The Napa Valley Unified School District had a quandary: The district needed a new high school in American Canyon, but taxpayers appeared unwilling to take the financial hit required to build it.

So in 2009, the district took out an unusual loan: $22 million with no payments due for 21 years. By 2049, when the debt is paid, it will have cost taxpayers $154 million - seven times the amount borrowed.

School board member Jose Hurtado said he stands by the deal. But if it were a mortgage, he acknowledged, "we would run."

Napa is one of at least 1,350 school districts and government agencies across the nation that have turned to a controversial form of borrowing called capital appreciation bonds to finance major projects, a California Watch analysis shows. Relying on these bonds has allowed districts to borrow billions of dollars while postponing payments, in some cases for decades.

This form of borrowing has created billions of dollars in debt for taxpayers and hundreds of millions of dollars in revenue for financial advisers and underwriters. Voters are usually unaware of the bonds' high interest. At least one state, Michigan, has banned their use.

In California, where rules governing the loans are among the loosest, more than 400 school districts and other agencies have racked up greater capital appreciation bond debt in the past six years than agencies in any other state.

They have borrowed $9 billion that will cost taxpayers $36 billion to repay over the next 40 years, according to data compiled by California Treasurer Bill Lockyer. He called it "debt for the next generation."

"The average tenure of a school superintendent is about 3 1/2 years, so they aren't going to be around, in most instances, to worry about paying that off," Lockyer said. "Nor will the voters, probably, that enacted it in the first place."

Good for advisers

The capital appreciation bond business in California has been lucrative for dozens of private financial advisers, banks and credit rating firms that have charged government entities nearly $400 million for financial services since 2007, state data show.

The bonds are unusual in public finance because they postpone debt far into the future. Typical school bonds require borrowers to begin making payments within six months and cost two to three times the principal amount to repay. But with deferred payments, districts have ended up paying as much as 23 times the amount borrowed.

The decision to issue these bonds instead of traditional bonds typically is made by district officials after voters have approved bond measures, and the public usually has no knowledge of how much they will cost to repay.

Earlier this month, Lockyer and Tom Torlakson, the state superintendent of public instruction, called for a statewide moratorium on capital appreciation bonds.

Widespread use

Since 2007, school districts and government agencies in at least 27 states and Puerto Rico have financed projects with capital appreciation bonds.

In Texas, 590 districts and other government entities have issued these bonds over the past six years - more than any other state, according to a database maintained by the federal Municipal Securities Rulemaking Board. California was second, with 404, followed by Ohio, with 202.

Bay Area districts that have issued these bonds include:

-- The Hayward Unified School District, which issued $21 million in bonds that will cost $131 million to repay - 6.2 times the principal.

-- The Bellevue Union Elementary School District in Santa Rosa, which issued a bond worth more than $378,000 that will cost $4 million - 10.75 times the amount borrowed.

-- The West Contra Costa Unified School District, which sold $2.5 million in bonds that will cost $34 million - 13.5 times the principal.

To pay off bonds, unified school districts are allowed to tax residents no more than $60 per $100,000 of their assessed property value each year. By issuing capital appreciation bonds, districts that have reached that limit can push the tax burdens of new bonds far into the future.

When districts issue these bonds, they are betting that property values will increase enough over time to pay their debts. Lockyer said some financial advisers appear to have exaggerated property value growth projections to get the deals approved.

Financial fees

Although private firms are not obligated to report their fees to state regulators, the treasurer's office has compiled some fee information found in official bond statements. At least 42 financial firms have charged school districts and other agencies in California a total of $389 million since 2007, Lockyer's office reported.

Nationwide, falling property values have hurt districts' tax revenues, prompting some to turn to long-term bonds. Outside California, however, tighter regulations helped curb their use.

Ohio, for instance, prohibits the type of ballooning debt structures found in many California deals by requiring bonds to maintain a flat debt service. That means the annual payment amount must remain roughly the same each year.

California removed its flat debt service requirement on long-term bonds in 2009 with the passage of AB1388. The bill was sponsored by the California Public Securities Association, which lobbies state lawmakers on behalf of financial consultants and underwriters. An association official declined to comment.

A workaround

Napa issued its bonds, in part, because officials had pledged to keep the tax rate near $36, well below the $60 state limit.

In 2006, Napa voters authorized $183 million to repair old school buildings and build a new high school in American Canyon. But by 2009, when the high school was nearly completed, property values had dropped and the district found itself short of cash.

On the advice of KNN Public Finance, an Oakland firm, Napa issued the $22 million capital appreciation bond. The first payment is not due until 2030.

Three months later, the district issued another bond for $7 million that will have cost $28 million by 2033.

KNN charged the district $156,000 for advising on the deals, according to state records.

Government criticism

Some government officials have criticized districts such as Napa for shifting debt to future taxpayers instead of asking voters to pay now.

"If they're trying to stay under a tax rate promised to the voters, that's completely egregious," said Glenn Byers, assistant treasurer of Los Angeles County, who has been critical of capital appreciation bonds that take longer than 25 years to repay. "If they're not at the tax rate's legal limit, it's a slam dunk: They shouldn't be doing (it)."

Whether Napa's school board understood the long-term implications when it approved the bonds remains unclear. When California Watch first asked school board member Joe Schunk about the deal in November, he said Napa had not issued any capital appreciation bonds.

A week later, he called back and said he had been mistaken.

Hurtado, the school board member, said the deals were hard to understand, but the board had received "adequate advice."

Still, he added, "there has to be a way that schools are financed so that it's not held hostage to other factors that really don't have anything to do with education."