CHICAGO -- A Michigan lawmaker has introduced a bill that would prohibit school districts in the state from issuing capital appreciation bonds.
State Sen. Jim Berryman, D-Adrian, said the bill he introduced late last month would repeal a 1986 law that allows school districts to issue capital appreciation bonds. Berryman said he believes voters, and to some extent school districts, have been misled because capital appreciation bonds push debt service payments into future years.
"I don't think taxpayers know what they're getting into. If taxpayers would look at what they're borrowing and what they have to pay back, if they looked at the bottom line, they would say no," Berryman said.
The principal and interest payments on capital appreciation bonds are deferred with the specific intention of not increasing the property tax millage for several years following the issuance of the bonds. The deferment rests on the expectation that future growth in assessed valuation will pay off the bonds when debt service payments are due.
Critics of the bonds in Michigan have charged that schools districts and their bond underwriters are using the practice to sidestep unpopular tax increases. The critics say voters are being told that by pushing the payments into the future, their property taxes will not increase. But, the critics say, taxes would have to be increased if assessed valuation growth does not suffice to meet estimated debt service payments.
Because the debt carries an unlimited tax general obligation pledge of the school districts, it must be approved by voters.
Critics also have said that deferring the payments on the bonds increases interest costs to three to four times more than on a normal bond issue.
As for the school districts, Berryman said "in many cases," he believes they were "sold a bill of goods" about capital appreciation bonds and were not really informed about the costs. He said he has gotten calls of support for his legislation from school superintendents and accountants in the state. Berryman also said that school superintendents have called his office in support of capital appreciation bonds as "an effective tool."
Berryman said that under his bill, the schools would still be able to use other "conventional" types of bond issuance, but would only be prohibited from issuing capital appreciation bonds. He said that existing capital appreciation debt would be grandfathered under his bill.
Berryman said he began working on the bill after the Detroit Free Press earlier this year ran a number of articles critical of the practice.
Officials from A.G. Edwards & Sons Kemper Securities, Inc., the two major underwriters of school capital appreciation bonds in Michigan, defended the practice.
Don Elliott, a vice president at A.G. Edwards, said that the 1986 law Berryman wants repealed gave schools a "necessary" tool for financing purposes.
"School districts that have used [capital appreciation bonds] have done so in a responsible manner," Elliott said.
Richard Allen, a managing director in Kemper's Lansing, Mich. office suggested that Berryman's bill aims to "throw out the baby with the bath water."
"If Sen. Berryman can identify abuses involving capital appreciation bonds, he should take legislative action to address those abuses, rather than eliminate the vehicle itself," Allen said.
Both Allen and Elliott said the bill unfairly singles out school districts' use of capital appreciation bonds, while allowing other governments to continue to issue that type of debt.
But Berryman said he was open to amending his bill to outlaw the practice for other governments as well.
"If it doesn't make sense for schools, it doesn't make sense for other governments," Berryman said.
Berryman pointed out that because the Michigan Legislature is in the throes of rewriting the structure and financing of primary and secondary schools, now is "an excellent time" to include capital appreciation bond issuance in the debate. Last week, Gov. John Engler proposed a plan to replace more than $6 million of property taxes levied by schools for operating purposes that were eliminated as of next July by the Legislature.
Berryman, who is a member of a Senate committee that will hold hearings on some of the governor's plan, said he hopes the Engler Administration will deal with capital appreciation bonds.
Nick Khouri, Michigan's chief deputy treasurer, said last week that the Engler Administration has not taken a position on Berryman's bill.