Wednesday, August 22, 2012

$1 Billion School Bond Scam in Poway

Poway Unified School District (San Diego County) borrowed $105 million from investors last year to complete a decade-long renovation of its schools. According to the Voice of San Diego, PUSD promised voters in 2008 that it would get the money without raising taxes. Without the increases, it could not afford to purchase a bond and pay it off over 20-30 years, as school districts normally would do. Instead, they took out a capital appreciation bond, which allows it to make no payments for 20 years, accruing interest all the while, resulting in a net cost to taxpayers of more than $981 million over the next 40 years, nearly 10 times what they borrowed. (In a normal school bond, a school typically pays two to three times what they borrowed).

In addition to the substantially higher costs, capital appreciation bonds are also extremely risky, as they depend on future growth in property values to pay off the original debts. If the current housing market does not recover quickly or another bubble busts during the lifetime of the loan, Poway taxpayers could get screwed even worse. Even in Michigan, where lawmakers seem to enjoy bankrupting school districts so they can invoke their Financial Martial Law rules and give the districts over to private business, capital appreciation bonds have been deemed too risky to taxpayers and banned.

Michael Turnipseed, executive director of the Kern County Taxpayers Association, said such loans are "way worse than loan sharking," calling Poway’s behavior “absolutely insane."

PUSD’s behavior, while seemingly crazy, is actually quite rational in today’s political and economic climate. States have been running regular large deficits and balancing their budgets by slashing education funding, inspiring school districts to engage in ever more risky and unconventional methods of fundraising. At the same time, politicians are scared to antagonize the powerful anti-taxers and worry that the public—still reeling from the recession, high unemployment and the huge losses to middle and working class personal wealth—would not support a tax increase, even for school facilities improvements.

Starting in 20 years, PUSD will have to make its first payment toward the loan: just over $30 million, $24 million of which is interest. After that, payments will increase to roughly $50 million per year for 20 years. Since the money must come from property taxes, the assessed values of Poway property will have to quadruple, or property taxes will have to be significantly raised without an increase in values.

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