Tag Archive for General Obligation Bonds

News Coverage: California Voters Must Be Wary of More Borrowing Via Bond Sales for School and Community College Construction

In July 2015, the California Policy Center released a 361-page report For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction. (Links to individual sections are below.)

For the Kids - California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational ConstructionAs of August 26, 2015, the report has received the following news media coverage:

Six California School Districts Will Ask Voters on November 3 to Borrow $1.2 Billion From Bond Investors – commentary by Kevin Dayton – Flash Report – August 17, 2015

Unions Seek Control of Recent California School Bond Measures – commentary by Kevin Dayton – Union Watch – August 11, 2015

School Bonds May Equal Taxpayer BondageVictorville Daily Press – August 8, 2015

California Schools Stick Taxpayers with $149 Billion in Bond Debt – Breitbart News – August 5, 2015

California is in Huge Debt Hole Because of School Bonds – KFBK News Radio 1530 AM/93.1 FM in Sacramento – August 4, 2015

“For the Kids” Borrowing Will Saddle Kids with Debt – opinion piece by Gloria Romero in Orange County Register – August 4, 2015

Tough Education Reform, not More Borrowing and Spending, is What Students Need – commentary by Ed Ring – Union Watch – August 4, 2015

Specter of School Bonds Is Haunting Californians – opinion piece by Ed Ring in Sacramento Bee – August 2, 2015

Statewide Report Criticizes Passage of School Bonds – lead story in California League of Bond Oversight Committees Review – July 29, 2015

Doing the Math, Bond Debt for California Schools May Not Pencil OutModesto Bee – July 28, 2015

First look: Poll finds support for testing — Pell grants for prisoners — Washington state chief: Put more dollars into education – Politico (Morning Education) – July 28, 2015

School Bond Proposal Stirs California DebateThe Bond Buyer – July 27, 2015

Report: Voters Better Start Learning How Construction Bonds WorkLA School Report – July 27, 2015

Deceptive Ballot Language for Solano College Bond Measure Not Unusual – opinion piece by Kevin Dayton in Vacaville Reporter – July 25, 2015

Statewide Report Criticizes Passage of School BondsFresno Bee – July 24, 2015 (reprinted as Report Criticizes Passage of School Bonds in California in Education Week – July 27, 2015)

Here are links to each section of the report:

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News Media Beginning to Pick Up on Story about California School Districts Selling Insidious “Capital Appreciation Bonds” – Dayton Public Policy Institute an Early Informant to California Taxpayers

Finally, the news media is discovering and reporting on how many California school districts are selling “Capital Appreciation Bonds” to investors, thus committing future generations of California property owners to staggering tax payments.

To summarize this obscure issue in two paragraphs, when California voters approve “bond measures” so that school districts or other government entities can borrow money for construction projects, voters are directing local governments to sell “General Obligation Bonds” to investors such as individuals, commercial banks, insurance companies, and money market funds. Investors make money through the interest paid by the municipal government during the time it borrows the money. “General Obligation Bonds” are backed by the “full faith and credit” of the government entities, meaning the investors are guaranteed to get the principal and interest on the investment.

Traditionally, school districts and other government entities have sold General Obligation Bonds that provide investors with a semi-annual interest payment throughout the term of the bond, with the principal returned to the investors when the bond matures. But a recent trend for California school districts is selling a different type of General Obligation Bond. These are called “Capital Appreciation Bonds” (CABs), also known as Zero-Coupon Bonds, in which interest is compounded over the life of the bond and then paid all at once with the principal to the investors when the bond matures. This means that the government entity can delay collecting property taxes and backload the tax burden to the later years of the term of the bond, which can be as long as 40 years. Compound interest (paying interest on the principal AND interest) can accumulate huge financial obligations over such a long time period.

A reporter for the Detroit Free Press newspaper named Joel Thurtell found this same racket going on at Michigan school districts in the early 1990s and wrote some comprehensive articles exposing it, starting with the April 5, 1993 story “Michigan Schools Load the Future With Debt.” His reporting was one of the catalysts leading to a provision in Michigan law prohibiting the sale of Capital Appreciation Bonds. It was added to a school finance bill on June 22, 1994 as an amendment offered by State Senator Joanne Emmons, and Governor John Engler subsequently signed the bill into law.

