We thought we’d plumbed the depths of political sleaze and voter rip-offs in California, but it turns out things there are even worse than we thought. Take a look at this story that comes from the Voice of San Diego:
Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools.
In many ways, the deal was unspectacular. Some of the money was used to pay off previous debts from delayed and over-budget construction projects. The rest went towards finishing upgrades that Poway taxpayers had been promised as far back as 2002. To a casual observer, it was just another school bond.
But Poway Unified’s deal was far from normal.
In 2008, voters had given the district permission to borrow more money to finish its modernization, and they had received a big promise from the elected school board in return: No tax increases.
Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.
With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years.
And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up.
The bottom line: For borrowing $105 million in 2011, taxpayers will end up paying investors more than $981 million by 2051, or almost 10 times what the district borrowed. That’s wildly more expensive than a typical school bond, in which a district pays back two or maybe three times what it borrowed.
The great-grandchildren of today’s taxpayers in Poway will be paying this debt:
In short: In order to keep its promises to current residents, the district entered into a deal that places a billion-dollar burden on future residents.
Poway is not alone, as Will Carless details in a follow up article. Other schools have made the same promises to voters and the same deals with investors, all with the same results: massive bills will be coming due—not now, but down the road.
Tar, feathers, riding someone out of town on a rail: these are ways Americans used to express their displeasure with outrageous scoundrels. We don’t approve of these methods or recommend them, even in Poway, but one thing we’d like to see: laws that make deals like this as illegal as they are morally wrong.
And Via Meadia has a suggestion for taxpayers everywhere: don’t count on sleazy politicians or the supine local media to provide accurate information about the true cost of the debt your municipal government plans to take on. This is an area where a lot more citizen involvement is needed. Wall Street and sneaky politicians share an interest in concealing the real cost of these deals, and too often the press is too lazy, too close to the power structure, or just too dumb to sound the alarm.