Only in California: Borrow $100 Million to Owe $1 Billion

Townhall.com ^ | August 8, 2012 | Mike Shedlock

[Kaslin]

Poway California, population 47,811 as of 2010, has placed an enormous bet on rising home prices and tax revenues. Poway borrowed $105 million but will not start to pay that amount back until 2033 at which time they will owe $877 million in interest.

Clearly this would be fiscal insanity anywhere, but it is especially true in California given Proposition 13 that caps property taxes.

The Voice of San Diego reports Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

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.

Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.

With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years.

And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up.



As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers.

Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians.

"This is way worse than loan sharking," said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing. "And Poway is the poster child. What they have done is absolutely insane."

Last year, the district put together its deal to borrow $105 million, without paying anything towards the debt for 20 years.

In two decades’ time, taxpayers will start paying about $50 million a year towards the loan. They’ll make those payments for the next 20 years or so.

It’s a bit like a massive version of one of those exotic loans that got homeowners into so much trouble.

With one key difference: For the next 20 years, Poway Unified isn’t even paying the interest.

Essential Math

Think growth will bail out Poway? Think again.

From Poway City Data the population of Poway shrank by .5% between 2000 and 2010.

The current upfront cost of this $1 billion proposal would be $2196 per every man, woman, and child.

By the time Poway starts paying the bill, the cost will be $20,916 per every man, woman, and child.

Given the average household size is 2.9, the cost per household when the debt is due will be $60,656.

Beyond Insanity

This scheme is not insane, it's well beyond insane. Unfortunately, I cannot come up with a stronger word to describe it.

Bear in mind that 20 years from now it is highly likely the school district will need still more money for school maintenance.  What then? Will property taxes rise 10-fold to pay back this loan?

I do not think that would happen even without Proposition 13 caps.

Forget about 20 years from now, Poway Unified residents are still waiting for the renovations they had been promised back in 2002. Cost overruns ate up the last bond effort already.

Not having learned anything, the district approached voters a second time in 2008, and voters approved on the promise of no property tax hikes.

Until when?
How?

This jackass deal was done with advice from an Orange County financial consultant. Can we have a name please?

I want to know what was in this deal for him, if anything. And if there is something, I want to see this person brought up on criminal charges. If there was nothing in it for the consultant, then he is just another stupid idiot who thinks property tax revenues will skyrocket enough to pay for this mess.

I assure you they won't. I also assure you this deal will bankrupt Poway.

It will not take 20 years to find out either. 10 years from now (or less) with property values stagnant, and the district likely needing still more money, it will be all over for Poway.

[BipolarBob]

You’ve got no more than 20 years to sell out before disaster.

[Gaffer]

These officials know full-well that they would default. They bank on being able to declare bankruptcy and renege on the loans. Besides, they’ll be retired in 20 years and it’s somebody else’s problem....live for the moment, you’re in Kallie!

[The Cajun]

Sounds like the Poway, California county officials met two guys named Guido and Sal on the docks to take out the loan.........Just speculating.

[omega4412]

using exotic financing to shift the burden

Poway should use lottery anticipation bonds. Borrow the $105 million. Every week the city buys $1000 in lottery tickets, and uses the winnings to pay off the debt.

[twister881]

I voted against both bond measures in 2002 and 2008, because of this kind of monkey business occurring. The City of Poway generally is well-run. Poway Unified School District is the usual nest of NEA/AFT collaborators and lickspittles.

Prop 13 has been weakened over the years to allow local property tax measures to pass with simple majorities. The original 2002 bond measure passed with a simple majority, then the 2008 extension passed with 64% of the vote when billed as only extending the $55 tax per of $100,000 assessed value for 11-14 years. No mention made of obtaining a capital appreciation bond that costs 10 times the value of the loan and is not paid off until 20-40 years down the road.

IOW, the school board and educrat b@St@rd$ lied through their teeth to the taxpayers.

[Fundamentally Fair]

Bond = Tax Increase. Always.

I will note that there is a bit of construction going on the southern most part of Poway. Also, General Atomics has their MQ-9 plant in Poway. They have expanded into nearly every piece vacant commercial real estate in town.

[PGR88]

Who would be dumb enough to loan them this money?

[Psycho_Bunny]

Who does the Poway USD think they are? Congress?

[5th MEB]

Typical upper management idiots in the school district financial and board of education offices. They have no idea of how to deal with their general contractors, their sub contractors or their vendors. They allow 10 million dollars in change orders on a 2 million dollar project because they are to stupid to read plans or specifications and to cheap to hire some one who can. They appoint some stupid junior high school principal (failed manager) to a new job description called a construction manager, then back all of his/her stupid decisions (mistakes) because he/she is one of their own.
School district managers generally have some sort of degree in the educational field, not the real world of the way things work. Generally when they appoint one of these people it is because they have failed in the classroom as a teacher, then failed as a school administrator for a number of different reasons. They won’t fire them because then they look like the bad guy; so they put them in charge of non educational areas of district management, such as construction and facilities planning. Where they fail, just like the rest of their “educational” career. And if you wonder how I know these things, it is because I spent 32 years watching it happen

[CaptainAmiigaf]

All of the gentlemen I’ve ever known named either Guido and/or Sal were way too smart to get involved with some insanity like this. They may have been many things, but stupid was NOT one of them.

[Erasmus]

It’s not such a bad bet. By the time they have to start servicing the loan twenty years hence, there one or both of two things will likely have occurred:

(1) Hyperinflation. They will be able to pay off the loan in worthless “dollars”.

(2) Everything falls to pieces—the economy, the social structure, the nation. There won’t be anybody to repay or to be repaid, and no rule of law to enforce it anyway.

[Truth is a Weapon]

Yes, it is crazy for them to borrow that way. But it is even crazier for someone to lend them money on that basis.

[mo]

These 470000 will stick the rest of us with the bill for their profligacy.

that verges on an act of war...it is certainly of overt aggression

[mo]

actually its 47000...10 times worse!!

[USMCPOP]

I have a used car lot. Can you send me contact info for these school board members? /S

[Dave Wright]

As a long time homeowner in the Poway School District I decided to look at their current budget to see how this would inflate over 20 years. They have revenues of about $80M with interest expenses of $5.6M. The ratio is 11.4%. The payments on the new loan would amount to $49.1M over 20 years beginning in 2031. To maintain the same ratio their revenue in 2031 would need to be about $430M. This would require annual revenue growth of 8.8%. Since long term inflation growth alone is 5-7% and property in Poway has appreciated much more than that over the years it doesn’t seem like such a crazy scheme.

[Chode]

guess they don't teach arithmetic out there anymore...

[publius911]

Only in California: Borrow $100 Million to Owe $1 Billion

This only underscores the really sad state of retards being elected to school districts.
If individuals or companies did this they would be prosecuted and serve serious jail time.

Once upon a time, fiduciary obligations were truly taken seriously, and failure was akin to embezzelment (as it probably was -- kickbacks.)

[publius911]

These retards seem to have a few hundred million$ MORE in bonds for the people to vote on in November!

Remarkable.