School Officials Borrow $105 Million and Will Force Their Grandkids to Pay Back $1 Billion... Have We No Shame?

Illinois has an unfunded public sector pension liability of $85 billion. That's not news. Where it will get the money to fund its obligations is still somewhat a mystery.

Some California school districts, however, have taken the mystery out of it and are doing something that really is disturbing. It involves issuing something called "capital appreciation bonds."

What it really amounts to is passing the liability on to future generations and doing so by borrowing money for which no interest or principal payments will be required for a few DECADES. That way they can avoid increasing taxes on today's current taxpayers. They just screw the future generations instead. It's shameful, and especially for a governmental entity. Let's open our eyes fully, fellow taxpayers.

Schools Pass Debt to the Next Generation describes the absurd situation in the following way:

"The deleveraging of America is well under way, as individuals and companies recover from the excess borrowing that helped to produce the boom and left many people vulnerable when the bust arrived. Household debt is down nearly $900 billion over the last four years, partly from repayments and partly from defaults.

Graphic

Shrinking Governments

During the crazy times, homeowners could get mortgages that allowed them to pay less than the full amount of interest being charged, with the rest added to the principal. Commercial property owners generally paid the full amount of interest, but did not have to repay any principal until the loan matured in five or 10 years. For both homes and commercial properties, lenders were willing to rely on extremely optimistic appraisals.

For property buyers, those days are gone,

But for some borrowers, it is still possible to borrow now and pay nothing for decades.

There is a furor in California because the Poway Unified School District, in San Diego County, borrowed money last year on terms that even Countrywide would have laughed at during the boom. It will not pay a dime of interest or principal for more than two decades. Only then will it begin to service the bonds.

It is paying a high price. Although it has a good credit rating — Aa2 at Moody’s and AA– at Standard & Poor’s — it will eventually pay tax-exempt interest of up to 6.8 percent for the borrowings. When it issued more conventional bonds last year, it paid rates that were much lower, ranging up to just 4.1 percent.

For borrowing $105 million in 2011, taxpayers — or perhaps it would be more accurate to say the children and grandchildren of today’s taxpayers — will pay $877 million in interest between 2033 and 2051.

In San Diego, the bond issue first gained attention on The Voice of San Diego, a Web-based publication, which published an article this month headlined “Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools.” As the Voice noted, others, including Joel Thurtell, a Michigan blogger, had written outraged articles about the bond issue. But it was the Voice article that attracted national attention, including a report on CNBC.

It turns out the Poway bond issue is not unique. This kind of borrowing has been going on for years, particularly in California, where the tax revolt that began with Proposition 13 in 1978 has made it harder and harder to finance education or other local government services. Assorted propositions approved by voters have made it very difficult to raise taxes at all.

According to a Thomson Reuters database, school districts issued nearly $4 billion in such bonds last year, and have sold almost $3 billion more this year. Back in 2006, when the credit boom was in full bloom, $9 billion worth of so-called capital appreciation bonds were sold.

The Poway issue is unusual in delaying interest payments for so long, but there have been others. Its neighbor, the San Diego Unified School District, borrowed $150 million in May, promising to begin payments in 2032.

School districts’ logic for borrowing for construction projects always was that those who benefit should pay for a construction project. In the case of the Poway bond, however, it is at least possible that it will be the children of today’s students who end up paying the bill. By then, many of these school buildings may be obsolete, or at least in need of another refurbishing. . . .  

Your guess may be as good as his as to just how inflated those costs will be. But it is hard to believe that the district would not have been better off borrowing on terms that called for repaying the loan more quickly. The interest rate would have been lower, and the power of compound interest would not have caused the total payments to rise into the stratosphere.

But the option of getting reasonable financing may not have been available to the Poway district, or to many of the other districts that have resorted to these capital appreciation bonds. Poway officials had promised not to raise taxes, and this way they won’t have to. At least not until 2033. They set the payments to begin after earlier bonds are paid off.

Nationally, it appears that fewer and fewer school districts have been able, or willing, to find ways to finance new buildings — or even to pay teachers, as property tax revenue plunged with the deflating of the housing bubble and pinched states reduced assistance. State and local governments are spending less and employing fewer people now than they were before the recession. Adjusted for inflation, state and local investment in buildings and other assets is at the lowest level since 1998....

Much of this expensive borrowing is a result of local officials searching for a way to meet their responsibilities at a time when opposition to taxes has become a mantra. This generation will not pay for what it needs, so some of its leaders have decided to saddle future generations with the bills."

My Take

This "spend and not tax but borrow" sick situation is getting totally crazy. It's also perpetrating a fraud on future generations and digging a deeper financial hole every day. It's totally out of control.

We have obligations that exist today. We need to begin to chart a clear path to meeting those obligations, and it shouldn't put the burden on future generations. Have we no shame?

Borrowing today and deferring any payments for DECADES is simply morally wrong.

Capital appreciation bonds are a fraud being perpetrated on our nation's future taxpayers, aka kids and grandkids, and they don't even have a voice in the matter. It's TAXATION WITHOUT REPRESENTATION IN ITS PUREST FORM.

Debts are debts, and commitments are commitments. Debts can't be extinguished without either default or repayment. What's done is done.

Commitments or promises can be changed. What's done still can be undone.

In both cases, however, promises are being made by current voters on behalf of future voters or generations, since the current voters or taxpayers are unwilling to tax themselves. This really stinks.

So whether that obligation is largely unfunded, such as with the Illinois public sector pension commitments, or actually borrowed money, as in California, isn't the real problem.

The fundamental underlying problem is our failure to accept the responsibility to pay for what we spend. Either don't spend it or have the guts to tax ourselves RIGHT NOW, in other words.

We've been borrowing from the Social Security "fund," the Medicare "fund," the teachers retirement "fund," the Solyndra type "investment funds" and too many other non-existent PRETEND funds for far too long.

We have a "commitment" and debt crisis, and we need to "fess up" NOW.

Ignoring our borrow and not tax in order to spend problems won't make them disappear. It won't only make them grow to unmanageable proportions.

Apparently many of our governments are morally bankrupt. Let's not follow these "public servants" off the cliff, fellow Americans.

It's time to "fess up," gut up and start paying up for what we spend.

That's my view.

Thanks. Bob.