The American Interest
Analysis by Walter Russell Mead & Staff
Ripping Off Taxpayers: The California State Sport

We thought we’d plumbed the depths of political sleaze and voter rip-offs in California, but it turns out things there are even worse than we thought. Take a look at this story that comes from the Voice of San Diego:

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.

But Poway Unified’s deal was far from normal.

In 2008, voters had given the district permission to borrow more money to finish its modernization, and they had received a big promise from the elected school board in return: No tax increases.

Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.

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.

The great-grandchildren of today’s taxpayers in Poway will be paying this debt:

In short: In order to keep its promises to current residents, the district entered into a deal that places a billion-dollar burden on future residents.

Poway is not alone, as Will Carless details in a follow up article. Other schools have made the same promises to voters and the same deals with investors, all with the same results: massive bills will be coming due—not now, but down the road.

Tar, feathers, riding someone out of town on a rail: these are ways Americans used to express their displeasure with outrageous scoundrels. We don’t approve of these methods or recommend them, even in Poway, but one thing we’d like to see: laws that make deals like this as illegal as they are morally wrong.

And Via Meadia has a suggestion for taxpayers everywhere: don’t count on sleazy politicians or the supine local media to provide accurate information about the true cost of the debt your municipal government plans to take on. This is an area where a lot more citizen involvement is needed. Wall Street and sneaky politicians share an interest in concealing the real cost of these deals, and too often the press is too lazy, too close to the power structure, or just too dumb to sound the alarm.

Published on August 8, 2012 12:00 pm
  • gezatop

    Interesting. A bet on huge dollar devaluation over the next 20 years. Where did they get the idea?

  • BigFire

    Don’t worry, they can ALWAYS declare bankruptcy. That’s the American Way.

  • Snorri Godhi

    The biggest fools in this case would seem to be the lenders.
    The next biggest fools are probably the voters.

  • dearieme

    Who has lent on such terms? They must be mad.

  • Corlyss

    Welcome to post-Prop 13 life in the Land of the Lotus Eaters.

  • Andrew Allison

    And yet, Gov. “High-Speed-Rail-or-Bust” Brown is still banking on the voters to give the State even more money to squander in November. One doesn’t know whether to laugh or cry, but as a resident of the late, great State, I’m more inclined to tears.

  • http://fat-city-usa.blogspot.com/ Walter Sobchak

    #5 Corlyss. Prop 13 was a generation ago, you can stop leaning on it as an explanation of anything.

  • Joseph Wilson

    Tar and feathers?
    Lets go Greek on them and banish them from these shores. Let them ply their wares across the seas.

  • Joseph Wilson

    and prop 13 was passed in 1978. Pete Wilson somehow managed.

  • John Burke

    I’m betting that school district voters, parents especially, thought this was a darn good deal: modernized schools all around for the kids with no tax increases! Let’s not assume all the blame falls on unscrupulous pols. I served on my school board for a decade and my experience was that the board’s biggest challenge was fending off community demands for more stuff — more teachers, more programs, more schools, more, more.

  • ed

    In the private sector, this kind of mega-fraud would sent every executive in the Poway system to long stretchs in jail.

  • http://barking-moonbat.com Rich K

    Well well, not a peep from our fave curmudgion thibaud on this one,big surprise.Anyway, I am so glad I am fully mobile so if my locale adopts BS like this I can roll up the carpet and relocate swiftly. Good advice for most young folks too actually,rent.Or do serious homework on where your going to plant roots because this kind of sleaze is in all 50 states with the possible exception of Alaska and Utah.

  • buzz

    Hey, the prop 13 guy has a point. If only it hadn’t passed, the property tax would have gone up so much in the past 30 years or so either the house market would have crashed years ago, or taxpayers would have finally risen up and tossed all these people out of office.

  • Vinny B.

    Of course no one cares about how Bush and the Republicans destroyed the national economy in the name of Halliburton, Big Oil, and Wall Street, and now all you tell us is to blame the nearest black man and if that fails, which it has, blames those illegal immigrant mooches in California. Time to move on, righ-wingers. You lost the argument in the last election. Accept it.

  • FrancisChalk

    A school board run by Democrats, voted in by Democrats. Is there a Democrat anywhere who understands math, debt or ecomomics?

  • Andy Freeman

    Govts should not be allowed to sell “general revenue” bonds. They should only be allowed to take out secured loans.

    That gives lenders some skin in the game.

  • Despiser

    Prop 13. Liberalos have been using that one since I was 14 and Im now 47… You would think the statute of limitations has run out on that stupidity long ago.

    California has stolen enough from the taxpayer and given us Tijuana North in return.

  • Despiser

    I remember clearly many times from 5th grade through HS Teachers telling us to bring our own pencils and paper because of Prop 13. As they were getting generous raises and unsustainable bennies.

  • Sam L.

    Yes, that’s the great-great-great-great-grand-post Prop 13 life. Show just how long the pols and the voters have been toking on those bonds. There’s plenty of blame to pass around, but it was the pols who sold the voters on passing the bonding bills.

