Is it Legal and Ethical?
The until-now little-known scheme of refinancing school district bond debts for capital expenditure and refunding the difference to the districts known as “cash out” is being challenged in court by a local group, Citizens for School Bond Accountability, chaired by Jill B. Escher. They have exposed that the San Jose Unified School District is skimming the difference created by lowering interest rates through refinancing the 1997 Measure C bonds in 2005, earmarking the considerable sum of $20.4 million for new projects rather than returning it to the taxpayers.
The school district claims that they have done nothing illegal. They base their claim on the fact that the agents that sold them the scheme and pocketed $1.61 million for restructuring the bonds under a no-bid process—UBS Financial Services in San Francisco and bond attorney David Casnocha—said there was nothing wrong with it.
If there is nothing wrong with the scheme, why is it that no-bid contracts are necessary and why is it that no other major financial institutions are vigorously pursuing the easy-money windfall created by such schemes?
If there is nothing wrong with the scheme, why has the district done its best to keep the whole matter quiet, issuing no public announcements about their plans? You would think that if the cash-out scheme was legal and brought the results that they claim, the district and the agents would be touting their partnership in successfully saving the taxpayers millions. In fact, there is a small mention of the refunding in the minutes of the school board, but absolutely nothing about the cash-out part of the process. Jill Escher has had to file numerous public records requests just to get a clear picture of what has been going on. Why should she have to do this?
In her quest for information, Escher asked the question of how this cash-out scheme could have occurred when the law clearly requires that any public entity must use ALL proceeds of the new bonds to repay the old bonds (i.e., to pay down the debt owed by the taxpayers). It turns out that the district sold the bonds to investors for a premium above market rate, kept the $22 million of premium for itself, and stuck the taxpayers with the bill for the artificially inflated interest rate that enticed the investors to pay the premium in the first place. She also uncovered that the district finance director, Ann Jones, mischaracterized the scheme to the board in a memo as the equivalent of refinancing a mortgage. (After approval of the refinancing, the entire board was invited out to dinner by UBS. It’s entirely fitting as this whole matter smells of a “free-lunch” deal.)
Another important aspect of this issue is that under Measure C, bond expenditures were to be strictly monitored by a citizens’ oversight committee. Unfortunately, the committee was disbanded in 2004 and there has been absolutely no public oversight on this matter.
If you are still confused about what’s going on, join the club. This type of scheme is so complicated that only a few people in the finance industry know its intricacies and understand it. The school board certainly didn’t. They should have remembered that if a deal seems too good to be true, it probably is. The ultra-complicated details of the scheme work to the advantage of those who are selling this bill of goods, courtesy of the city’s taxpayers.
Escher told me that “this is not a debate about whether the district should be able to move ahead with some nifty new construction projects, but rather a debate about the integrity of voter-approved indebtedness, and whether public entities can unilaterally decide to raise additional revenue from a bond in a way that violates the contract that was created when the ballot measure was originally passed. If these schemes were legal, no public entity would bother holding a bond election again—they would simply refinance, take out some cash, and stick the taxpayers with the bill.”
My thanks to Jill Escher for helping me understand what’s going on. She posted a comment a few days ago about why she is suing the school board and I am reposting it below. This is an extremely important issue in fact and in principle, with many legal, constitutional and ethical aspects. Meanwhile, Citizens for School Bond Accountability is readying their lawsuit seeking an injunction against the school district’s plan to spend the $20.4 million while awaiting an opinion of Attorney General Jerry Brown as to the legality of cash-out refinance schemes under California law.
For further coverage and information, see the May 14 article in the Mercury News and the links in Jill Escher’s post below.
If USB FInacial Services quietly and without competitive bidding sold the SJUSD this scheme to pocket $1.61mil, how many City. County, Water District, Open Space and other special project public bonds are being quietly and non-competitively refinanced, and how those funds are being distributed.
