California School District Owes $1 Billion On $100 Million Loan

http://www.npr.org/2012/12/07/166745290/school-district-owes-1-billion-on-100-million-loan

by Cbasedlifeform • 14 years ago

123 81 14 years ago

npr.org

cynwoody• 14 years ago

Lessee ...

Issued in: 2010. Principle: $2,999,949. Due in 26.1 years: $33,820,000

That works out to an interest rate of 10.495%. How does that compare to your mortgage interest rate?

http://spreadsheets.latimes.com/capital-appreciation-bonds/

What California needs is the power to issue its own currency, call it the CMB (the California moon beam), legal tender for all California debt, public and private. Well, public anyway. Initially equal to $1. But only initially ...

droithomme3• 14 years ago

> San Diego's Poway Unified School District borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says.

Poway's population is 48,518, comprising 16,128 households. 6,493 households have children, so this is costing them $154,012 per household with children for one expense, at a time when they already had several school buildings that were not old and were in good condition. The population of children is not increasing. It's certainly not the only expense to run the schools either.

How will the 16,123 households pay their $62,003 debt per household?

If they all sell their houses and assets it can be paid back.

bcoates• 14 years ago

Surely they won't be that dumb and will just default via Chapter 9 city bankruptcy? I'm mostly wondering who's dumb enough to trade good cash for bad debt on those terms.

kyboren2• 14 years ago

As someone who lives in the area, the PUSD includes (very affluent) parts of San Diego. The district is huge, and its Mello-Roos income is also huge. This is absolutely outrageous. Rest assured, the entire school board will be dumped come the next election...

cheese1756• 14 years ago

Too bad the US Constitution was created to deal precisely with this issue. If only it didn't state that "No state shall. . . make any Thing but gold and silver Coin a Tender in Payment of Debts."

Quick, call your representative and ask for the California Moon Beam amendment to be passed!

prostoalex5• 14 years ago

During one of the recent California budget emergencies (don't remember which one, there seem to be two or three every year), the state issued I.O.U.s to contractors and employees. Initially banks accepted I.O.U.s at the same rate as US dollars, but ever confident about California's legislative wisdom, politely declined afterwards, which led to a whole bunch of entrepreneurial activity on Craigslist "services" section, where you could sell a California I.O.U. for about 75-80 cents on the dollar.

Debt obligations can serve as a proxy for money, so California can already issue those. What they don't have the power to do is to require it to be legal tender, so in a way this inflationary currency would only be accessible to those who have no choice but to accept it (i.e. state contractors and employees).

niggler• 14 years ago

File this under "awesome":

US treasury secretary can issue platinum coins of any denomination. This is currently a serious proposal to resolve the current fiscal crisis

tokenadult• 14 years ago

From the article:

"Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. 'You'd take that any day,' he says. 'Why would you leave $25 million on the table? You would never leave $25 million on the table.'

"But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. 'It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for,' Lockyer says. 'So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary.'"

No, I would leave that on the table. I wouldn't agree to a sucker loan like that on my own behalf, nor would I agree to it as a public official on the taxpayer's behalf. The problem here is that the public official forgot that he has a fiduciary duty to the public. I wonder if he learned his civics and his understanding of the mathematics of loan interest in a California public high school.

AFTER EDIT: Oops, I almost forgot a rare example of a pithy quotation attributed to Mark Twain that is an actual genuine Mark Twain quotation. This is what he wrote about school boards more than a century ago:

"In the first place God made idiots. This was for practice. Then He made School Boards." -- Mark Twain, Following the Equator (1903) 2:295

AFTER SECOND EDIT: The claim that the school district did well to take out a loan on unfavorable terms to also obtain a loan with a federal subsidy doesn't take into account that all the taxpayers in the district are also on the hook for federal deficit spending, as most of them are federal taxpayers directly and all are part of the national economy.

sputknick2• 14 years ago

If you look more completely at the deal it actual is a good deal for the school district. They will pay a total of $34 million over 20 years to obtain $25 million. So their effective total interest is only $9 million, which works out to about 2% per year... an excellent loan rate for anyone. What is hidden in that is that the other $23 million (34-9) in interest that is "free" to the school district is actually paid by all of us as taxpayers. If given the opportunity why not have taxpayers across the country finance your school district? I would fire any superintendent who DIDN'T take that deal. I'm not arguing that this is a morally correct thing to do, just that it makes good financial sense from the superintendent's perspective.

stickfigure• 14 years ago

This is not what the article states. The article says they will pay a total of $34 million to receive a $25 million federally subsidized loan. Presumably the principal and interest on the $25 million must be repaid as well, so the actual cost of that $25 million is somewhere north of $60 million.

tzs• 14 years ago

The $25 million they obtained was a loan, want it? You have to include paying that back, and the interest on that loan, in you calculation.

csallen• 14 years ago

>> "Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. 'You'd take that any day,' he says. 'Why would you leave $25 million on the table? You would never leave $25 million on the table.'"