  • Jerry

    @John Burke,

    It’s the wealthy who demand the modernized schools in my area. And when I say modernized I mean schools far and away better than those they compete against in high school football. No concern for the average Joe and none for those just hanging on. I assume they suppose we only need to eat cake.

    The Piper will be paid however. You don’t build an economy on debt, or at least not for ever.

  • SDN

    John Burke, if the pols told the voters this, how many of them could have actually done the investigation, especially if Poway adopted Obama transparency and refused to show the data a la global warming scammers?

  • chaz

    This is why bonds should never be passed. This is why you don’t borrow money unless you absolutely have to… period.

    ‘For the Children’ was the biggest lie ever invented. This chart is the biggest piece of evidence to show that.

  • Redstate

    No sympathy from this corner…I enjoy watching Californians ripping off Californians.

  • Pitbullll

    Decades of corrupt Democrat hegemony have ensured that California will continue to lead the nation… over the fiscal cliff.

  • Jim T

    I hate to disagree with you, but whoever lent this school district money on these terms is crazy. It’s essentially free money for Poway because it will never be repaid.

    Running the numbers, it looks like they are charging less than 8 percent. For a community in California?!? Once again, crazy.

  • Californio

    So that would make the effective interest rate – what, exactly?

  • VRWC

    I was in Poway a few years ago for a baseball tournament…. Walking thru the parking lot of the middle school where the games were held I noticed ten spaces marked off for school officers.

    There was one for the principal and THREE spaces for “assistant” principals…. Plus a finance officer…. ( one of the assistants couldn’t cover finance?)

    All this for one middle school with less than 500 students…. No wonder the state is broke.

  • Mike Gordon

    It has long been my belief that school bond issues should be paid off over short periods of time so that the beneficiaries of the spending, current parents of school children in the district,should bare the burden of paying.

  • bobby b

    I think there’s no longer any doubt that We The Nation’s Taxpayors will be – no, not just “bailing out” California – we’ll be making California whole PLUS adding some gravy to help with their train, and their oil, and whatever other crises they can pack onto the deal they make with Reid and Obama.

    A number of the more stolid polls indicate a very tight race, (which is a vast disappointment in and of itself,) but the worst of it is that it puts us into the “don’t make it close enough so that they can steal it” range, and I’m pretty sure that a massive deal that cleans up California’s issues and gives them a continued shot at their train could also leak significant chunks of additional money out to other interested parties in sufficient bulk so that, combined with California’s gratitude, they pull the El Votes they need.

    We’ve (always) very badly underestimated the expertise of the legal tricks-making of the Dems, and so, again, our lack of diligence is about to bite us on our collective conservative butt. There are legal processes with which the Executive Branch could restore California to a position of wealth and power that can be put in place through Executive Order or agency action. We’d all be shocked and appalled, of course, and internet traffic would spike for months, but, honestly, would Obama pulling such a ripoff cause any of us to think “migawd, I NEVER would have believed that he’d do something like THAT!”?

    (Wouldn’t it be funny if the recent welfare rule changes were essentially a rogue action by the really lefty left, presenting it to BO as a done deal, and he blinked and let it stand? Any other agencies that might think that support of California ought to be a progressive value, and that also might think that BO needs to be pushed left faster?)

  • Jim.

    @Joe Wilson, #8-

    There’s also the old Roman way involving a leather sack and various uncooperative and irritable animals.

  • http://www.theparenttrigger.com Bruno Behrend

    Every school district in America is a mini-Enron. Public Education has become a legalized money laundering scheme for worthless bureaucrats, piggish unions, and greedy bond dealers.

    This goes on everywhere. If a school superintendent is talking, s/he’s lying. It is an empire of greed.

  • Bohemond

    “Of course no one cares about how Bush and the Republicans destroyed the national economy in the name of Halliburton, Big Oil, and Wall Street,”

    And the existence of this sort of stupidity explains why California continues to elect villains and dullards.

    BTW, genius, the last election was 2010, and your lot got thumped.

  • Daedalus Mugged

    How is this any different from the Social Security Trust fund, which ‘they’ lent to themselves, and expect someone else to make good on? How is it any different than the unfunded liabilities of Medicare, or the fiscal disaster that is Obamacare?

    The entire premise of our government is to steal from the future to buy votes now. Given that the future didn’t get to vote on the deal, don’t be surprised that they renege when they are expected to pay.

    The ponzi was always, we steal a little from the future, and if you make us good, you can steal even more from the future! The problem is that we have now effectively stolen everything from the future.

    This bond is probably a smart move by Poway. The most likely scenarios are that:
    A) The loan is eventually repaid, and the $981mm is almost, but not quite, enough to buy a school lunch.
    B) When converted to the new quatloos, the $981mm is almost enough to pay for a school lunch.
    C) Some time in the next 40 years, Poway (along with virtually every other entity, at least every entity with an inflation indexed pension) will go bankrupt, and the lenders will get almost enough to pay for a school lunch.

