortgage to lower monthly payments and taking out equity in cash.

A growing number of districts and community colleges statewide have turned to that strategy because they get extra money - often in the millions of dollars - without having to return to voters.

But taxpayers will ultimately pick up the tab for the additional money generated "without any vote on whether or not the bond amount should be increased," the grand jury said in its report.

The grand jury also noted that cash-out transactions face legal concerns and "important uncertainties in their tax status."

The state Attorney General's Office "has been asked to review" the cash-out practice, the grand jury said. "The Internal Revenue Service is also reviewing the tax-exempt status of interest earned on a particular type of refunding bonds. If the IRS rescinds the tax-exempt status of such bonds, their market value would be reduced considerably."

The grand jury recommended that districts "better acquaint themselves with the complexities of" the cash-out process and its legalities.

Districts should also inform their communities about the practice and consider seeking approval by voters, the grand jury said.

The districts noted in the report were Belmont-Redwood Shores, Jefferson Union High, Las Lomitas, Ravenswood, San Mateo-Foster City, South San Francisco Unified and Woodside.

Belmont-Redwood Shores board President Jeni Benelli agreed that the public should be made aware that refinancing can lead to additional costs borne by taxpayers.

"In our democracy, we need to inform voters as much as possible," Benelli said Friday.

But she also pointed out that choosing not to refinance can cost a district in other ways such as a lack of adequate buildings.

San Mateo-Foster City officials declined to comment specifically on the grand jury's report, saying they have yet to read it completely.

But San Mateo-Foster City leaders openly discussed the refinancing issues involving a $79 million bond during various board and public meetings, said Joan Rosas, district assistant superintendent of student services.

The way the district refinanced that bond - approved in 1997 - has actually saved taxpayers more than $2 million, officials said. That's partly because the refinancing has shortened the time that the bond needs to be paid off by several years.