Now retired from the Detroit Free Press but continuing his journalism with a blog (Joel on the Road: Words Shot With a Loose Cannon), Mr. Thurtell discovered earlier this year that California school districts were now playing this game. The giveaway was an outrageous 2011 sale of Capital Appreciation Bonds by the Poway Unified School District (just north of San Diego) that allegedly will cost taxpayers a total of $981 million by 2051. That’s the price of borrowing $105 million in 2011!

As I say to Californians whenever I try to explain this:

School board members don’t care how much these Capital Appreciation Bonds cost after 30 or 40 years. By the time property owners are assessed with the staggering tax burden, the elected board members will be out of office and probably dead. They won’t be accountable for the consequences, but they’ll still have their names on rusty plaques next to the front doors of deteriorating schools.

I learned about Capital Appeciation Bonds at the California League of Bond Oversight Committees (CalBOC) annual conference on May 11, 2012. (I’m on the Board of Advisors for this group.) I was astonished at the lack of news coverage about this potentially disasterous practice for the state and posted an article about it that evening.

I was still thinking about the issue a few days later and wondering why so few Californians knew or cared. Looking through my notes from the conference, I saw that the feisty and determined Mt. Diablo Unified School District Measure C 2010 Citizens’ Bond Oversight Committee member Alicia Minyen (an unsung hero for fiscal responsibility in California) mentioned that a reporter in Michigan has exposed the racket there, which led to a state ban on school districts selling Capital Appreciation Bonds. Researching on the web, I identified the reporter and then found his blog. I discovered he had posted several articles in the previous two weeks on the threat of Capital Appreciation Bonds in California, starting on April 27, 2012:

Muni bomb ticks in California

Posted on April 27, 2012 by Joel

By Joel Thurtell I was sipping coffee and reflecting on the ignorance displayed for all the world to read in a New York Times article. It was January 9, 2009. The Times story claimed to offer “a rare glimpse into … Continue reading →

I posted a comment on his blog to let him know that a fiscally conservative policy consultant in California had noticed the issue and planned to spread the news. He then mentioned me in his blog:

See no evil: CABS and media

Posted on May 16, 2012 by Joel

By Joel Thurtell Thanks to Kevin Dayton of the Dayton Public Policy Institute for noticing my recent columns about the evils of Capital Appreciation Bonds. He covered the May 11, 2012 meeting of California’s League of Bond Oversight Committees annual … Continue reading →

Fast forward to August 2012, and people are giving as much attention to my May 2012 articles about Capital Appreciation Bonds (Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes and Reporter Behind Michigan’s 1994 Prohibition of Capital Appreciation Bonds (CABs) Watches and Writes about the CAB Frenzy at California School Districts) as they are to my posted photo of the closest Chick-fil-A to San Francisco. The issue is now getting attention, perhaps in part because big urban school districts such as the Sacramento City Unified School District, the West Contra Costa Unified School District, and the San Diego Unified School District are asking voters on November 6, 2012 for approval to borrow hundreds of millions and even billions of dollars through bond sales to investors.

A big break for exposing the issue was a Voice of San Diego article on August 6, 2012:

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

After putting together a bond that will cost taxpayers almost 10 times what they borrowed, the Poway Unified School District has become California’s poster child for a form of exotic financing.

I suspect that a key element in the successful spread of this article was the brightly-colored pie chart that put the astonishing news into graphic form for people to understand.

The Voice of San Diego then provided a nifty guide on August 8, 2012 to other school districts selling Capital Appreciation Bonds:

Find High-Interest School Bonds in Your District: A Five-Step Guide

Want to find out if your local school district has borrowed money using expensive capital appreciation bonds? Follow our guide.

