Mike Shedlock

Poway California, population 47,811 as of 2010, has placed an enormous bet on rising home prices and tax revenues. Poway borrowed $105 million but will not start to pay that amount back until 2033 at which time they will owe $877 million in interest.

Clearly this would be fiscal insanity anywhere, but it is especially true in California given Proposition 13 that caps property taxes.

The Voice of San Diego reports Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

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.

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.



As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers.

Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians.

"This is way worse than loan sharking," said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing. "And Poway is the poster child. What they have done is absolutely insane."

Last year, the district put together its deal to borrow $105 million, without paying anything towards the debt for 20 years.

In two decades’ time, taxpayers will start paying about $50 million a year towards the loan. They’ll make those payments for the next 20 years or so.

It’s a bit like a massive version of one of those exotic loans that got homeowners into so much trouble.

With one key difference: For the next 20 years, Poway Unified isn’t even paying the interest.

Essential Math

Think growth will bail out Poway? Think again.

From Poway City Data the population of Poway shrank by .5% between 2000 and 2010.

The current upfront cost of this $1 billion proposal would be $2196 per every man, woman, and child.

By the time Poway starts paying the bill, the cost will be $20,916 per every man, woman, and child.

Given the average household size is 2.9, the cost per household when the debt is due will be $60,656.

Beyond Insanity

This scheme is not insane, it's well beyond insane. Unfortunately, I cannot come up with a stronger word to describe it.

Bear in mind that 20 years from now it is highly likely the school district will need still more money for school maintenance.  What then? Will property taxes rise 10-fold to pay back this loan?

I do not think that would happen even without Proposition 13 caps.

Forget about 20 years from now, Poway Unified residents are still waiting for the renovations they had been promised back in 2002. Cost overruns ate up the last bond effort already.

Not having learned anything, the district approached voters a second time in 2008, and voters approved on the promise of no property tax hikes.

Until when?
How?

This jackass deal was done with advice from an Orange County financial consultant. Can we have a name please?

I want to know what was in this deal for him, if anything. And if there is something, I want to see this person brought up on criminal charges. If there was nothing in it for the consultant, then he is just another stupid idiot who thinks property tax revenues will skyrocket enough to pay for this mess.

I assure you they won't. I also assure you this deal will bankrupt Poway.

It will not take 20 years to find out either. 10 years from now (or less) with property values stagnant, and the district likely needing still more money, it will be all over for Poway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.