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Posted by on Aug 7, 2012 in Local Government, Prop 13, Thinking of Buying?, Thinking of Selling?, Train Wrecks | 23 comments | Print Print

Exotic Financing for Schools

An excerpt from the Will Carless article at the Voice of San Diego – hat tip to several readers!

The Poway Unified School District may be California’s poster child for exotic school bond financing, but it is by no means alone in San Diego County.

As I detailed in my story yesterday, Poway Unified borrowed $105 million last year using a form of financing called a capital appreciation bond. The district won’t start making payments on the loan until 2033, and by the time it’s paid off in 2051, taxpayers will have paid back almost $1 billion, or almost 10 times the original loan.

As I point out in my story, capital appreciation bonds have become increasingly popular across the state, since they allow school districts to borrow money now without raising taxes on current residents. Instead, the burden for paying for the bonds is pushed to future generations, who are left on the hook for loans that are wildly more expensive than conventional bonds.

I’ve been digging through public records to try and find some other examples of these bonds in San Diego County. I haven’t come across anything quite as extreme as Poway’s deal, but I have found some bonds with very similar rates of interest and repayment schedules.

The deals elsewhere in the county mirror Poway’s deal in other ways, too. All three districts had recently passed bond measures to complete previous renovation and modernization efforts that were behind because of cost overruns and delays.

The three bond measures, passed in 2008, all made the same promise to voters: Tax rates would stay the same.

Read more here:

I think this should be considered when making a decision about homebuying!


  1. Do you agree or disagree?

    ( Shouldn’t “exotic” read “extortionate” ? )

  2. People are just not aware what their “leaders” are doing. The folks who voted for this will probably be dead before the payments start. Kind of like that guy in Palm Springs who refinanced his underwater mortgage over a forty year term and a 400K balloon payment at the end. His monthly payment was cut more the 50%. He is in his mid fifties and doesn’t expect to live to the end of the term.

  3. Buying what you “deserve” instead of what you can afford is easy when you pass the bill to your kids.

  4. 1.) I believe this works out to an interest rate of 5.8%. Terrible.

    2.) In order to make these payments, how much do their property tax reciepts need to increase in the next 20 years? I’m guessing the number is about as realistic as CalPers’ 7.5% assumed long term gain.

  5. 1.Do you agree or disagree?

    With calling it extortion? Yes, I guess, exotic isn’t strong enough, but there had to be other options. Couldn’t they have agreed to pay some of the principal along the way, instead of none for 20 years?

    It demonstrates how ignorant and careless these school boards are about how these massive debts will ever be paid.

  6. I see Pac-man everywhere.

  7. WHEW!!! just in time!!

    based on these projections, my kids would have long since graduated high school. After that, the Mrs. and I will pull up stakes and move out of the state and leave it to everyone else to pay.

    This is can-kicking to the max.

  8. For many the Mello-Roos will be wrapping up, just in time for this bill to come due.

    I wonder if the school boards plan to re-issue some sort of Mello-Roos to legitimize payments, or just go BK?

    Or if they have a plan?

  9. From the original article:

    “We could have authorized more taxes, it would just have been breaking the promises we made to the community,” said school board member Todd Gutschow.

    I guess when you haven’t made a promise specifically to the yet unborn or future residents, it’s okay.


    “Right now, the district receives about $11 million a year from homeowners towards paying off its bonds.

    So, to be able to afford its debt payments 20 years from now, the total assessed value of property within the taxed area would have to quadruple.

    Basically, they are gambling that someone’s house currently valued at $500K within the school district is going to be worth more than $2 million for the tax revenue which will be needed by the time they start paying anything on this.

  10. The most likely plan is BK sometime before then, most likely they did the math and figured out that either be BK by then over other obligations (pensions anyone), or the YOY inflation rate would be over 8% in the next few years, besides, they will probably be either dead or retired out of state by then.

  11. (My 3 year old daughter) “We are so F$&@)ING screwed”

  12. “So, to be able to afford its debt payments 20 years from now, the total assessed value of property within the taxed area would have to quadruple.”

    Unf*cking believable.

  13. “extortionate”, no other way around. This is maxing out all your credit cards before you declare bankruptcy. A city of 50,000 people will never be able to pay back a billion and change.

  14. So what I am reading is that I should set up an IPO for 165 million, pay off the loan, give the district a huge charitable donation of a third off the loan, move to the area so my kids can be referred to as the “children of that hero”, and let the district pay the company nearly 800 million for doing nothing but being patient.
    Who wants in on the IPO? You’ll get at least four million for each million you invest.
    Any ideas of how much to insure against the BK? 50? 100 million? Or is this the reason for the other 400 million?

    That and I totally agree with @BootyJuice; Unf*cking believable!

  15. My guess is they won’t end up paying. Either they default in 20 years because we’ve been dealing with deflation or we’ve already had some kind of hyper inflationary event that makes $1 billion look like nothing.

    We all know there’s tons of promises for future productivity out there that aren’t going to get paid. You just don’t know how it’s going to play out.

  16. I guess this is the sort of thing you end up with when revenues and spending are disconnected from each other…

    I do hope the bondholders end up taking it in the pocketbook, but expect that taxpayers will instead.

  17. As a product of PUSD it pains me that a school district formerly of such high quality is forced to use these kind of exotic financings just to invest in the future. If the area wasn’t so reactionary when it comes to taxes – even for taxes the fund things that everyone can use like schools and roads the solution would be obvious.

  18. I’m going to guess that these school-district boards got sold on “you can always refinance later”, just like many homebuyers did at the peak. That is how they got in this position to begin with – Will is reporting that the school boards are refinancing old bonds that didn’t finish the work intended:

    “Apart from their sheer cost, there are other stark similarities between these three deals and Poway Unified’s 2011 bond.”

    “All three districts passed bond measures that paved the way for their capital appreciation bonds in 2008.”

    “And, all three of those bond measures were floated for the same reason: To finish off previous bond programs that had been started in the districts years before but hadn’t yet finished because of cost overruns and delays.”

  19. “school district formerly of such high quality is forced to use these kind of exotic financings just to invest in the future.”

    Nobody forced them to do anything, much less DESTROY (not invest in) the future of their community. That is unless you believe they had only two options – increased taxation or bankrupt future generations. Perhaps they should have considered another option – LIVING WITHIN THEIR MEANS?

    You can’t make this sh*t up.

  20. Just another wall street used car salesperson selling a broken down old jalopy to a rub from the countryside. A bit of polish and touch up paint does wonders. After anyone who believe you can always borrow when you want to obviously was under a rock in 2008 with no net connection. My suspicion is that a lot of CFO’s have decided the you can always borrow when you want to is a just plain lie, but politicians believe so. BTW despite the intent of the congress the Central Pacific and the Union Pacific got loans where the interest was due only at the end.

  21. From piggington:

    Looks like Businessweek just picked this story up.

    Jim, given you now know people in high places, what about getting this thing to go viral nationally. Maybe Nightline need to come over and knock on some doors and figure out how the PUSD board got duped. Or at the very least NYTimes or something.

    This thing is so outrageous that these board members need to be called out and answer for what they have done.

  22. Jim, can the school board actually force new MR on already built homes?

  23. From the Business Week article. . .”They’re not callable bonds so you can’t pay them off early.”

    PUSD got screwed!

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