Regrettably, as other news media outlets picked up on the story and circulated it nationwide, Mr. Thurtell and the Voice of San Diego received some attention for their dispute over proper attribution of sources and credit for the story. I’ll let them speak for themselves on their web sites, but I am pleased to see this issue brought to the attention of the public as more California local governments and the State of California itself careen toward bankruptcy. (For example, see The Right Way, the Wrong Way, and the Poway of School Bond Financingwww.CalWatchdog.com – August 9, 2012)

Something has to be done now to protect today’s California children from oppressive taxes in 20-40 years when they start families, buy a house or other residential property, and own small businesses with property. (I’m assuming there will still be private property in California in 2052 – am I being too optimistic?) I want to see someone in the California State Legislature introduce a bill banning the sale of Capital Appreciation Bonds and limiting all General Obligation Bonds to a maximum time period of 30 years. It can be modeled on the law in Michigan.

Will any California state legislator dare to challenge the many special interests that regard school bonds as “chasing after money…live for today and don’t worry ’bout tomorrow, hey, hey, hey” (Use the chorus of this song as the theme music for the effort.)

Also, I thank Joel Thurtell for mentioning my early attention to this story in his blog:

Credit

Posted on August 9, 2012 by Joel

By Joel Thurtell I appreciate the article by Andrew Donohue in the Voice of San Diego acknowledging my work in uncovering and reporting about the Capital Appreciation Bond scandal in California. Donohue responded to my complaint that reporter Will Carless of the … Continue reading →

I’m in Michigan. The first California reporter to write about California’s Cab scam was Kevin Dayton, on May 11 and May 14.

Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes

Today I attended the first annual conference of the California League of Bond Oversight Committees (CalBOC) in Sacramento.

Several speakers provided guidance on how to be an effective oversight committee for a school district and provided case studies of dysfunctional oversight committees. But for me, the most valuable part of the conference was learning that foolish bond sales to finance school construction today are leaving our children and grandchildren with a tremendous tax burden in 20 to 40 years.

Walking into the conference, I knew little about municipal bonds. Unlike many Californians, I had understood that taxpayers must pay back the principal on these bonds, must pay back significant interest payments to the investors who buy the bonds, and must pay fees for various professional services associated with selling the bonds. Bonds are not “free money.”

I will guess that even Californians who know that a bond creates a debt that needs to be paid back usually don’t consider that voters who approve a $100 million bond are usually assessing property owners with taxes of about $180 million (amount not adjusted for inflation) over the term of the bond, when interest payments and fees are included in the total debt.

Traditionally, school districts have sold typical “General Obligation Bonds,” in which investors buy bonds, receive regular interest payments, and then receive the principal at the end of the term of the bond. But the growing problem for future generations of Californians is that they will need to pay off more than 1200 “Capital Appreciation Bonds” (CABs) to fund school construction (or to fund the funding of school construction, in a few cases).

Capital Appreciation Bonds are sold at a price substantially less than the principal amount of the bond. Investors don’t receive interest payments regularly over the life of the bond, but instead get a single huge payment of the principal plus the accumulated compounded interest at the end of the term of the bond.

People tend to underestimate the power of compounded interest, in which interest is earned on the principal AND on the accumulated interest. One speaker claimed that Poway Unified School District (in San Diego County) sold 40-year Capital Appreciation Bonds that will cost taxpayers 2200% of the principal because of the compounded interest.

Elected school boards like Capital Appreciation Bonds because they defer payments on the principal and backload interest payments to the final years before maturity, therefore keeping the present tax rate for property owners under the maximum rate set in Proposition 39 as a condition to seek 55% voter approval for the bond (rather than two-thirds approval).

Evading higher property taxes helps school board members to stay in public office, of course. And the huge debt service payments resulting from the compounded interest in Capital Appreciation Bonds will start for taxpayers 30 to 40 years after the bonds are issued, at which time many of the voters who approved the bond measures will be dead, as well as the school board members who authorized the sale of Capital Appreciation Bonds so many years earlier.

Does this story seem far-fetched because you’ve never heard of it? I think ordinary citizens rarely hear about municipal bonds because the topic can be complicated and dry. It doesn’t sell newspapers and it doesn’t attract TV viewers. Perhaps my layman status will allow me in occasional blog posts over the next few weeks to clearly and effectively explain the long-term dangers of these Capital Appreciation Bonds.