Contortions
I surprised myself the other day. A journalist from Denver got in touch with me to chat about the school district planning to issue certificates of participation that would finance several school construction projects.
It was a wild coincidence because that morning I happened to be preparing for a podcast interview by looking at Sarasota, Florida’s school district. In digging through Sarasota, I came across a certificate of participation deal they’d done starting in 2009 and had renewed several times over the years for several different projects, including most recently in 2022 and 2023.
Here’s how it worked. The district created a shell company called the Financing Corporation of the School Board of Sarasota County.
Then it sold its buildings to the company for $10 each.
Then the shell company leased out the buildings back to the district, the district paying the shell company lease payments.
Then the shell company paid back the certificates of participation investors.
At first, you’re probably like: um, what? Why would a public school district set up a shell company and sell its buildings for ten bucks? Sounds fishy! And it is kinda fishy. But I’d seen this before in Los Angeles. A certificate of participation (COP) is an investment security that’s not a bond, but rather an credit allocation product that permits investors to get in on a deal where the lease payments on the underlying infrastructure serve as the collateral.
Usually, the school district’s full faith and credit is what’s backing a general obligation bond. The district says “listen, trust me, I’ll pay you back with interest, I’m good for it.”
In a certificate of participation, the district tells investors “buy this certificate and participate in our infrastructure project, and we’ll pay you back with the lease payments we get from the building itself through our intermediary shell company.”
The the certificate of participation is a strategy for getting credit. Why would a district do one instead of a bond? A few reasons. As an AI summarized for me when I asked it: the COP can get around debt limits, since it’s the holding company that’s technically holding the asset; the COP isn’t subject to bond referenda since it’s technically not a bond; the COP revenues can come in more quickly sometimes; the COP gets rated by the credit raters differently.
And for the nerds out there: the COP is very similar to a revenue anticipation note, which is a bond paid back with specific revenues that come in from a specific activity. Whereas the general obligation bond is borrowed on the full faith and credit of the school district ("I’m good for it”) the revenue note is borrowed on the expectation of revenues from a particular source.
It’s like, if I asked you for a hundred bucks and I said “I’m gonna go sell some hot dogs and pay you back with that money,” it’d be different than saying “I’m good for it, trust me.”
The COP is sorta like the hot dog situation, except it’s not a bond, and the hot dogs are lease payments.
Finally understanding the COP thing a little bit, I thought to myself: “I mean yeah, if a school district has to do this kind of weird contortionist thing to get the money it needs for its buildings, fine, it’s a tactic in an unfriendly system.”
I had sympathy for the district: with all the pressures acting on it, more or less trying to destroy it, the district’s gonna do what it can to make sure its kids don’t get sick from mold, get overheated in the summer, are safe from earthquakes, or have ceilings fall on them (all of this shit actually happened at schools around the country because of the bond regime).
Literally an hour later, this reporter from Denver asked what I thought about Denver’s public school district selling certificates of participation. The angle was sort of that skeptical reaction, like, um, what’s happening, why is this school district doing this? Is it shenanigans? (The article came out and that’s the angle, supported by a lot of reporting and analysis.)
This is where I surprised myself. I got kinda mad during the interview and I went into a whole thing about how public school districts operate in a terrible political-economic environment. Wall Street is like a bully on the schoolyard taking a school district’s wrist, banging the district’s hand against its own chest, and saying “why are you hitting yourself?!” Meanwhile, taxpayers are like other kids taunting it and teachers punishing it for crying.
The political economy of educational infrastructure finance in the US puts public districts in a terrible position, makes them contort themselves in all kinds of ways, the COP being yet another. If a little kid has to zig and zag to get away from bullies, so be it.
I also called the municipal bond market regime a tower of babel where no one really speaks anyone else’s language, which researchers call “information asymmetry.” I was on a tare!
I think maybe I was remembering how Denver Public Schools have had to sue credit ratings agencies for downgrading them in advance of any district fiscal action, and how the court found in favor of the ratings agencies because of free fucking speech rights.
And also how the Denver municipality was one of the first to try minibonds, a project that tries to make municipal bonding more democratic and open to the working class. Even though it doesn’t work, it was a cool attempt. Like, Denver has a creative approach to municipal finance!
So yeah, I found myself defending the Denver district. Which isn’t something I’d anticipated doing. Maybe I’m wrong and Denver Public Schools are corrupt and doing shenanigans like all the people in the article say. I’ve certainly caught districts doing plenty of shenanigans.
But I had a strong feeling that what’s really corrupt—much more corrupt—is the private credit market regime public governments are thrust into when making sure their kids don’t get poisoned.
Again, readers of this newsletter know I’ve been a harsh critic of districts in the past. But this felt like a culminating moment for me; that maybe we shouldn’t blame the victim of a bad system here and try to understand maneuvers like COPs from the district’s point of view?
This violated my union-based perspective, which is always and everywhere critiquing the district, mostly because they’re the bargaining counterparties in contract negotiations. Districts hold the purse strings and unilaterally control debt policies. The district is the one that holds back on wages, benefits, and other kinds of righteous spending. The district is the one that decides when and how much to go into debt. They’re the ones unions have to grate and grind against to get what teachers and students need.
And yet. The district is structurally (and that’s an important qualifier) caught up against forces not in its control, namely the racial capitalist school finance regime in the United States that subjects them to the municipal bond market. The authority of that market makes democracy a sham.
A nagging question I’ve had in my research is: what if communities and unions changed their orientation to the district and tried to be in solidarity against the credit markets and private property system? Something I’ve found in my research of Yugoslavian school finance is that their educational governments were like a merger between a school board and a teachers union. Imagine if the union and district combined dialectically to fight private toxic credit regimes that pits them against one another? That’s sort of what I think schooling in socialist America could look like.
Maybe that’s what I was reaching for in my rant at the reporter…