California’s Public Indoctrination Center Debt Bubble

School districts across California have borrowed billions of dollars using a costly form of financing that sees many paying as much as $23 per $1 borrowed. So-called capital appreciation bonds have been used by school districts in, at least, California, allow borrowers to postpone payments for decades. Some districts are merely gambling that the economy will improve in decades’ time. California’s youngsters, as they settle into their picket-fence lives, will find their own childhood neighborhoods (and their entire state) uninhabitable because of property taxes servicing the loans of decades past. At the same time, the California housing market will surely remain depressed with the implication for property taxes across the state. Stemming from Wall Street, as the CABs do, be certain that California is not the only state. Kids are not only going into debt for college in the USSA, but also for school to which they are forced to go.

The CABs enable schools to borrow wantonly without violating state or locally imposed caps on property taxes, at last for now. The long delays in interest payments can result in increased interest expenses of 10 or 20 times the amount borrowed.  The practice has been banned in one state, but California has borrowed liberally through the scheme

“They are terrible deals,” California Treasurer Bill Lockyer said. “The school boards and staffs that approved of these bonds should be voted out of office and fired.”

The school system won’t, in the end, be who is on the hook to pay back the loans; that’ll be left for homeowners. For that reason, the CABs are dragging down property prices where they are known to have been used.

The Newport Mesa Unified School District in Orange County issued $83 million in long-term notes in May 2011. Principal and interest will total about $548 million.

One-fifth of the districts statewide have issued the notes, borrowing $2.8 billion since 2007 through CABs with maturities longer than 25 years. They will have to pay roughly $16.3 billion in principal and interest, or an average of 5.8 times the amount borrowed.  70% of the money borrowed was in the form of 30-40 year notes, which will cost about 6.6 times the original loan.  “This is part of the ‘new’ Wall Street,” Lockyer said. “It has done this kind of thing on the private investor side for years, then the housing market and now its public entities.”

The Poway Unified School District in north San Diego issued $105 million in capital appreciation bonds, and by their maturation should cost taxpayers about $1.2 billion in principal and interest. “It was well worth it,” said Jennifer Zaheer, president of the Palomar Council Parent Teachers Assn., which serves Poway Unified. “In my son’s experience, there’s a big difference between using a trailer and having a new classroom.”