Post by jeffolie on Jan 24, 2013 9:37:48 GMT -6
risky school bonds CABs worst repayment explodes 10 or more times
" ... But with CABs, repayment does not begin immediately but is pushed off far into the future. As a result, interest compounds and the size of the payback explodes to 10 or more times the original borrowing over as much as 40 years.
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Mortgaging future -- California school districts must stop issuing irresponsible capital appreciation bonds
01/23/2013
Hundreds of California school districts have put themselves and their taxpayers in financial jeopardy through a costly and risky method of borrowing money that smacks of worst of the mortgage-bubble schemes.
Now all the state's districts should heed a financial warning issued jointly by the state treasurer and the state superintendent of instruction to stop the practice immediately.
Bill Lockyer and Tom Torlakson wrote a letter to school districts last week, calling on them to self-impose a moratorium on capital appreciation bonds while the governor and state Legislature consider proposals to restrict the use of this costly method of financing facilities.
Capital appreciation bonds, or CABs, mortgage the future by putting off repayment of the bonds for decades. They became popular - unfortunately - in the hard times during and after the Great Recession.
When a school district sells a traditional bond, the taxpayers of the district are assessed to pay back the principal and interest, year by year, usually for 30 years; the payback total is generally about three times the amount of the bonds sold.
But with CABs, repayment does not begin immediately but is pushed off far into the future. As a result, interest compounds and the size of the payback explodes to 10 or more times the original borrowing over as much as 40 years.
Poway Unified School District in San Diego County has become the poster child for this kind of costly financing. The district's borrowing of $105 million through CABs in 2011 will cost district taxpayers $981million by 2051 - nearly 10 times the loan amount. Voice of San Diego reported that no payments are due for the first 20 years, but starting then taxpayers will be on the hook for $49 million a year for the next two decades.
That means all the gain and none of the pain comes now. Current school board members will be long gone before the first payment comes due. In 30 years, school officials likely will complain that the buildings constructed with the CAB money are old and outdated and need to be replaced; but taxpayers will still be encumbered by the huge yearly payback for another decade into the future, so they're not going to vote to borrow more money to replace those buildings.
That's why it amounts to mortgaging the future.
There are many examples of CAB borrowing closer to home. Hundreds of California school districts have used CABs since 2007, according to a database compiled by the Los Angeles Times, and many of those loans exceed what government finance experts consider wise: cost of more than four times the original loan or a payback period of more than 25 years. Following are some highlights -- lowlights, really -- from that database.
Las Virgenes Unified borrowed $5.7 million in 2009 and 2011 and will have to pay back $27 million - 4.7times as much.
Redondo Beach Unified used CABs for a relatively small loan, $269,172, which it will pay back 8.2 times over.
Walnut Valley Unified, a district that is already in financial trouble, borrowed $310,547 in 2011 and will pay back 5.3 times that amount. That is not fiscal prudence.
Hawthorne School District borrowed $6.7 million and will pay back more than seven times that much over 40 years.
Alhambra Unified borrowed $21 million in 2009 and will pay back more than six times that amount, then borrowed another $9 million in 2011 and will pay that sum back seven times over.
Los Nietos, a small school district in Whittier, borrowed $3 million in 2011 and will pay back more than six times that amount. In 2008, the district took out a very small loan, $178,130, but will pay it back a ridiculous 11.2 times over 25 years.
That's a lot of money owed to bondholders a long time from now.
School districts must not issue any more of these irresponsible capital appreciation bonds, and the Legislature should act to rein in the costly financing method.
www.presstelegram.com/opinions/ci_22434852/editorial-mortgaging-future-california-school-districts-must-stop
" ... But with CABs, repayment does not begin immediately but is pushed off far into the future. As a result, interest compounds and the size of the payback explodes to 10 or more times the original borrowing over as much as 40 years.
=========================
Mortgaging future -- California school districts must stop issuing irresponsible capital appreciation bonds
01/23/2013
Hundreds of California school districts have put themselves and their taxpayers in financial jeopardy through a costly and risky method of borrowing money that smacks of worst of the mortgage-bubble schemes.
Now all the state's districts should heed a financial warning issued jointly by the state treasurer and the state superintendent of instruction to stop the practice immediately.
Bill Lockyer and Tom Torlakson wrote a letter to school districts last week, calling on them to self-impose a moratorium on capital appreciation bonds while the governor and state Legislature consider proposals to restrict the use of this costly method of financing facilities.
Capital appreciation bonds, or CABs, mortgage the future by putting off repayment of the bonds for decades. They became popular - unfortunately - in the hard times during and after the Great Recession.
When a school district sells a traditional bond, the taxpayers of the district are assessed to pay back the principal and interest, year by year, usually for 30 years; the payback total is generally about three times the amount of the bonds sold.
But with CABs, repayment does not begin immediately but is pushed off far into the future. As a result, interest compounds and the size of the payback explodes to 10 or more times the original borrowing over as much as 40 years.
Poway Unified School District in San Diego County has become the poster child for this kind of costly financing. The district's borrowing of $105 million through CABs in 2011 will cost district taxpayers $981million by 2051 - nearly 10 times the loan amount. Voice of San Diego reported that no payments are due for the first 20 years, but starting then taxpayers will be on the hook for $49 million a year for the next two decades.
That means all the gain and none of the pain comes now. Current school board members will be long gone before the first payment comes due. In 30 years, school officials likely will complain that the buildings constructed with the CAB money are old and outdated and need to be replaced; but taxpayers will still be encumbered by the huge yearly payback for another decade into the future, so they're not going to vote to borrow more money to replace those buildings.
That's why it amounts to mortgaging the future.
There are many examples of CAB borrowing closer to home. Hundreds of California school districts have used CABs since 2007, according to a database compiled by the Los Angeles Times, and many of those loans exceed what government finance experts consider wise: cost of more than four times the original loan or a payback period of more than 25 years. Following are some highlights -- lowlights, really -- from that database.
Las Virgenes Unified borrowed $5.7 million in 2009 and 2011 and will have to pay back $27 million - 4.7times as much.
Redondo Beach Unified used CABs for a relatively small loan, $269,172, which it will pay back 8.2 times over.
Walnut Valley Unified, a district that is already in financial trouble, borrowed $310,547 in 2011 and will pay back 5.3 times that amount. That is not fiscal prudence.
Hawthorne School District borrowed $6.7 million and will pay back more than seven times that much over 40 years.
Alhambra Unified borrowed $21 million in 2009 and will pay back more than six times that amount, then borrowed another $9 million in 2011 and will pay that sum back seven times over.
Los Nietos, a small school district in Whittier, borrowed $3 million in 2011 and will pay back more than six times that amount. In 2008, the district took out a very small loan, $178,130, but will pay it back a ridiculous 11.2 times over 25 years.
That's a lot of money owed to bondholders a long time from now.
School districts must not issue any more of these irresponsible capital appreciation bonds, and the Legislature should act to rein in the costly financing method.
www.presstelegram.com/opinions/ci_22434852/editorial-mortgaging-future-california-school-districts-must-stop