It's maddeningly common for people to neglect that pesky "cost" part of a cost-benefit analysis.

mathattack• 14 years ago

And it's still another $25 million loan, even if on good terms.

joelhaus• 14 years ago

On the contrary, the "cost" is quite clear[1][2]. It's the "benefit" part which requires a highly dynamic analysis.

Bottom-line:

  A Loan makes sense for the borrower when the return
  on loan proceeds exceeds the cost of the loan.

Since the reporting completely left this out[3], if anyone is aware of models used to measure return on such public investments, your insight would be extremely beneficial to those of us commenting on this article.

[1] CABs are fixed rate. http://www.msrb.org/msrb1/glossary/view_def.asp?param=capita...

[2] See 16731.5 (a)(3). http://www.leginfo.ca.gov/cgi-bin/displaycode?section=gov...

[3] The public is genuinely harmed by this type of reporting and it drives me nuts. How can anyone draw a rational conclusion to these difficult policy issues without a best effort cost-benefit analysis of the transaction?

rorrr• 14 years ago

Well, this idiot gets to put "built a brand-new $25 million school" on his resume. He's benefiting himself without any cost, while screwing the taxpayers.

rdl4• 14 years ago

It's hard to believe people on school boards are given this level of financial power. Even though the California state government is horrible, it's hard to believe they'd be more incompetent than local part time school board members in making financial decisions like this.

Criminal prosecutions may be in order. Certainly there have been financial crimes at the county level in California (Orange County being the famous example).

rayiner4• 14 years ago

Government gets less competent as you go down the chain, because the most qualified people want to work higher up. Municipal government is the absolute worst, except in big municipalities like New York City, etc.

rdl4• 14 years ago

Yet, there's a libertarian argument for keeping decisions and programs at the most local level possible, since it's most accountable to individual voters. An annoying opposition of facts.

In a place like Hillsborough or Palo Alto, there may be some hope of a retired or free-time competent executive being a local resident and doing a good job for non-economic reasons. Ghetto parts of SoCal, though, have little risk of that happening.

mynameishere• 14 years ago

Come on. The federal debt is >$40,000 per person, and that's not including unfunded liabilities. At the worst, a municipal level government can have an orderly bankruptcy that causes no systematic damage. When the treasury market finally crashes, the entire world is going to look like an exploding hemorrhoid.

Turing_Machine• 14 years ago

/me looks at http://www.brillig.com/debt_clock/ and is...skeptical.

1123581321• 14 years ago

That is true for people in meritous systems, but in general:

1. The level of incompetence designed into the system rises at the federal level faster than the level of average individual incompetence. For example, large municipal debt can be reduced by municipal employees and councilors who could never get a job in Washington. In Washington, there are thousands of brilliant people who can do nothing about debt and poor choices.

2. Many of the most competent believe crazy things and rise to the federal level to inflict them on the government and us. The most brilliant, careful financial manager in the world can become secretary of treasury, and all of their work can be undone with an enormous war, creation of homeland security, etc.

droithomme3• 14 years ago

> Government gets less competent as you go down the chain, because the most qualified people want to work higher up

Interesting hypothesis. According to this hypothesis, the US Congress members should be among the most intelligent, skillful and talented people in the country. Does the known evidence match the hypothesis?

prostoalex5• 14 years ago

Now when you see another California prop raising money for education, you know precisely where the money is going.

patio11• 14 years ago

If this sounds irresponsible, you really, really do not want to hear about pension financing. This is "In return for $1 in the present day, we will pay you $10 in 30 years." Californian state employee pensions are "In return for $1 in the present day, 30 years from now we will reward you with a non-callable perpetuity bond with a $10 a year coupon. Oh, here's your dollar back."

spoiledtechie• 14 years ago

It the same way in most states. They can no longer afford pensions. I know in Florida its just as bad if not worse.

gwern• 14 years ago

At least with pensions, funds are being invested in assets with direct value that can be recaptured in 30 years; even in the optimistic case where new schools really add value, that value may well just get up and leave if taxes are raised in 30 years to pay for the loan.

lmm3• 14 years ago

The "force multiplier" from education is better than anything else; labour is the greatest single cost to almost all businesses, and the amount of education needed is high and will only increase in the future. Alongside healthcare it's pretty much the best possible use of government money.

Whether these new schools improve education is of course an open question.

friism• 14 years ago

If you're interested, Russ Roberts did a great podcast on unfunded pension liailities a few weeks ago: http://www.econtalk.org/archives/2012/11/joshua_rauh_on.html

California is pretty deep in...

pathy• 14 years ago

Thank you for the link, interesting yet scary podcast.

I have a feeling I will have to fund my own private pension in the future, and I am from Northern Europe.

dylanvee• 14 years ago

Khan Academy video that uses Illinois as an example of what happens when pension obligations are underfunded: http://www.khanacademy.org/humanities/american-civics/v/illi...

toomuchtodo• 14 years ago

God damn it Illinois, can't we get our shit together?