    So Poway just got $100mm for the cost of a future school lunch. The only problem is that future school lunch will be more valuable to the taxpayers of Poway than what the $100mm was wasted on. Three assistant principals for a middle school?

  • WJW

    This may be a bad idea (and probably is), but Mr. Mead (and the reporter at voice of san diego) left out two key pieces of information in order to properly evaluate this deal.

    What is the interest rate on the bond?
    Given the long time of deferred payments and capitalized interest (in this case 20 years), all dollar amounts should be done in current dollars (i.e. use net present value analysis) so that the time value of money can be taken into consideration.

    For example, if someone were to loan my company $100M today, and then I had to pay back $1B over 20 years STARTING 100 years from now, that would be a great deal.

  • Squid

    I fear Daedalus has the right of it. By the time these debt service payments come due, a loaf of bread will cost two grand, and the Dems will base their campaigns on their glorious success at turning us all into millionaires. I mean, it’s not like Uncle Sam is going to pay back $100 trillion without some massive inflation.

    The sad moral of the story is that the State has set up a system that will punish every saver and reward every profligate borrower. And they wonder why commodities prices keep climbing…

  • teapartydoc

    In discussing Rousseau’s idea of the social compact Burke said that society was a partnership of the living, the dead, and those yet to be born. Chesterton reiterated some of this idea with his concept of the democracy of the dead. Many of the above comments demonstrate an understanding of the obligations that must be borne in a Burkean understanding of society. The Blue Model of government, like the Rousseauian concept of the General Will, counts only the generation in existence at the time the decisions are made which defecate on both past and future generations alike. This will not turn out well.

  • http://www.jpfo.org james solbakken

    Kalifornians are soooo stupid they are evil.
    I so much look forward to seeing the utter destruction of these wicked monsters I don’t even want to leave the place myself. Just like I would be inclined to hang around Sodom even though I knew the place was toast just to see the spectacle. I also like massive train wrecks.

  • Mick The Reactionary

    @james solbakken:

    “Kalifornians are soooo stupid they are evil.
    I so much look forward to seeing the utter destruction of these wicked monsters”

    Enjoy bashing CA while it is legal.

    CA currently is 40% whites, 39% hispanics, 7% blacks, 13% asians.
    In a few years it will be 50%+ hispanics + blacks.

    By then statements like yours above will be deemed criminal racissssm punishable by time in a workcamp or a term in psychiatric facility (obviously no sane persone could be so racisss).

    Just wait a little and we will deal with you, you no-good intolerant bad racisss.

  • Spreadsheeter

    It sure is easy to jump to conclusions, pull out a favorite rubber hose and beat the [profanity removed] out those “others” for their egregious transgressions. A lot easier than trying to understand what is going on here.

    If you run the numbers the deal looks approximately like this:
    • Loan: $105,000,000
    • Annual Interest: 7.5%

    If you assume 3% average annual inflation for the 40-year term (which is in line with historical inflation over the past 40 years), the present value cost (cost in 2008 dollars) of that $105M to the taxpayers is:
    • $351,000,000

    For comparison sake, if Poway had done a typical 20-year bond with a 7.5% interest rate and started paying immediately, the present value cost to taxpayers would be:
    • $156,000,000

    This is about half the cost to taxpayers. And Poway should have been able to get a lower interest rate than 7.5% on the shorter term bond.

    Here’s my take on this. It is quite common for public agencies to pay way too much for financings like this. These are often very technical transactions and most public agencies, especially school districts, don’t have the financial sophistication to protect themselves. That may have happened here. I would guess that Poway has other outstanding bonds that will be paid off in the next 20 years which will free up that revenue to pay off this bond.

    It is also quite common for CA public schools to be in desperate financial straits right now following 4 years of cutbacks from the state. This deal smells of desperation. And folks, whatever you think of Prop. 13, it is alive and well and plays very large in this financial catastrophe for CA public school districts. It’s too complicated to get into here, but I spent many years as a trustee of a CA public school and have a very strong grasp of the legal/structural legacy of 13. It was not good for schools.

    We don’t know what the district is spending the money on. For most facilities projects, there is no return on investment. However, if they are financing energy efficiency projects or renewable energy facilities, these do have an ROI and could essentially reduce the cost of the financing to taxpayers.

    Overall, I think a CAB financing like this is a bad idea. It costs too much and ties up the district’s ability to raise facilities financing well out into the future. Should we really be taking financial actions for our constituencies 20-40 years in the future? But I don’t see it as a Democrat or Republican thing. Nor is this likely to be the result of any malfeasance or malice on the school board’s part. Like most boards, they are probably doing the best they can with thin expertise and under very difficult circumstances. We elect these people to represent us – they sometimes make mistakes. Board governance is a very messy process.

    Lastly, many people are guessing that the U.S. economy is going to collapse and that inflation will go through the ceiling. Maybe gezatop is right: if the average annual inflation over 40 years is 7% or more, it’s actually a better deal for the taxpayers to do this financing than a standard 20-year bond. An interesting gamble if it was considered.