“School District Equivalent of a Payday Loan”

Poorer Schools, Richer Banks (Source: Wikimedia)

Schools may be facing tight budgets but some California schools are facing even costlier problems with capital appreciation bonds that require 10 or 20 times the initial cost to pay them back.

NPR laid out the story of two school districts that took a shortsighted approach to their money problems.

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.

“We’d be foolish not to take advantage of getting $25 million” when the district had to spend just $2.5 million to get it, Ramsey says. “The only way we could do it was with a [capital appreciation bond].”

That bond, called a CAB, will cost $34 million when it comes due. Subtracting the $25 million that the district received from the $34 million amount to be paid leaves West Contra Costa in the hole $9 million. Yes, years of inflation will reduce that imbalance, but a nearly fourteen-fold return remains a helluva of an investment for whoever put the money up front. That’s not such a nice bargain for education.

If that looks like a bad deal, then look at this one:

Perhaps the best example of the CAB issue is suburban San Diego’s Poway Unified School District, which borrowed a little more than $100 million. But “debt service will be almost $1 billion,” [California State Treasurer Bill] Lockyer says. “So, over nine times amount of the borrowing. There are worse ones, but that’s pretty bad.”

The superintendent of the Poway School District, John Collins, wasn’t available for comment. But he recently defended his district’s use of capital appreciation bonds in an interview with San Diego’s KPBS Investigative Newsource.

“Poway has done nothing different than every other district in the state of California,” Collins told the program.

Maybe Collins has a point that other districts are making the same mistakes. However, the difference is that West Contra Costa’s mistake was $34 million, Poway’s is a $1 billion. Besides, the “Hey, everyone else is doing it” excuse never buys any legitimacy.

California’s educational system is in deep trouble because of budget cuts but poor management has wasted millions of dollars that are meant to be spent on pupils by sending it to enhance bankers’ investment portfolios instead. As California State Treasurer Bill Lockyer said, “It’s the school district equivalent of a payday loan.”

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