Jill,
I applaud your efforts in bringing this issue out in the open and to educate everyone in the complexities and legalities of refinancing bonds. The process of refinancing bonds in itself can greatly benefit the community when done openly and taxpayers are informed of the windfall and of any proposal to spend the money and/or to refund it back to taxpayers. When decisions are made without public scrutiny, it unfortunately gives a negative image to the whole process and will likely cause reluctance amongst voters to approve future school bond measures.
Generally, not always, elected politicos have the utmost contempt for taxpayers and voters—and act on that contempt because they can’t help but notice that even if the taxpayers and voters are smart they’re just too busy to do what Jill has done—stick with the story til the truth pops out. But, as enraging as is this instance of SJUSD stealing, the bigger outrage is why parents of SJUSD parents don’t DEMAND pre-test/post test of every student in every classroom to see if the “treatment”, at an enormous cost that makes 22 million look like peanuts, actually works, i.e., does every teacher teach so that every student learns, at least something one can point to. So-called grades cover a lot of mystery. The school boards are complicit in all this, whether it’s not understanding “refinancing” bonds, or that there ought to be proof that generously funded “instruction” works. Mark Twain said a long time ago that God created idiots for practice, and then created school boards. I find it amusing that most candidates for city council in the last election mentioned how important the council’s role was in supporting education, whatever that means. I think it means that the teachers’ union gives out a lot of money to politicos to make sure that all things “educational” are either confusing or mysterious (like the Ed Code). George Green
With friends like these…
A down on his luck friend comes to you for help. His house is in disrepair and about to be condemned. He’s found a place to borrow the money to get it fixed, but he is going to need you to make the payments. You agree because, even though making those payments is going to hurt, this is a good friend, one worth helping.
After a number of years of you making payments and watching your friend’s house put in order, you are shocked to learn that in addition to making the repairs you agreed to fund, workers are about to begin construction of a very expensive addition to the house. When you ask your friend about it he tells you not to worry, the add-on was made possible by refinancing the loan in a way that will not result in higher monthly payments or a longer term.
“No harm, no foul,” he tells you, patting you on the back reassuringly. “It won’t cost you a dime more.”
So ask yourself, have you been harmed?
I say yes. Significantly harmed. Your involvement cannot be defined in terms as simple as dollars and repayment schedules. Your involvement was founded on your relationship with your friend, his desperate need, and your decision to engage that need. Of those three elements, in only the third were dollars and repayment schedules significant. The first, your relationship with your friend, was a matter of shared values, experiences, trust in one another, and any number of personal considerations. The second, his desperate need, was very specific: repairs necessary to save the home.
It is the first two elements that define the agreement, not the third. The loan was an act of altruism. People who claim the right to frame their obligations solely in terms of dollars and repayment schedules do business with banks, not buddies.
The add-on to the house may have been made financially possible by the third element (refinance process), but it could not have been done without violating the first and second. Friends don’t exploit friendship: any savings made possible by refinancing the loan should’ve gone towards reducing the balance (the benefactor’s financial burden), and definitely not towards improvements beyond the agreed-upon need.
By treating the loan as if it were solely a matter of dollars and repayment schedules, your friend deprived you of the chance to lessen your repayment obligation; deprived you of the option of spending the savings on yourself; and deprived you of the chance of using those savings to help out another needy friend.
Deprive defined: to take something away.
In other words, you’ve been robbed. It’s that simple.
At least, that’s the way I learned things in school.
Hmm. Sounds to me like the Grand Jury should be looking into this smelly
mess. Both of them, Civil and Criminal. Where there “kick backs”
from USB?
Jerry
Why I’m Suing San Jose Unified School District
By Jill Escher
You may have read in the Merc that my group, Citizens for School Bond Accountability, is planning to file a lawsuit against SJUSD challenging the District’s decision to double-dip the taxpayers for an additional $22 million of proceeds from the 1997 Measure C school bond, all of which must be repaid through our now artificially inflated property taxes.
It’s interesting to read San Jose Inside about the opposition to the garbage rate increase because that cost pales in comparison to what taxpayers are paying to fund the unauthorized $22 million SJUSD cash-out. But because people don’t receive an itemized bill for this stealthily imposed school taxation, people don’t know about it, don’t understand it, and don’t challenge it.
