
California School District Owes $1 Billion On $100 Million Loan - Cbasedlifeform
http://www.npr.org/2012/12/07/166745290/school-district-owes-1-billion-on-100-million-loan
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patio11
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."

~~~
friism
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
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.

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tokenadult
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.

~~~
sputknick
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
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.

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cynwoody
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 ...

~~~
droithomme
> 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.

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bcoates
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.

~~~
prostoalex
The interest rate charged compensates for the Chapter 9 risk.

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justincormack
Not if there is no chance of payback and I think no interest up front.

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rdl
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).

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rayiner
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.

~~~
rdl
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.

~~~
prostoalex
Bond issues like this are usually subject to popular vote. Not sure whether
there was loophole in the procedure, or public approved such bond terms, but
Californian cities do have to get majority of residents to agree to new bond
issues.

~~~
rdl
People often defer to professional administrators. If a school administration
asks for something, I think the default is to give it to them, after all, it's
"for the kids". And if they only bring one option to the table, even if it's
not the best option, it might still be better than doing nothing. So you're
still down to needing competent administration, even if the public has some
oversight role.

~~~
prostoalex
Yeah, you're right. I think the public votes on the intent to issue bonds, and
once the intent is approved, the administrators duke it out. I would not
attribute everything to incompetence or corruption though - a lot of
California municipalities have negative ratings, and school board bonds are
least attractive compared to general obligation and other muni papers, so that
rate might be in line with market.

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

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Stratoscope
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!

~~~
lmm
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
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.

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debacle
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?

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

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

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r00fus
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.

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donaldc
_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?

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

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blacksqr
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!

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ck2
Doesn't knowingly obligating taxpayers for $1 billion in interest amount to a
felony? If not, why not?

~~~
gizmo686
What law is being violated?

~~~
ck2
Gross negligence?

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krakensden
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...](http://schoolsofthought.blogs.cnn.com/2012/06/04/once-bankrupt-
school-district-now-debt-free/)

On a related note: <http://www.networkworld.com/community/node/16331>

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Rhymenocerus
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.

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nazgulnarsil
Democracies do not have long time horizons.

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lifeisstillgood
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.

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namank
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.

