"The school boards and staffs that approved of these bonds should be voted out of office and fired." -- Bill Lockyer, at left, California State Treasurer, discussing capital appreciation bonds (CABs) -- loans to schools districts with compounded interest. Lockyer is quoted in today's Los Angeles Times in a story by Dan Weikel in which [Lockyer]..."compares CABs to the sort of creative Wall Street financing that contributed to the housing bubble, the subsequent debt crisis and the nation's lingering economic malaise."
CABs...allow schools to borrow large sums without violating state or locally imposed caps on property taxes, at least in the short term. But the lengthy delays in repayment increase interest expenses, in some cases to as much as 10 or 20 times the amount borrowed. The practice is controversial ...
Like in Emeryville, where the blog, the Emeryville Tattler, reported earlier this month:
Here at Emery, the School Board wants to finance the closing of the newly remodeled elementary school and move it over to the site of the Center of Community Life, where they are building a new high school. The elementary school move will cost $20 million, before interest.
The problem is Emery doesn't have enough bond raising capacity to build the new high school and move the elementary school... Emery has proposed using CAB financing for the move, putting taxpayers on the hook for $107 million to borrow the $20 million. Additionally, taxpayers will have to continue to pay for up to 40 years for the last $20 million.
...A populist prairie fire is starting at the prospects of arrogant school districts using CAB financing as citizens are getting wise to the pitfalls... Legislation is being proposed in Sacramento to not allow school districts to use this ruinous form of bond financing and now starting in the south land, districts are pledging not to use CABs for their capital improvements...
Or in San Diego's Poway School District, where Voice of San Diego reporter Will Carless covered the story last August:
Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools.
In many ways, the deal was unspectacular. Some of the money was used to pay off previous debts from delayed and over-budget construction projects. The rest went towards finishing upgrades that Poway taxpayers had been promised as far back as 2002. To a casual observer, it was just another school bond. But Poway Unified’s deal was far from normal....
The bottom line: For borrowing $105 million in 2011, taxpayers will end up paying investors more than $981 million by 2051, or almost 10 times what the district borrowed. That’s wildly more expensive than a typical school bond, in which a district pays back two or maybe three times what it borrowed.
As the Los Angeles Times reports, overall, 200 school systems, roughly a fifth of the districts statewide, have borrowed more than $2.8 billion since 2007 using CABs with maturities longer than 25 years. They will have to pay back about $16.3 billion in principal and interest, or an average of 5.8 times the amount they borrowed.