So, what happened here?
Instead of refinancing to lower the tax burden (which the law allows), SJUSD refinanced Measure C in order to take out $22 million for its own use while providing only a token amount of savings to the taxpayers (which the law doesn’t allow). It’s sort of like buying a Pepsi with a $10 bill and getting only $1 in change, and the cashier asking, “Why are you complaining? You got some money back!”
No one knew about this transaction because the cash-out was never mentioned in the agenda or the minutes of any District board meeting, and the District disbanded the Measure C oversight committee before undertaking the cash-out. The District made a concerted effort to keep the cash-out under the radar. I discovered the cash-out after months of research and pouring through documents received in response to public records act requests.
In the end, this is all about school districts trying to find a way around the requirement that they must hold an election before raising funds for capital projects from property taxes. Would voters have approved of an additional $22 million in bonds, as the District apparently presumed when it engaged in the cash-out? What do you think?
I think it’s critical to air this issue in public. (Full disclosure: I’m a registered Democrat and have always supported school bonds.) Nothing prevents the District from holding another bond election and making its case to the voters if it really feels it needs building funds beyond the $165 million Measure C and the $429 million Measure F. I have three kids that have been, are currently, or will be enrolled in the public school system, and I want a great district, but one that acts with integrity and honesty. A district that makes closed-door deals that disadvantage taxpayers is not a district I want to be involved with. An engaged community that demands ethical behavior will translate over the long run into a higher quality school district.
With Norcal, with VTA, we’ve seen what happens when government plays fast and loose with tax dollars and the public trust. I was disappointed to find out what was going on behind closed doors at SJUSD, too.
Jill Escher
[email protected]
For more information, see the blog:
http://www.citizensforschoolbondaccountability.blogspot.com
And see the article about the SJUSD cash out in The Bond Buyer:
http://www.bondbuyer.com/article.html?id=20070426N1IRYX8T
#3- Great job Jill! You go girl!
Hmm, so if you figure out how to make your money go farther, that’s a bad thing?
The public approved the bond, and the tax loading that went with it. So the district gains 20 Million that can be used to better the system, does not cost time and energy to have another bond measure, and people cry foul?
As long as the money goes to the schools, and not vacations for the higher ups…. the problem is what?
We knew what the original bond money was going to cost, and the votes proved we were willing to pay it, someone else just figured out a way to make it go farther….
Jerry,
The Grand Jury did look at the SJUSD’s Measure C spending and found no important irregularities, even though they had evidence to the contrary. I think the DA doesn’t want to touch school districts because there is a lot of public sympathy for them. The print media are slow to criticize also, maybe for the same reason.
I’d like to point out that the SJUSD has plenty of money—more than they know what to do with—for construction and repair from Measure F. I think this whole refinancing maneuver was designed to give the District unrestricted money to spend without citizen oversight, not to generate desperately needed funds.
Jack and Jill,
Thanks for the insight. I certainly had no idea that SJ Unified was trying to pull this off.
You’re correct, this is tantamount to increasing the burden on taxpayers as the district spends this windfall on capital projects instead of reducing the bond indebtedness.
Shame on them!
Jill, I hope your disclosure of this issue results in SJUSD being ordered to pay down the bonds.
Jack, thanks for the post. Upon reading it I realize I need to clarify one of my own comments. While some interpret cash-out refinancing as a way to raise money from taxes without holding elections, it appears that SJUSD’s attorneys believe that this is true when limited to an environment of declining interest rates, so that preexisting debt service is not superficially increased.
So for example, if original bonds were sold when interest rates were 8%, SJUSD’s lawyers would argue that by cashing out during refinancings, a public entity could keep taxpayer debt at 8%, enjoy all the premiums for its own use (exceeding the total amount of bond proceeds authorized in the ballot measure), and do nothing to lower the debt owed by taxpayers, even if market rates dip to, say, 3%.
Beyond simply violating the contract with the voters, the Government Code doesn’t allow this. For more details, see our blog:
http://www.citizensforschoolbondaccountability.blogspot.com
Thanks!