/Illinois resident

nekojima• 14 years ago

If the pension funds invest in the CAB issues, that might help solve the pension funding shortfall. :-/

wildgift• 14 years ago

LOL. The liability is something like 56 billion, and at least Brown is addressing it, or starting to address it. Give Cali some credit.

sageikosa• 14 years ago

Every so often, when you kick the can down the road, you have to face the possibility that the road will end.

xedd• 14 years ago

Well, looks like it is just another case of bankers, (AGAIN) making off with huge profits that rely upon taxpayer money.

monochromatic• 14 years ago

Yes, let's blame the bankers for the incompetence of government officials.

r00fus• 14 years ago

Yes, well because we all know the officials aren't on the take. It's not like the UC Board of Regents doesn't have massive ties to the financial elite, do they? That's just a well known example.

logn• 14 years ago

It looks like the banks did fine on this one. They priced the risk appropriately. 10:1 for a 20-30 year loan? Maybe go even higher. Their real sin was saying that junk mortgages were good and not collecting enough interest.

retube• 14 years ago

well according to cynwoody this $34m equates to a ~10% interest rate. Not sure why that's so terrible, if anything sounds cheap for a borrower of this credit quality and the duration of the loan (25+ years).

bjourne• 14 years ago

The article doesn't say, but I'm pretty sure the California School District is borrowing the money from the state itself. That makes the interest a non-issue because it doesn't matter if it is 1% or 100% per annum - the money just flows from one part of the government to another. The interest is just a form of accounting.

Now it would be a different matter entirely if the loan was made through a private bank. Then even an interest rate of 0.1% would be a waste of taxpayer funds as there is absolutely no reason not to borrow from the state itself. But that is not how it usually works since governments always are able to finance their loans themselves.

krakensden2• 14 years ago

And just after they'd finally gotten out of debt, after more than twenty years: http://schoolsofthought.blogs.cnn.com/2012/06/04/once-bankru...

nazgulnarsil• 14 years ago

Democracies do not have long time horizons.

namank• 14 years ago

WOW. WTF.

I'll contribute to the fund that supports teachers/admins getting an MBA for cheap. They must sign something saying they'll come back to the school district.

No, it doesn't exists as far as I know. Please go start it.

ck22• 14 years ago

Doesn't knowingly obligating taxpayers for $1 billion in interest amount to a felony? If not, why not?

gizmo686• 14 years ago

What law is being violated?

ck22• 14 years ago

Gross negligence?

blacksqr• 14 years ago

Clearly, at some point it becomes cost-effective for the state to step in and just buy back the bonds at close to par under the implied threat of bankruptcy as an alternative. Almost free money!

lifeisstillgood• 14 years ago

Bad solution: regulate financial control of school boards. Good solution: allow the profitable well run boards to take over the others via voting

I keep seeing "Market will sort it out comments" when the market cannot play in this, Market.

School boards are a fairly unique US thing but they are like a canary in the mine.

donaldc• 14 years ago

In 2010, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed $2.5 million to help secure a federally subsidized $25 million loan to build a badly needed elementary school.

Charles Ramsey, president of the school board, says he needed that $2.5 million upfront, but the district didn't have it.

If the school was really so badly needed, why didn't they raise taxes to get the $2.5 million? If they couldn't get the district to pass a tax increase in order to qualify for a subsidized loan 10 time its size, then I'm skeptical on how necessary that new school actually was.

If they couldn't afford $2.5 million up front, what made them think they'd be able to afford $34 million later?

sethg4• 14 years ago

In California, under Proposition 13, it takes a two-thirds majority vote to raise either local or state taxes.

Stratoscope• 14 years ago

Many years ago, Capital One sent me an offer for a $5000 personal loan with this pitch: "What's the problem with most personal loans? The monthly payments are just too high."

Indeed, their monthly payments were very low, only 1% of the outstanding balance, with a minimum of $15.

But the interest rate looked a bit steep, so I coded up a little amortization calculator for fun and ran the numbers.

If you made the minimum payments, your $5,000 loan would cost you $50,000 to repay. But thanks to those easy low payments, you'd get 105 years to do it!

lmm3• 14 years ago

Would that be such a bad idea? You get the $5,000 now when you need it. In 105 years' time you're most likely either a lot richer than you are now, or dead. It wouldn't suit everyone, but I can see that being a useful loan in several circumstances.

SkyMarshal• 14 years ago

Create enough loans like that and there's an incentive for the loan industry to lobby Congress to make it so that children and descendents are liable. Trans-generational debt slavery.

Rhymenocerus• 14 years ago

My life's work to collect what little I have means nothing while things like this are going on. I might go borrow millions of dollars too, because everyone is under the assumption that no one is paying anything back when the whole ship goes down.

debacle• 14 years ago

This type of financial irresponsibility drives me crazy. School districts do so many stupid things in the name of the children, when really all they're doing is trying to maintain their elected positions.

If you stay in your seat for fifteen years, then leave the next guy with a ticking timebomb, it's a victimless crime (taxpayers, children, employees), right?

California School District Owes $1 Billion On $100 Million Loan

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