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Fiscal Sanity Creeping Toward California's Shores


It looks like California is heeding Via Meadia’s advice about capital-appreciation bonds, which many California school districts have been using to fund construction and other such projects. These poisonous bonds allow school districts to borrow money and delay payment for decades while the interest can balloon to ten times the number borrowed, and use of them is at a five-month high. But Governor Brown is poised to rein them in. Bloomberg reports:

The measure the 75-year-old Democrat is considering passed unanimously. It would cap interest on securities known as zero-coupon capital-appreciation bonds at four times the principal, and limit maturities to 25 years from the current 40. A school-finance lobbying group dropped its opposition to the bill.…

Boards overseeing California’s nearly 1,000 school districts increasingly turned to the financing mechanism after the recession that ended in 2009 reduced property-tax revenue used to build and modernize classrooms, an analysis of the bill shows. In 2009, lawmakers also eliminated a 10 percent cap on the annual growth in debt service, according to the analysis.

The result was an explosion in practices that Lockyer, a 72-year-old Democrat, termed “abusive” as districts pushed interest payments decades into the future, often with “balloon” payments due in 40 years. The securities differ from coupon-bearing bonds, which pay interest on a regular basis.

The impetus for the legislation was a story we covered last year: The Poway Unified School District (near San Diego) used these toxic bonds to borrow $105 million from investors in 2011, saddling future generations with a disgraceful $1 billion liability due in 2051.

Cutting the limit on maturities by 15 years is absolutely a step in the right direction, and we hope Governor Brown will hasten the bill’s passage. But even capped at 25 years, these bond issues are extremely dangerous. The massive interest and fees they accrue are pie in the sky for greedy bankers and crony capitalists who are all too happy to help feckless politicians rip off taxpayers decades down the line.

The pension crisis is already one time bomb that will explode in the face of future generations if it isn’t resolved soon. If it isn’t, and bond bombs start going off too, Californians—and soon enough, many more Americans—will find themselves in a very dark place.

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  • Corlyss

    Why not just forbid the schools from using the bonds?

  • bigfire

    Meanwhile LAUSD (the largest school district in the nation) is issuing iPAD for everyone. Mind you, these things will be obsolete in about 3 years. And they’re paid for using the school construction bond money.

    I wish I was kidding.

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