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The bank, the school and the 38-year loan
Topic Started: Mar 19 2013, 03:46 PM (429 Views)
LTC8K6
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Assistant to The Devil Himself
We've heard of these loans before in that other thread on California, but I think they deserve their own thread. This must have been going on elsewhere in the country. It's astounding that politicians who are supposed to represent the public, and spend money wisely, would do things like this.

Okay, it would have been astounding when I was 25. It's par for the course today.

These loans are even worse than the ones mentioned earlier.

I'm interested in finding out if these "your grandchildren will pay for it" loans are common anywhere else.

http://www.ocregister.com/news/bonds-496091-school-bank.html

Quote:
 
The fliers touted new ballfields, science labs and modern classrooms. They didn't mention the crushing debt or the investment bank that stood to make millions.

In early 2008, residents of Placentia and Yorba Linda approved a $200 million school construction bond after reading those fliers and being assured repeatedly that "their money will be spent wisely."

What happened instead was that Measure A led to a debt so large and long lasting that it has mortgaged the future of their children's children.

With no public discussion, the school board had hired George K. Baum & Co. and its staff of political strategists to help push the measure through so the district could continue an ambitious building spree.

After the election, the board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount – $280 million – to repay.

Those bonds, known to Wall Street traders as capital appreciation bonds, are like a loan for which no principal or interest payments are made for 35 years. Interest is charged on a growing pile of unpaid interest, causing the balance to balloon.

"It's another method of pushing debt to future generations," said state Treasurer Bill Lockyer, who compares the bonds to "payday loans."

"I just don't understand how these board members got away with this," said Alexandria Coronado, a former member of the Orange County Board of Education. "These people need to be recalled."

Placentia-Yorba Linda Unified is hardly alone. Bankers from Stone & Youngberg, Piper Jaffray and other firms have traveled all over California in recent years, pushing capital appreciation bonds as a tool to vault over legal debt limits. Hundreds of school districts, including 14 in Orange County, signed up.

But Baum's deals stand out. According to an analysis of data from the state treasurer's office, Baum has issued more than 60 capital appreciation bonds for California school districts since 2007, including the single most expensive such loan. That debt – $283,612 borrowed by San Bernardino County's Rim of the World – will cost future taxpayers 23 times the principal.

Compare that with a 30-year home mortgage with a 5 percent interest rate, which requires payments of about twice the amount borrowed.

"Who borrows money thinking you don't have to even begin to pay interest for 20 years?" asked Kevin Graves of Lake Arrowhead, whose two children graduated from Rim of the World. "The board members knew what they were doing. They did it because there were no consequences."

The story of how Baum pushed California schools into complex bond deals that charged payments to future taxpayers is one of naïve public officials, sophisticated financiers, and laws, rules and guidelines ignored:

•It is illegal for California school officials to hire political consultants with public funds to help pass bond measures. Using the bank's political consultants is not a legal way around that law, according to the state Office of Legislative Counsel.

•Finance experts advise school districts to sell bonds through public auctions to get the lowest interest rate and to employ independent financial advisers to review the details. Placentia-Yorba Linda, like most of Baum's California school clients, did neither.

•State law requires that donated consulting work on an election be reported as an in-kind, or non-cash, political contribution. Baum did not disclose its consulting role on state campaign filings in three elections the Orange County Register reviewed.

Placentia-Yorba Linda Superintendent Doug Domene and all five board members declined repeated requests for an interview. Carol Downey, the board's president, sent a written response prepared by Domene. That statement said the district issued the capital appreciation bonds because it wanted to continue building but did not want to raise taxes. The district's construction effort, which began in 2002, has included four new schools, a football stadium and a 600-seat performing arts center.

Domene added that the district also wanted to take advantage of matching construction funds provided by the state, as well as special financing that is heavily subsidized by federal taxpayers.

...


Much more of the story at the link.
Edited by LTC8K6, Mar 19 2013, 03:50 PM.
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LTC8K6
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Assistant to The Devil Himself
This could be interesting. The whole house of cards may tumble. Wonder who will be left holding the bag? I bet it won't be the banks.

http://www.ocregister.com/news/school-500256-bonds-political.html

Lockyer: School bond election deals appear illegal
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abb
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While we've got lots of problems here in Louisiana, one glimmer of prudence is our state's audit law. Every public entity is required to have an annual audit. While they aren't infallible, such activity as this would have been caught pronto. A long-term obligation like this would stick out like a sore thumb.

In my coverage of Jonesboro, I've learned way more than I ever wanted to about public audits. They can be very useful in pointing out stupid financial planning and decision making.
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kbp

LTC8K6
Mar 19 2013, 03:46 PM
We've heard of these loans before in that other thread on California, but I think they deserve their own thread. This must have been going on elsewhere in the country. It's astounding that politicians who are supposed to represent the public, and spend money wisely, would do things like this.

Okay, it would have been astounding when I was 25. It's par for the course today.

These loans are even worse than the ones mentioned earlier.

I'm interested in finding out if these "your grandchildren will pay for it" loans are common anywhere else.

http://www.ocregister.com/news/bonds-496091-school-bank.html

Quote:
 
The fliers touted new ballfields, science labs and modern classrooms. They didn't mention the crushing debt or the investment bank that stood to make millions.

In early 2008, residents of Placentia and Yorba Linda approved a $200 million school construction bond after reading those fliers and being assured repeatedly that "their money will be spent wisely."

What happened instead was that Measure A led to a debt so large and long lasting that it has mortgaged the future of their children's children.

With no public discussion, the school board had hired George K. Baum & Co. and its staff of political strategists to help push the measure through so the district could continue an ambitious building spree.

After the election, the board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount – $280 million – to repay.

snip

...


Much more of the story at the link.
Why is it I immediately thought of the "no debt problem" Pelosi?
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