Screwing Future Generations ... CAPITAL APPRECIATION BONDS

Have you ever heard of "capital appreciation bonds?"

If not, then get ready for an education in American generation screwing.

It's time for us oldsters and even younger adults to 'fess up and admit the truth to the youngsters and even the unborn.

Because only after accepting the current reality, will we ever be able to move on together to creating a better reality for ourselves and future generations.

And we very much need to create that better reality. In fact, our current and widespread habit of governmental financial malfeasance has resulted in historical levels of unaffordable public debts, deficits and unfunded liabilities --- at all levels of government.

Here's the sad and cruel story of generation screwing in its simplest form. Our "public servants" in the various states, cities and those serving in our beloved federal government engage in it each time they borrow money which won't be repaid by the current generation of taxpayers.

It happens all the time, and it's wrong every time it happens. We'll use California as our example du jour, but it's just that and nothing more --- an example. Generation screwing happens in lots of places and in lots of ways. All the time.

California Schools Finance Upgrades by Making the Next Generation Pay tells the tale:

"LOS ANGELES — School officials in Santa Ana were in a bind several years ago: they wanted to build hundreds of new classrooms, but feared that voters would rebel against tax increases to pay for the construction.       

Since 2007, hundreds of school districts and community colleges across California have used capital appreciation bonds to raise nearly $7 billion for various construction projects, according to data from the state treasurer’s office. The bonds have allowed school districts that are short on cash to finance classroom renovations and new athletic facilities while delaying payment for years, or even decades.

But these new facilities often come at an enormous cost to future taxpayers, who will be liable for huge interest payments that sometimes balloon to more than 10 times the amount borrowed over as much as 40 years. By contrast, repayment on traditional school bonds usually costs no more than two to three times what was borrowed. . . . 

And in the most expensive case yet, the Poway Unified School District borrowed $105 million to finish modernizing older school buildings, which local property owners will be paying off until four decades from now at an eventual cost of nearly $1 billion. Because payments on the bond do not start for 20 years, current school board members faced little risk of resistance from property owners.

Still, residents and elected officials have expressed growing outrage at the bonds since news of the Poway deal was reported. . . . 

Some states — including, until recently, California — have strict laws to curb use of these bonds. Michigan has barred school districts in the state from selling capital appreciation bonds at all.

But in 2009, as the housing market crash drove down tax revenues for schools and state education financing was cut, California lifted its requirement that long-term bonds be paid off at approximately the same rate each year, opening the door for bonds that delay payments for 20 years.

Tom Duffy, a former superintendent of the Moorpark Unified School District who now works as a lobbyist for the Coalition for Adequate School Housing, said long-term capital appreciation bonds offered school districts needed flexibility. He criticized efforts to limit them again.

“California school districts have a very limited number of tools available to them when it comes to financing public infrastructure,” he said.

The bonds let school districts embark on costly school renovations with minimal immediate pain for property tax payers.

A bond measure that Santa Ana voters approved in 2008, which authorized the district to borrow $200 million, has financed the replacement of hundreds of temporary classrooms with new, permanent ones. More than 800 existing classrooms have been renovated.

District officials had pledged to complete all those projects without raising property taxes further. To keep those promises, they had to turn to long-term bonds, said Michael Bishop, an associate superintendent for the Santa Ana school district.

Although the 2009 capital appreciation bond brought in only 17 percent of the $200 million authorized by the 2008 bond measure, it accounts for more than half of the total debt the district incurred. As a result, more than half the cost of all the projects will fall on the shoulders of taxpayers decades from now.

In addition, if property values do not continue to rise in the intervening years, as district officials are anticipating, future school board members may have to raise taxes to pay for 30-year-old classrooms. . . .    

Many voters — and even some school board members — said they did not realize when they supported the bond measures that they would be signing up for huge debts that local homeowners would still be paying off 40 years from now.

“If you asked the average voter,” said Assemblywoman Joan Buchanan of Alamo, a co-sponsor of the Assembly bill, “I think they would have no idea what a capital appreciation bond is.”"

Summing Up 

Buy now, pay later, has long been part of the American way. But there's a new twist on the old practice.

"We" buy and "you" pay is the new way, and the "you" is future generations, aka our kids and grandkids. How about them apples?

To repeat, "we" vote to buy now and "you" are obligated to pay later is the way it all works.

We, of course, are the current voters and adults.

You, of course, are our children and grandchildren, and many of you aren't yet born.

Aren't "you" lucky to have such caring and concerned adults acting on your behalf and looking after your future interests?

Or perhaps do "you" feel differently?

Like you're being the victims of taxation without representation? And wasn't that why the Revolutionary War was fought?

That's my take.

Thanks. Bob.