"There is danger from all men. The only maxim of a free government ought to be to trust no man living with
power to endanger the public liberty." - - - - John Adams

Saturday, December 1, 2012

California issues billions in Junk Bonds

California becomes Greece
  • 200 California school districts have avoided a vote of the people and issued $2.8 Billion in junk-style bonds at high interest rates that have little hope of being repaid.
  • The phony label of Democrat or Republican has no meaning as politicians from both parties join in a bi-partisan orgy of spending and debt. 

The liberal spending insanity of the People's Republic of California is the gift that just keeps giving.

If Comrade Obama had his way he would fully adopt the California model of endless spending and tax increases to fully fund the unionized cradle-to-grave Marxist welfare state.

Two hundred school districts across California have borrowed billions of dollars using a costly and risky form of financing that has saddled them with staggering debt, according to a Los Angeles Times analysis.

Schools and community colleges have turned increasingly to so-called capital appreciation bonds in the economic downturn, which depressed property values and made it harder for districts to raise money for new classrooms, auditoriums and sports facilities.

Unlike conventional shorter-term bonds that require payments to begin immediately, this type of borrowing lets districts postpone the start of payments for decades. Some districts are gambling the economic picture will improve in the decades ahead, with local tax collections increasingly enough to repay the notes.

CABs, as the bonds are known, allow schools to borrow large sums without violating state or locally imposed caps on property taxes, at least in the short term. But the lengthy delays in repayment increase interest expenses, in some cases to as much as 10 or 20 times the amount borrowed.

The practice is controversial and has been banned in at least one state. In California, prominent government officials charged with watching the public purse are warning school districts to avoid the transactions.

One sounding the alarm is California Treasurer Bill Lockyer, who compares CABs to the sort of creative Wall Street financing that contributed to the housing bubble, the subsequent debt crisis and the nation's lingering economic malaise.

"They are terrible deals," Lockyer said. "The school boards and staffs that approved of these bonds should be voted out of office and fired."
$2.8 Billion in junk bonds have been
issued on top of the normal debt.

And property owners — not the school system — are likely to be on the hook for bigger tax bills if the agency's revenues can't cover future bond payments, Lockyer and other critics say.

The Newport Mesa Unified School District

  • They issued $83 million in long-term notes in May 2011.
  • Principal and interest will total about $548 million.

The bonds "have allowed us to provide for facilities that are needed now," said the district's business manager, Paul Reed.

Overall, 200 school systems, roughly a fifth of the districts statewide, have borrowed more than $2.8 billion since 2007 using CABs with maturities longer than 25 years. They will have to pay back about $16.3 billion in principal and interest, or an average of 5.8 times the amount they borrowed.

Nearly 70% of the money borrowed involves extended 30- to 40-year notes, which will cost district taxpayers $13.1 billion, or about 6.6 times the amount borrowed on average.

State and county treasurers say debt payments of no more than four times principal are considered reasonable, though some recommend a more conservative limit of three times.

"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."

Insane Liberal Spending.
The Poway School District in San Diego borrowed $105 million using "junk-style" bonds, but must repay $982 million.  Translation - repay $9.82 for every $1 borrowed.  Don't worry about a thing say the moron elected officials.  This is all "free" money that magically appears in the treasury, 
All of this was done without a vote of the taxpayers.  But rest assured, the taxpayers will be on the hook to pay that bill.

The Poway Unified School District, which serves middle-class communities in north San Diego County, is one of the school systems faced with massive CAB debt payments. In 2011, it issued $105 million in capital appreciation bonds to complete a school rebuilding program.

Because the recession had depressed property values and tax revenue, Poway district officials realized that using conventional bonds might jeopardize a promise to district voters to limit the tax rate.

So on the advice of an Irvine-based financial consulting firm, they turned to the long-term notes. Under the deal, the school board could keep construction moving, avoid reneging on its pledge to voters and stay within the legal limits. And it would not have to repay the bonds for decades.

By the maturity date of 2051, however, the $105 million in Poway notes will cost district taxpayers almost $1 billion in principal and interest — more than $9 for every $1 borrowed.

California spends more on prisons than colleges
Insane spending for California prisons has increased by 436 percent.

Poway is not the only school district to sign on for large CAB repayments, according to the Times analysis that examined statewide records for hundreds of bonds issued by school and community colleges. Some of the more extreme cases include:

  • The Mojave Unified School District in Kern County borrowed $252,098 but will have to repay $2,830,000.  That is about $11.20 for every $1 borrowed.

  • The Fairfax Elementary School District in Kern County borrowed $1,020,175 but will have to repay $15,553,109.  Some $15.20 for every $1 borrowed.

  • The Santee School District in San Diego County issued $3.53 million in capital appreciation bonds in 2011. By the final maturity date in 2051, it will have to pay back $58.6 million — $16.57 for every $1 borrowed.

  • What appears to be the most expensive deal in the state was made by the Rim of the World Unified School District in Lake Arrowhead. It issued $283,612 in bonds in 2010. By the final maturity date in 2039, the district will have to pay $6.65 million in principal and interest — $23.45 for every $1 borrowed.

  • A huge $9.20 per dollar borrowed in the Westside Union School District in the Antelope Valley.

"These things are all over the place right now and should be of massive concern to taxpayers," said David Wolfe, the legislative director for the Howard Jarvis Taxpayers Assn. Capital appreciation bonds "kick interest and principal payments 40 years down the line. Property owners who never voted for these bonds will have to pay for them."

(Los Angeles Times)

The spending insanity in California is bi-partisan.
GOP Governor Arnold Schwarzenegger had the backing of Republican legislators to massively increase spending and taxes.  Just having an "R" after your name in no way means you are a Conservative.

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