Advertisement
YOU ARE HERE: Burbank HomeCollections

Editorial: Measuring a bond's risk

February 19, 2013

How good are you at predicting the future? Or, more to the point, what do you think it will cost to borrow money in 2023?

Your answer should determine your vote on the Burbank Unified School District’s $110-million bond initiative, Measure S.

No doubt BUSD needs the money, given the hard realities of decreased state funding, pension pressures and all manner of other problems facing Burbank schools — no different from any other public district across the state. Many of the items the district says it will spend the money on — wireless infrastructure, preventive maintenance, improving energy-efficiency — are worthwhile and laudable goals.

Other ideas, which include buying tablets and other computer equipment, make us wonder if district leadership is underselling the bond’s inherent risks. Why in the world would you put yourself in debt for 25 years to buy iPads that will have a school life of two or three years, maximum?

Advertisement

Of the $110 million, the district says it will spend a bit less than half — $44 million — on “current interest bonds.” This is similar to a fixed-interest mortgage. You buy a $500,000 home and finance — aka “borrow” — $350,000 at 4% interest over 25 years. With this financing you would pay a total of $554,229 by the time it was paid off, or $204,229 in interest.

Simple enough. But the district also wants to have the remainder, $66 million, in “convertible bonds.” This allows them to delay paying for the bonds for as long as a decade. At the end of that decade, the bonds would “convert” into a fixed interest rate for the remaining term, or 15 years.

This ramps up the true cost, in part because interest continues to accrue during the decade no payments are being made, and in part because of the uncertainty of 2023’s interest rate.

Burbank officials estimate it will cost $2.50 for every borrowed dollar, or about $275 million in total costs for $110 million in capital. But it could be more. Will the 2020s be the “Roaring ’20s,” or will the nation be facing yet another prolonged recession? No one knows.

Why is the district doing this? Partly because Burbank residents have yet to pay off a 1997 school bond measure, and state law limits how much debt homeowners can levy upon themselves. Delaying payment allows the district to borrow more money now.

District officials have said if Measure S does not pass, they will continue to bring measures to voters until they win approval. So, if this bond strikes you as too risky, vote against it and require BUSD leaders to bring something more in line with your thinking.

But be warned, a “no” vote may end up costing more money in the long run, as interest rates are at historic lows, and borrowing — at least for the current interest bonds — has rarely, if ever, been cheaper. It would also delay or eliminate much-needed improvements.

So, again, it comes down to this: What is your risk threshold? Keep that in mind when you make your choice.

Burbank Leader Articles Burbank Leader Articles
|
|
|