I wish we had people like Jill Escher on the school board or on the city council. Oh yeah, I forgot….she’s too honest, too brilliant. Thanks, Jill, for pointing out this scam by the school district. Be warned: you are going to be totally villified by the school district. Hopefully the media will pick this up without spinning it and applaud an honest citizen with courage to step up and speak out.
I understand exactly what Fred’s point is. If you don’t already get it you probably never will.
# 12 Fred, I’m trying to understand your point but it looks like you left out half of your argument. Is there something else you wanted to add?
Fred in San Jose
Please explain what you mean – Who is they , What, When etc and Why I am Sick of Neighborhood Bullies, (It’s not refinancing, it’s racism)
#12 #16
Your point about neighborhood bullies is clear. I understand and see your point (about bullies).
It’s tie to the refinancing issue is not that clear. You know more about the school, neighborhood and bond deal than many. Can you help me see what you see? i.e. tie it together?
Thanks.
Why I am Sick of Neighborhood Bullies,
(It’s not refinancing, it’s racism)
They buy a house across from a high school and then complain constantly about the school. They proclaim living by the school is “like living by ground zero.” They call 911 for reported gang activity, cops arrive and turns out to be hispanic football players wearing their jerseys picking up trash. They hand out flyers stating putting lights on a football field will inspire gang violence. Though it’s National Blue Ribbon and CA Distinguished, graduating students to Harvard, Princeton, NYU and Julliard, they ask their City Councilman when is he going to “shut down the school.”
# 12 I think Fred is referring to Lincoln High.
The District made the decision to sell off school property to Sommerhill Development. The result Lincoln’s parking lot too small and insufficient to handle parking for it’s school athletic events.
The decision was made to locate it’s Stadium at the opposite end of the campus, 1/2 mile from the parking lot.
The result, at any sporting event in the Stadium, the neighborhood is forced to become Lincoln’s parking lot, while it’s official parking lot remains empty.
Good judgement? Good planning? What do you think?
The Community is right to question the judgement and decisions made by the District.
It has a right to question the judgement and decisions made by the District re: what it’s doing and how it’s spending taxpayer money, and how those decisions will effect the Community. So, who really is “the bully”?
#18 Clueless
You make it sound like the locations of the Lincoln football field/stadium and the parking lot is something new, but they have been located in same spots for about 60 years. And before the Lincoln “stadium” it was the site of the Velodome which held 3500 in the grandstands. As the plaque states “Beneath the Lincoln Football Field is the remains of the most famous bicycle track in the Western U.S. Garden City Velodome 1936-1941.”
For more on this check link from Rose Garden Resident archive
http://www.svcn.com/archives/rosegardenresident/20040902/rg-news3.shtml
By using the fear factor “turn neighborhood into a parking lot” quite frankly you lose credibility. Remember how freaked people got about the Arena? Shasta installed traffic controls/blockers, the residents later realized their fears were unfounded, they made a mistake and took it out.
Of course we can and should discuss. I don’t always agree with everything SJUSD does but then I bet not everybody who has a kid at Bellarmine or Mitty or wherever the heck agrees with everything that happens at their school either. And if we want stronger neighborhood public schools, then we need to work together, in a positive manner – not make inflammatory statements. There have been just too many of those lately “living by Lincoln is like living by Ground Zero” and I too, am sick of it.
#19, I couldn’t agree more. The “stadium” has been in the same location as long as I can remember. It’s the same few people who object to any improvement the school wants to make. They protest against a new theater (at a performing arts school), improved fields, planting roses, improved science classrooms and other similar improvements. This time the few usual complainers have rounded up more people, through scare tactics, to speak against Lincoln Lights. The school and the district bend over backwards to accomodate the neighbors. It seems the neighbors would prefer if the school was there without students.
#18 Not only is your logic faulty, you are clueless about the facts. Summerhill never the site of Lincoln parking. As Friend of Fred points out, the stadium was always located where it is today. The parking lot location has nothing to do with the stadium. The Summerhill project was constructed on the former site of the SJUSD Headquaters Building and the Lincoln Future Farmers of America field and sheds. Seems to me that pigs, goats and chickens would make better neighbors for Lincoln than Clueless, Finfan, Jill (I’m far more righteous and intelligent than you) Escher, and her other nattering nabobs of negativity.
