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When raising taxes is out of the question, government officials can resort to some unusual ways of financing. As I posted the other day, the Poway Unified School District used capital appreciation bonds to delay any debt service until 2033, with the biggest amounts due in 2046 and 2051. This comes after previous borrowing at super-high interest rates - and Poway is hardly alone. From Fox Business News:
The San Diego Unified School district borrowed $164 million up front, but will owe a whopping $1.3 billion at the end of its long-term bond. Oceanside Unified sold a $30 million bond, but will owe nearly ten times as much decades later, $280 million total. And Escondido Union School District likewise borrowed $27 million and will owe $247 million total. The bonds are a "kick the can" move to avoid dinging taxpayers now with higher property taxes. Oh, and the bonds are not callable -- they can't be paid off early or refinanced.
From Bloomberg:
Other issuers in California may pursue similar deals to raise money for construction at a time when revenue from property taxes is stagnant, said Marilyn Cohen, founder of Envision Capital Management Inc. in Los Angeles, who has $195 million of munis under management. "I'm sure California is the worst offender," Cohen said in a telephone interview. "Property taxes have gone to hell in a handbasket in California." Last year, Los Angeles County Treasurer Mark Saladino advised school business officials there against long-term capital-appreciation bonds, saying they would result in a "significantly higher debt burden." School administrators appear to have looked around at the sluggish economy and property tax revenues and figured, 'Heck, why not defer now and pay nothing at all for decades? We'll be dead by then.'"
More about capital appreciation bonds from blogger Joel Thurtell:
The "coupon rate" of a bond is the annual interest the borrower pays for use of the money. A normal, current interest bond might have a coupon rate of five percent, meaning the investor is paid five percent interest per year. Current-interest bonds work something like a home mortgage. A borrower might expect to pay interest equal to the loan principal. CABs don't pay interest for a number of years. The coupons have zero interest. But oh boy! Interest is compounding all the while. And "zero" is not its middle name. By 2051, if you bought a $5,000 Poway bond for $300, you will collect $4,700 in profit. Collectively, investors will reap nearly $1 billion in interest on Poway's $105 million debt.
Photo: Voice of San Diego
Mark Lacter created the LA Biz Observed blog in 2006. He posted
until the day before his death on Nov. 13, 2013.