Friday, August 10, 2012
California school district financing proof that the worst is yet to come
This graphic represents a recent bond deal that was agreed to last year by the Poway Unified School District in California. Under this agreement, the school district agrees to pay a high interest rate, but doesn't actually have to pay anything for 20 years, at which point it starts paying on the debt.
It's called a capital appreciation bond, and presupposes that the value of both the buildings and the tax base will increase in value. But the fact is that California real estate remains overvalued and the economy is in a shambles. Deals like this one ensure that it won't recover in the future.
Poway isn't alone in using these ridiculous bonds. San Diego Schools recently agreed to pay $1.1 billion in interest on a $164 million loan. Other school districts are joining in with the borrow now, pay 20 years later plan. Of course, if the taxpayers don't have the money now, what makes them think the citizenry will have five times more money in 20 years?
If you want to know where the economic growth is going to be in the next 50 years, find states with the lowest unfunded pension obligations and the least amount of down-the-road debt that some many states are willing to accept. States which have huge unfunded liabilities are going to have to raise taxes to such high levels that industry will have to leave. California is one of these states. Unfortunately, as we've seen California's fiscal woes have a way of spilling over into the nation at large.
The Voice of San Diego has led the way in educating the public about the dangers of these bonds. They've even put together a guide, including a spreadsheet, showing how to find which districts have issued these bonds. Currently there are more than $18 billion of these bonds outstanding in California. Be afraid. Be very afraid.
We've known about the problem on unfunded pensions for some time now but have done nothing due to the power of public-employee unions. Now you can add to that problem these balloon bonds, or capital appreciation bonds, high-interest bonds on which payments don't start until long after the idiots who approved them are out of office and retired. Oh, and to add insult to injury many of these bonds are not callable. They can't be paid off early.
Sort of gives a whole new meaning to the phrase, "Let's do it for the children," doesn't it?