I think the bigger and much more important issue here is whether the SJUSD should play by the rules. The main difference between the money the District manufactured with this refinancing scheme and the hundreds of millions of dollars the District has access to through the Measure F bonds is that the spending of these new funds has no citizen oversight and is not restricted by Measure C language. The question we should be discussing is whether or not it is appropriate for a government agency to sidestep public oversight. It’s hard to argue that the District needs that extra $20 million for construction, so it really isn’t the money, it’s the citizen’s oversight.
Measure F passed with over 2/3 of the popular vote, so the District could have had unrestricted use of that money. But they decided to go for the 55% malority provisions of Proposition 39 and the narrower scope of spending options. Measure C money also came with restrictions. If the SJUSD wants unrestricted funds, let them ask the voters for unrestricted funds and abide by the will of the people.
The Lincoln stadium lights are a real threat to the neighborhood around Lincoln. We can discuss the severity of that threat versus the benefits derived from the lights, but name-calling and ad hominem attacks cheapen this whole exchange. Fred and friends should make their case for these lights, and not just deny the concerns of the neighborhood. If these lights are going to be such a benefit to the community, let the District find a legal and ethical way to pay for them.
Bill Aaron
Not again . . .
“The Lincoln stadium lights are a real threat to the neighborhood around Lincoln. . . but name-calling and ad hominem attacks cheapen this whole exchange”
“Real threat?” “Name-calling?” What do you call signs that say “Too Dangerous” or inflammatory flyers making accusations of “gang violence” and other crap? Oh and don’t forget another favorite, if I don’t get my way I’m going beat you up, no excuse me, file a lawsuit . . . Sounds like a bully to me.
I do agree with you on one point, such tactics do cheapen the whole exchange.
Barney,
“Bully” is name-calling. By “real threat” I’m talking about the threat to the peace and quietude of the neighborhood around Lincoln. I’m not suggesting that people’s lives are threatened. That’s why I wrote “…a real threat to the neighborhood” and not “a real threat to the people of the neighborhood”.
I am only following this conversation on this blog, and I am asking for an honest dialog on the issues on this blog. I don’t know what other stuff is going on outside of this blog.
So, Barney, calm down. Tell us the benefits of these stadium lights. Let us weigh those benefits against the traffic, noise and light pollution at night that the neighborhood will certainly have to suffer. Then try to make a convincing argument that the District is being perfectly ethical and legal with their refinancing of Measure C funds, and their avoidance of citizen oversight. If your only response is sarcasm and name calling, I’ll assume you can’t otherwise defend you opinions.
Dear Bill,
Glad to know you were not suggesting the “threat” was to people’s lives, because that is exactly what had been espoused on flyers, web pages, etc by the No on Lincoln Lights gang. So hence the reaction.
Threat to “peace and quiet?” A pep band playing, crowd cheering, singing of the national anthem. (And if it was Roseanne Barr I’d have to agree the threat would be indeed serious!)
There are many positives, including stronger school and community spirit. Not going to list them all here, because they have been frequently discussed in other forums including over 17 public meetings on this project.
And hey, I’m calm. Beautiful evening, glass of champagne, life’s great!
Barney,
The positive that you mentioned, “stronger school and community spirit” hardly is a mandate to disrupt the peace of residents who mostly do not have children attending the local high school. The “many positives” you allude to, but didn’t list, are certainly all exclusively enjoyed by the sports departments. There were 17 public meetings, not 17 compelling reasons to install the lights. I’m sure there are many people who are very happy about the vote of the Board, but I’m also sure that their number is much, much smaller than the people who desire peace and quiet in their neighborhoods. This is one of the most important issues that neighborhood leaders are concerned with in San Jose, it is not a trivial matter.
