CHICAGO - The Michigan Senate last week passed an amendment that would essentially eliminate the use of capital appreciation bonds by school districts.

The amendment was passed as part of a package of school reforms proposed by Gov. John Engler in the wake of the elimination of school property taxes for operating purposes next year. The Senate also included other restrictions on school bonding in one of four reform bills it approved last week.

The capital appreciation bond amendment would prohibit school districts from selling bonds at a discount of more than 10%. Public finance officials in the state said the amendment, which would take effect on Jan. 1, would eliminate the use of CABs by schools. The amendment would effectively kill the use of CABs on which the discount, depending on maturity and interest rate, can be as high as 80% to 90%.

In a press release, state Sen. Jim Berryman, D-Adrian, a sponsor of the measure, called capital appreciation bonds "virtually always a bad deal for taxpayers in the long run."

"Delaying payments and stretching it out may sound good until you work out the numbers," Berryman said. "We are mortgaging the future and crimping our ability to respond to new capital needs down the road."

Virgil Bernero, an aide to Berryman, said Friday that because the state's municipal finance act allows schools to issue the bonds, the senator will continue to push his original measure. The original bill would amend the act to expressly prohibit the issuance of the bonds by both schools and municipalities. Bernero said the amendment that was passed represents a compromise between Berryman and state Sen. Joanne Emmons, R-Big Rapids, to curtail the use of capital appreciation bonds by schools.

Berryman introduced the original bill in September after the Detroit Free Press ran a number of articles critical of the bonding practice.

Critics of the bonds have charged that school districts and bond underwriters use the practice to sidestep unpopular tax increases by telling voters that pushing the payments out into future years will not increase their property taxes. However, critics say that if assessed valuation does not grow in the future, taxes would still have to be raised to pay debt service on the bonds, which carry interest costs three to four times higher than traditional bond issues.

Some public finance officials in Michigan have defended capital appreciation bonds as necessary and responsible tools for school financing.

The Senate also placed restrictions on what school districts can finance with bonds. The Senate bill would allow bond financing for new construction or renovation that would cost 10% of the cost of the building or $500,000, whichever is greater. But the bill would prohibit using bonds for remodeling or improving school buildings, purchasing school buses, and for urban renewal program administration costs.

The bill would prohibit the issuance of operating deficit bonds by schools as of Jan. 1.

One public finance official predicted that most of the bonding restrictions, including the elimination of capital appreciation bonds, would fail in the House.

"There are going to be major changes," the official said. "What you'll see is going to be a lot different."

Don Elliot, a vice president at A.G. Edwards & Sons in Okemos, Mich., said he hopes underwriters and school districts will get an opportunity in the House to discuss the bond restrictions.

The bond-related provisions were contained in a reform bill that would allow parents to choose the public school their children will attend. The Senate also passed measures that would create charter schools that would not be subject to state tenure and collective bargaining laws.

The House has yet to pass any of the reform legislation that was introduced shortly after Engler unveiled his plan Oct. 5. In addition to restructuring the elementary and secondary school system, Engler's plan would replace more than $6 billion in property tax revenues for school operating purposes that will be eliminated as of July 1, under a law passed by the Legislature last summer.

Engler has proposed increasing sales and single business tax rates, imposing a real estate transfer tax, raising the cigarette tax, instituting a new property tax on business and non-residential property, and eliminating about $774 million in state revenue sharing to local governments.

On Thursday, Engler urged the House to move on passing the bills out of committee, saying that he is ready to provide Thanksgiving dinner "with all the trimmings, if that is what it takes to accomplish education reform in Michigan."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.