Over the past few months, California has come under fire for its use of capital appreciation bonds to fund school repairs and expansions. These exotic bonds allowed pols to pour money into schools without raising taxes. The catch was that when bills come due decades later, taxpayers will be on the hook for as much as ten times the borrowed amount. In one school district, a $514,000 bond was expected to cost $9.1 million in about 25 years’ time.Now, in a modest return to sanity, the state is doing something to limit the damage these bonds could do. Bloomberg reports:
The lower house of the state legislature approved a bill that would limit the duration of capital-appreciation bonds to 25 years, prohibit debt payments of more than four times the principal and mandate the option of early repayment on deals that mature in more than 10 years. The vote yesterday was 73-0.
This is good news, suggesting that some reserve of fiscal sanity still exists in California. But now the state is faced with the same dilemma that prompted the abuse of the bonds in the first place: how to pay for the upkeep of its school system when its budget is eaten up by exploding pension costs?[Aaron Kohr / Shutterstock.com]