But as I’ve written above, I think the much more important issue is the way the SJUSD ignores state law and citizen oversight. That, after all, is what the lawsuit is about. You didn’t address that in your response. Perhaps you don’t really care about it. You probably are mostly interested in the the installation of the stadium lights. You and the rest of the voting public would be overwhelmed if you realized to what degree the District operates without regard to the mandates of the State Constitution.
I have had to deal with their hubris in my neighborhood. I have seen how they have abused the mostly Hispanic population in the northern part of the District. I have seen how they have used the Court’s Desegregation mandate to create Cadillac magnet schools for mostly non-Hispanic students. The lists goes on and on. This out-of-control District has operated under the radar for far too long, and I welcome any effort to make them accountable, like this lawsuit.
It’s too bad that the public in general does not realize how much the SJUSD negatively affects the community in San Jose. I wish you and the rest of the people of San Jose would get as interested in the general operation of the District as you have in this specific issue.
Bill: The basic problem is that you chose to live in the middle of a neighborhood with a High School, Middle School, and two Elementary Schools. The earliest of these dates from the 1920s. The newest, Lincoln, dates from the 1940s. You didn’t predate the schools. They were here before you. Therefore, you should adapt to the schools and not the other way around. You chose to live here knowing full well where the schools were located. If you find the schools so objectionable, I suggest you admit your mistake, cash out, sell your home and let a family with children enjoy all the benefits and amenities of the neighborhood. I would also respectfully suggest that if you want to constructively apply your concerns about SJUSD governance, to stand for election as a School Trustee at your earliest opportunity.
#26 In all seriousness, what are the “Cadillac magnet schools for mostly non-Hispanic students” that you spoke of within SJUSD? I’m curious to know.
Thanks
Bill: Look at the bright side… “If this is one of the most important issues that neighborhood leaders are concerned with in San Jose” we are in good shape!
Friend of Fred,
I don’t live near Lincoln, but I do live near a public school. Most people in San Jose do. However most people in San Jose don’t have children attending a public school. And most people in San Jose don’t think installing stadium lights and other new disruptions to the peace of their neighborhoods is a given right of school districts.
Sure, you buy a house near schools, you should expect the ordinary activity that comes with the territory. The installation of new stadium lights is clearly not something one should ordinarily expect.
It seems that people with children in public schools, or those involved in the schools believe that they are the only ones who should have a say as to what schools do. Public schools affect far more that just the students who attend them and their families.
You want stadium lights for Lincoln? Fine. You probably think that they will benefit you and your family somehow. Some people living near Lincoln will not share those benefits, but they will share the added disruptions that the lights will bring, so they want to try to stop the installation of the lights. You think they should move out and leave the neighborhood to you. Do you really believe that?
Actually, I did run for SJUSD Trustee. I almost won, too. When I was running for the Board, I did a lot of research, and I found out just how extensive the deception is in the District. Unfortunately the politics around here make it pretty hard to take on the District except in the courts.
I don’t know the personal motivations of the others who are participating in this lawsuit. Maybe some of them are simply trying to stop the stadium lights. Nevertheless, the lawsuit itself is about citizen control over a government bureaucracy—a bureaucracy that operates with utter disdain for the will of the people at large.
The people of San Jose, especially the less affluent, are not getting a fair deal from the District. To be sure there are many complex, and perhaps unsolvable issues that contribute to that situation, but unless the District is shaken from the status quo and made responsible to the people—all of the people—that problem cannot get better.
Just have to ask,
Hacienda, Castillero, and Hammer were supposed to draw Hispanics from the north part of the District into the predominantly White central and southern parts. I think Hammer (a Montessori school) has been moved and I don’t know what the situation is now, but in the past that very expensive school, paid for with desegregation dollars, had very few Hispanic students. The only magnet school that was working as a magnet was Lincoln which was drawing non-Hispanics northward with their performing arts program.
Things could be worse,
Disruption of the peace of San Jose neighborhoods is mostly what neighborhood leaders are concerned with. You are right, things could be worse. Just check next year and you will see.
#30 and others from Bill above
Bill,
I see. I understand your logic. That makes sense.
Thanks.