California Dreamin’

The insanity of local government spending all too often flies under the radar, as the politicians can fudge, hide and kick the can down the road so they’re mostly out of office when the skeletons emerge.

But every now and then a tale gets exposed that should strike fear in the heart of every tax-paying citizen and really really force them to ask full probing questions of their local leadership and delve into all the minutiae of how towns are providing the “services” and how they plan to pay for them.

Today’s example is Poway Unified School District

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.

…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.

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.

Read the whole story and the comments. Someone in the comments observes that the interest rate on this is something like 8.3%…in a market where everyone else can borrow at 3.5% or so.

And there’s no chance of the district refinancing the deal. The loan contains a provision strictly barring the district from refinancing its debt.

Why is there this nagging voice in my head telling me that CalPERS is on the other side of this, as a way to shore themselves up?

I’ve got to talk to Meep about this one.

Update: These deals are pretty popular in California, evidently. They are totally screwed.

12 Responses to “California Dreamin’”

  1. aelfheld says:

    I’ll gladly pay you Tuesday for a hamburger today.

  2. JeffS says:

    That sort of agreement should result in criminal charges.

    Or at least pitchforks and torches.

  3. Kathy Kinsley says:

    I vote for tar and feathers.

  4. Kathy Kinsley says:

    They are nuts but that’s still a good song. From a time when ‘hope and change’ still meant ‘hope and change’…sigh.

  5. Mr. Bingley says:

    Aelf, it’s more like “I will gladly have my grandchildren pay you in 40 years for the burger I eat today.”

  6. Skyler says:

    What happens when a city or state declare bankruptcy?

    Nothing good, I expect.

    When a nation can’t pay its bills, there’s usually a war.

  7. Skyler says:

    Oh. I know! The state will have to bail out the cities and the feds will have to bail out California.

    Because we can’t let them stop living the high life. That wouldn’t be fair!

  8. […] from a variety of sources, in particular Mr. Bingley at Coalition of the Swilling and Wayne Lusvardi at CalWatchdog I see an even worse idea that evidently is popular in […]

  9. major dad says:

    The state is doomed, doomed I tell you. Just like that Police Chief of a town of maybe 30K people who was earning almost 500K before somebody said wait a minute. He’s suing for a severance package now even though with Ca’s. screwed up pension plans for government workers he is making almost 700K in retirement. Nice work if you can get it.

  10. aelfheld says:

    Mr. Bingley, grandchildren? You optimist.

  11. nightfly says:

    If I were a supervillian, I think I could not do any more harm than the political class.

    So, how long before a crazy Howard Hughesian billionaire just decides to buy a bankrupt city on the cheap and govern it privately, efficiently, and make even more zillions of dollars from people flocking wholesale to live there? Wouldn’t that be the ultimate refutation of the blue state model?

  12. Michael Lonie says:

    A positively Randian idea. See if you can sell it to the Koch Brothers.

    Alas, if someone tried it, the state governments would drop regulation bombs on his city government and the Feds would lob civil rights violation litigation at him like ICBMs with dead tree warheads, more dangerous than nukes but less radioactive. Whoever tried it would become radioactive in short order. Imagine the governments tolerating soomebody who made them all look like incompetent twits. No way, no how.

    Ah, but as a dream it’s magnificent.

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