COPs (but not that kind)
I meet all kinds of great people writing this newsletter. Recently, a researcher and organizer in California reached out and we had a great conversation. They do work with the teachers union in Los Angeles as they fight for a great contract. I offered to do digging/reading/writing if it was needed, since I like to get little assignments if I can help benefit the movement. They had a puzzle ready to hand, and when I went digging I learned some interesting things about what's happening in the country's second largest school district.
The question was: why would Los Angeles Unified School District (LAUSD) issue $386 million in Certificates of Participation (COPs) rather than municipal bonds, particularly when they have $3 billion in reserves?
Whatcha gonna do
A COP is different than a bond, which is paid back using some kind of tax revenue. A general obligation bond is paid back by some general mix of taxes; a tax or revenue anticipation bond is paid back by a specific kind of tax or revenue. While a COP is also a way to get funds for capital expenditure, it doesn't have the same structure as a bond at all. It's a shareholder structure rather than a lender structure.
A district will issue a COP instead of a bond when it can generate revenue from the specific project it's doing the COP with. (As a sidenote, I'm not sure why a district would sell a COP rather than a revenue anticipation note. Maybe it's a way to save money on fees, or it's an LA thing?)
So instead of creditors in the muni bond market, you have shareholders buying shares in the lease agreement on the project, typically a building and/or land, who will then be paid out and make money when that project generates its specific form of revenue. So the question is, why would LAUSD issue these COPs?
BABs History
Here's the bond statement for the COPs we're talking about. I found a ton of fascinating things in it. Before we get to it, some history. The last time LAUSD sold a COP was in 2010, taking advantage of the Build America Bonds (BABs) program that was part of the Obama administration's relief legislation in the wake of the 2008 financial crisis. I've written about BABs before.
As a refresher, during that crisis, the federal government offered municipal governments like school districts a program to pay a portion of the interest payments on bonds issued under the program, around 30%. It was a drop in the bucket, but also not nothing, so districts took advantage of it. Then the Tea Party rose to power and killed BABs in its first debt ceiling hostage fight when they took over congress in 2010, rampaging Obama's second budget and pulling the rug out from all the local governments who'd sold bonds thinking the federal government would help them.
Just this bit of information gives us a clue as to why LAUSD would do COPs now. We're in the wake of another big crisis--the pandemic--and the federal government under the Biden administration has made a bunch of money available for the recovery too. Financially it's a very similar situation, except the Biden programs have been much more generous and creative because the neoliberal ruling class finally learned that, gee, maybe the government should actually spend sometimes and their awful austerity ideology is bullshit.
Anyway, maybe LAUSD wants to do the COPs thing again because of this similarity? In the 2010 COPs, the district put Central Region Elementary Schools (CERs) 15 and 17 up for the lease. The bond statement says that the rental value of these properties does not exceed the lease payments set forth in the bond, which tells me that they rented out these elementary schools, or at least got rental income from them somehow.
I found two studies that establish "developer fee justifications" from 2020 and 2022 that talk about this process and lay out what the district can do with "developer fees," or "revenue collected on residential and commercial/industrial construction." That's what's happening in the COPs I think. There are a lot more schools listed, along with CERs 15 and 17 though. This is a can of worms I'm not sure I can open right now, but these reports have a ton of information about the district's capacities viz. building, renting, selling, and maintaining the commercial and residential properties in its plant. A couple passages of interest:
Education Code Section 17620 allows school districts to assess fees on new residential and commercial construction within their respective boundaries. These fees can be collected without special city or county approval, to fund the construction of school facilities necessitated by the impact of residential and commercial development activity. In addition, these fees can also be used to fund the reconstruction of school facilities to accommodate students generated from new development projects. Fees are collected immediately prior to the time of the issuance of a building permit by the City or the County.
And
Prior to levying developer fees, a district must demonstrate and document that a reasonable relationship exists between the need for new or reconstructed school facilities and residential, commercial and industrial development. The justification for levying fees is required to address three basic links between the need for facilities and new development.
So I'm pretty sure the district does these studies to get ready to sell COPs.
In 2010, the COPs were on these elementary schools, but the money was going towards what the district called Capital Projects-1. These projects aren't what we typically think of in capital expenditure. They were for big system overhauls involving technologies and protocols. Like "automation of classified seniority calculation process and integrated financial system replacement," along with a more traditional project to utilize space at a place called the Robayal Center.
So in 2010 LAUSD sold the last COP I can find in the public municipal market database. It created a lease on two elementary schools, most likely to generate developer fees that would pay for two big system overhauls and a space utilization project. The elementary school projects generate developers fees, a specific form of revenue for which you can pay out a COP rather than a bond.
It turns out these 2023 COPs are very similar to the 2010 ones.
Venice and Roosevelt
The 2023 COPs have been designated "sustainability bonds," meaning that the monies are all going towards green and social projects. This is a type of green bond, which I've written about before, but never in the form of a COP, where the district gets shareholders to put in money on a property lease.
The properties involved in the 2023 deal are two high schools this time, Roosevelt and Venice, which are getting substantial makeovers in all their facilities. That land and plant could be worth a lot of money generally, so maybe there are revenues that come into the district from them in the form of developer fees. If the buildings are going to use green construction and production technologies, they could save the district energy and even create energy, which would generate revenues too maybe? Unlike the 2010 COPs, the statement doesn't mention any federal recovery programs, like the IRA or IIJA, so I'm just guessing. Maybe it's just a COP without federal help?
So while the district is selling the share in the COP on the Roosevelt and Venice properties, that's not where the inflow from the COP will actually get spent. According to the statement, like the 2010 COPs, the money will go to big system overhauls and some infrastructure. In this case, the system overhauls have to do with security and the infrastructure is bus electrification. The latter would make sense if this has something to do with IIJA and IRA programs at the federal level. There's a lot of money in those bills for electrification, and the policies are tax credits (and there’s language in the teachers’ contract on this), so green companies will want to get in on the action. The bond statement says the district will be working with LA Water and Power on the project, so perhaps there's revenue generation there?
Security!
The COP proceeds are also going to fund cybersecurity and campus security programs.
The recent cyberattack last year on the district appears to have inspired a series of costs whose amounts the district can't anticipate, including increased insurance costs and the results of three lawsuits filed against it as a result of the breach (pretty serious: medical and financial records were released on the 'dark web').
So just like 2010, the COP inflows--the payments the shareholders pony up--will go to security and electric buses, while the outflows to pay them back will come from developer fees on the Venice and Roosevelt projects. At least from what I can tell.
I have a bunch more questions about this process, since I've never seen a COP like this up close, and I might be wrong about a lot of the above as a result, so I'd be happy if any Californians out there have insight into this!