Eleven year ago, the Indian River County School District owned Vero Beach High School and the land it sits on along with all the other district schools and land. But that was before it plunged into a building finance scheme designed to prevent voters from having a say in school bond issues as required by state law.

Since that time, the District has put about 30 percent of school property, including the high school, in hock, and encumbered $133 million in property taxes, all while using a legal loophole to bypass the state’s constitutional requirement that “long-term” debt be approved by voters. Certificates of participation, a fancy form of financing using double-speak, legal fictions and pass-through leasing entities, are wildly popular with Florida school districts and the Indian River County School District is no exception. It is the go-to form of financing for multimillion-dollar capital projects because it gets around holding a referendum meant to ensure the current and next generation aren’t saddled with paying off debt through their property taxes without first giving permission.

Part of the double-speak involves using property tax revenue to pay off construction bonds that are sold with no guarantee tax revenue will be available to service the debt. Without the guarantee, which could only be given with voter approval, some other form of collateral must be put up to make investors and trustees confident the school district will pay them back their principal, with interest, on time – or suffer dire consequences.

The collateral turns out to be school land and buildings.  But again, it is not a straightforward proposition where a single property backs a specific bond. Florida school districts lead the country in using “master leases” bundling multiple properties as a form of collateral, and the Indian River County School District, again, is no exception.

A master lease gives a bank trustee eviction and repossession power over an ever-increasing group of school properties. The Indian River County School District, so far, has essentially mortgaged about 30 percent of the county’s total school property. If it defaults on just one of its string of debts, then SunTrust Bank, its trustee, could take over all the real estate collateral in one fell swoop, displacing about 5,000 of the district’s 17,600 students.

When a new school building is built, such as the upcoming Beachland Elementary classroom building and cafetorium, that property too is added to the master lease, subject to repossession if the School District defaults.

The Indian River County School District set up a master lease with SunTrust Bank in 2005, creating the collateral for issuing certificates of participation, a form of revenue bond. The revenue stream for investors is rent that the school district promises to pay for 20 years for the use of its own property. It is an elaborate rent-to-own or lease-back financing arrangement.

Over the last 11 years, the Indian River County School District’s certificates-of-participation debt has grown from zero to about $133 million and extends through 2029. It has used the non-voted 1.50 capital outlay millage residents pay through their property taxes to service this debt.

In 1990, the Florida Supreme Court ruled the certificate of participation lease payments are one-year – not long-term – debt, thereby allowing school districts to evade the state’s constitutional requirement to hold an election before encumbering property taxes.

However, the deputy executive director of the Florida State Board of Administration, E. Lamar Taylor, who oversees about $162 billion in retirement and local government investment pools, warns that a lot has changed since 1990 and the facts of a new case could result in a different ruling. In a Stetson Law Review article, Taylor urges Florida school districts to move away from master leases, an action that could bring the certificates-of-participation house of cards tumbling down.

Taylor said the master leases are a form of “cross collateralization” that reduces risk for investors but ups the risk for school districts of losing the use of school property. Therefore a judge could rule that a school board actually has no choice but to raise taxes rather than dislocate students. Such financing could be deemed “an indirect pledge of ad valorem taxation much like granting a mortgage on property, which the Court had previously ruled ... required voter approval,” under the state constitution, Taylor said.

It would only take one court case to demonstrate whether a trustee can actually evict an insolvent school district from its property, Taylor said. Since it’s an essential public use and school districts have strong home-rule powers, it is likely a court would rule against the trustee and faith in all Florida certificates of participation would collapse.

Such a ruling almost happened in 2007, Taylor said. The Florida Supreme Court, in Strand v. Escambia County, almost reversed the 1990 ruling.

“Rating agencies’ reactions to the Court’s decision was swift ... Standard & Poor’s issued a press release and placed all ratings on Florida’s school districts certificates of participation on ‘Credit Watch’ with ‘negative implications.’ This had the potential to bring lease-financed school construction to a complete stop,” Taylor said, which should serve as an object lesson to school districts what damage one court ruling could do.