That nice man from the Big Bank explained to us at the school board meeting how their nifty new bonds will save us a bunch of money. True, the bonds are a little hard to understand. But as long as something (I’m not sure what) goes up, our borrowing costs go down! So that means we can load up on debt for new construction because they’re practically giving the money away. We won’t have to impose new taxes which means avoiding all those tedious public hearings and screaming members of the public.
This magic is achieved by the wonderfulness of Capital Appreciation Bonds. California school districts loaded up the truck with them, because really, what could go wrong?
Unlike conventional bonds that have to be paid off on a regular basis, the bonds approved in AB1388 relaxed regulatory safeguards and allowed them to be paid back 25 to 40 years in the future. The problem is that from the time the bonds are issued until payment is due, interest accrues and compounds at exorbitant rates, requiring a balloon payment in the millions of dollars. . . .
Oh wait, maybe CABs aren’t so wonderful after all.
High cost, high risk, overly complex, and sold to the school boards as a way to finance capital projects without breaking the “no new taxes” pledges. The thought of paying out at 15:1 when the debt costs should have been no more than 3:1 is possibly worse than the ranting of Fauntleroy’s mother after the 5th grade play cast was announced.
The average functional life of a school building is 40 years. So, a capital appreciation bond could be issued for 40 years – go back to the unfortunate example of the Poway School District, wherein borrowing $150 million ended up costing $1 billion.
The Placentia School District in California has essentially bankrupted itself with CABs.
With no public discussion, the school board had hired George K. Baum & Co. and its staff of political strategists to help push the measure through so the district could continue an ambitious building spree.
After the election, the board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount – $280 million – to repay.
Ouch. Gosh, didn’t Mafia loan sharks go to prison for things like that?