General obligation bonds cost taxpayers more than their face value, but ten times more? A payment ten times the face value of a bond can occur with Capital Appreciation Bonds (CABs) that are paid off over 40 years. Just ask the good folks living within the Poway Unified School District in San Diego County, who only recently became aware of their huge debt.
Residents in the Poway Unified School District learned that a 2008 $179-million bond issue approved by the voters for construction purposes will cost $981-million by the time it is paid off in 40 years.
There are usury laws for that sort of thing in the private economy but apparently not when taxpayers are the victims.
In the shadow of the economic downturn some schools districts have turned to the long-term payoff of Capital Appreciation Bonds to meet financial needs.
Under the Poway deal, the district makes no payments for 20 years and repays the bond over the next 20 years all the while the bond is building up interest.
The exorbitant cost of the bond was revealed from thousands of miles away by a Michigan blogger who covered similar bonds when he worked for the Detroit Free Press. Michigan banned the use of CABs in 1994.
Defenders of the bond say the economy will come back and help cover the cost. They are betting on inflation to clear the books by paying the cost in cheaper dollars.
Under such a scenario, the tax dollars to pay the debt, not to mention the income earned by the taxpayers, would be inflation-adjusted dollars, too. Counting on inflation is no excuse for creating huge debt.
A year before the Michigan blogger exposed the terrible expense associated with the CABs, Los Angeles County Treasurer and Tax Collector Mark Saladino warned school authorities not to participate in CABs and other financing schemes that would be cause great risk to school districts.
In a White Paper written in 2011, Saladino highlighted the danger of some General Obligation bond financing schemes. Saladino’s paper pointed to the dangers of relying on using certain financial instruments to meet financial needs created by the economic downturn. He singled out concern over the long term CABs, which he pointed out were “exceedingly costly for both school districts and local taxpayers.”
He stated that any CAB that required payoff over 25 years would come at an enormous cost to the taxpayers.
The California Association of County Treasurers and Tax Collectors supported Saladino’s position.
However, school districts such as Poway cut a deal that put their taxpayers in a hole—40 years and hundreds of millions in interest above the face value of the bond.
Before the problem gets out of hand and other school districts get burned they best take a look at Saladino’s paper. It can be found here.