Passing the Buck--Big Time!

Only folks who play with other people’s money and will be long gone when it’s time to pay the piper would feel free to enter into an agreement that obligates the borrower to repay almost a billion bucks to finance a loan of $105 million.

Poway Unified School District recently became the national poster boy for capital appreciation bonds whose delayed repayment schedule (beginning in 2033) accounts for the embarrassing interest-to-principal ratios for PUSD’s 2011 loan.

Unfortunately Poway isn’t alone when it comes to employing this borrow-now-pay-a-lot-much-later financial instrument. Most prominent on the list is San Diego Unified’s 2010 agreement to repay 1.25 billion dollars, starting in 2030, for a loan of $164 million.

Other bonds with similar interest-to-principal ratios, but smaller amounts borrowed, have been issued by school districts in Oceanside, San Marcos, and Escondido. A number of community college districts also issue capital appreciation bonds—most prominently the San Bernardino Community College District whose 56 million dollar loan would eventually cost almost half-a-billion dollars by 2048, the final repayment date.

Fortunately, some capital appreciation bonds, unlike those employed by the Poway school district, can be refinanced.

It should go without saying that this etched-in-stone bond with eye-popping repayment figures wasn’t clearly presented in the 2008 election when Poway voters approved the sale of $179 million in “general obligation bonds.”

A boldface declaration in the text of Proposition C assured voters that the maximum tax rates levied to pay for the bonds would be the existing rate of “fifty-five dollars ($55) per year per one hundred thousand dollars ($100,000) of taxable property.”

Another incentive for reluctant voters was the prospect of $20 million in “free money” from Sacramento.

The impartial analysis of county counsel blandly noted in its third dense paragraph that bond interest rates could not exceed 12 per cent per annum or mature later than 40 years after issue—“pursuant to the Government Code.”

Prop C passed with 64% of the vote, but when funds ran out and planned construction projects were still incomplete, the easiest way to keep the “no tax increase” pledge and complete construction was to employ the capital appreciation bond alternative—a choice that passed the buck (a billion bucks, in fact) to a future generation.

Lacking the federal government’s power to run trillion dollar deficits, local politicians naturally latch on to convenient alternatives like borrowing with long-deferred repayment schedules and praying for another housing boom.

In both cases, however, our children and grandchildren are the ones left holding the bills.