School District Borrows on Subprime Terms

Tuesday, February 19, 2013

In early 2008, residents of Placentia and Yorba Linda, Calif., approved a $200 million school construction bond after being assured repeatedly that "their money will be spent wisely." After the election, the school board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount ÃƒÂ‚Ã‚Â–- $280 million ÃƒÂ‚Ã‚Â– to repay. "Who borrows money thinking you don't have to even begin to pay interest for 20 years?" asked Kevin Graves of Lake Arrowhead, whose two children graduated from Rim of the World. "The board members knew what they were doing. They did it because there were no consequences."

Posted by uglyblinddate at 07:31 PM | 49 COMMENTS | permalink | Comment on This Entry |

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uglyblinddate

Joined 2013/02/08
Visited 2013/03/01

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After the election, the board allowed the bank to sell some of the costliest bonds ever issued by a California public agency. Just one $22 million borrowing from 2011 will cost taxpayers nearly 13 times that amount – $280 million – to repay.

From the article

#1 | Posted by uglyblinddate at 2013-02-19 03:35 AM | Reply | Flag:

According to an analysis of data from the state treasurer's office, Baum has issued more than 60 capital appreciation bonds for California school districts since 2007, including the single most expensive such loan. That debt – $283,612 borrowed by San Bernardino County's Rim of the World – will cost future taxpayers 23 times the principal.

Compare that with a 30-year home mortgage with a 5 percent interest rate, which requires payments of about twice the amount borrowed.

From the article

#2 | Posted by uglyblinddate at 2013-02-19 03:35 AM | Reply | Flag:

"Who borrows money thinking you don't have to even begin to pay interest for 20 years?"

Answer: A democrat

#3 | Posted by paneocon at 2013-02-19 06:50 AM | Reply | Flag:

Title is incorrect. The state is not borrowing the money. School districts are. There is also a legislation solution being imposed to stop these loans.

You're a day late and a dollar short there Ugly one.

#4 | Posted by Prolix247 at 2013-02-19 12:10 PM | Reply | Flag:

Looks like it's CA school districts who are late, and a few dozen billion dollars short.

Not my problem though.

#5 | Posted by uglyblinddate at 2013-02-19 07:50 PM | Reply | Flag:

Ugly - you do understand these bonds are going to be restructured don't you?

If you don't know what that means ask a democrat. I'll give you a hint, it's the opposite of the GOP's "default" stance on everything...

#6 | Posted by Prolix247 at 2013-02-19 07:59 PM | Reply | Flag:

The bonds aren't callable, and there are no refundings permitted. Was that the plan? To borrow the money, then force a restructuring? How is that not a technical default?

I don't want you to default. I want you to choke on the sinking funds for the next 30 years. But I love it when stupid liberals try to understand credit markets, and act smart. If they were that smart, the deals wouldn't have been done in the first place.

I'll have to look in to buying CDS's on these bonds, with the caveat on a repo agreement. Problem is the duration, of course. CA won't feel pressured to do anything about these crummy bonds for at least 30 years. By then, anyone with half a brain will have moved out of the district to avoid the enormous tax hits that are coming.

Nice werk!

#7 | Posted by uglyblinddate at 2013-02-19 08:09 PM | Reply | Flag:

These contracts should simply be nullified. Parties on both sides violated laws.

As for what to do about the money: Both parties are at fault, so judgment should favor the taxpayers.

#8 | Posted by snoofy at 2013-02-19 08:50 PM | Reply | Flag:

So if an investor bought these CA municipal bonds, what should happen to his money? Does he forfeit it, while CA schools get to keep their buildings?

#9 | Posted by uglyblinddate at 2013-02-19 09:11 PM | Reply | Flag:

Ugly - not one of these bonds affect me. I live in the beautiful city of Santa Monica.

I would hazard a bet that if you looked up Yorba Linda or San Bernardino you would find it is not a liberal stronghold.

#10 | Posted by Prolix247 at 2013-02-19 09:11 PM | Reply | Flag:

They don't affect me either. Doesn't mean I don't find it entertaining.

#11 | Posted by uglyblinddate at 2013-02-19 09:17 PM | Reply | Flag:

Ug - question for ya.

Which name do you want me to put down for you on the DR Military Veterans List? Right now it's "RightisRight" but you can change it to whichever one you want -- that one or Uglyblinddate, Wellhungbear, Michele's cabana boy, or whatever. lol Just stick to one though. I'm tired of trying to keep up with everyone's ever changing noms de plume on here. Thanks.

#12 | Posted by CalifChris at 2013-02-19 09:27 PM | Reply | Flag:

So if an investor bought these CA municipal bonds, what should happen to his money? Does he forfeit it, while CA schools get to keep their buildings?

Investments are risky.

Perhaps the investments should be recast into something that complies with the law, though I'd only favor that if the people who perpetrated this illegal contract get prosecuted.

#13 | Posted by snoofy at 2013-02-19 09:29 PM | Reply | Flag:

"These contracts should simply be nullified." - Snoofers

What would Danforth say?

#3 ... gave me a nose enema..

#14 | Posted by AndreaMackris at 2013-02-19 09:32 PM | Reply | Flag:

I liked RIR, but that was banned. So were all the ones that followed. There was a month-long stretch where literally every single post I put up was flagged as abusive, no matter what I said.

So I'm back in this new incarnation, though not by choice. I'd love to have RIR back.

#15 | Posted by uglyblinddate at 2013-02-19 10:10 PM | Reply | Flag:

...So I'm back in this new incarnation, though not by choice. I'd love to have RIR back.

#15 | Posted by uglyblinddate

Then just go back to using RightisRight. That's the name everyone knows you by best, anyway. Send Rcade an email and ask if you can make one final request to change your name (back to RiR). I know you got hit -- often unfairly, I thought -- rather hard and continuously by a few of the serial flaggers on here. I think it was far more for your political stance than anything to do with personally insulting anyone.

Tell you what, suppose I just leave you on the military vet list as "RightisRight" until you get things straightened out with your name -- one way or the other, okay.

#16 | Posted by CalifChris at 2013-02-19 10:23 PM | Reply | Flag:

#10

Prolix247

There are no republicans, or fiscal conservatives in the land of the fruits and nuts, my daughter was transferred out of California 6 months ago,lol. Probably the land of the most incompetent politicians in the country. Is it any wonder they are stone broke? I am waiting for the state to file bankruptcy, it is inevitable.

#17 | Posted by gtjr at 2013-02-19 10:52 PM | Reply | Flag:

17: Right, none in one of our largest states. None. Oh, that's right; you said "lol," so you were just joking. (sigh)

#18 | Posted by pragmatist at 2013-02-20 12:28 AM | Reply | Flag:

Oh, shucks, looks like it's our largest state (by population).

#19 | Posted by pragmatist at 2013-02-20 12:29 AM | Reply | Flag:

"Ugly - not one of these bonds affect me. I live in the beautiful city of Santa Monica."

That hand you will feel soon in your pocket will be the state taking from you to pay this off, regardless of where in the state you live.

#20 | Posted by Diablo at 2013-02-20 01:13 AM | Reply | Flag:

#17 huh? Mitt Romeny lives in La Jolla. And a schoolboard-related bond scam was revealed a few months ago in some Republican San Diego area district not too far from La Jolla. We even had a thread about it here.

Our finance industry has simply found a way to tap into the lucrative ballot initiative process. Lucrative for them I mean. The lucre comes at the expense of the taxpayers, but why should the finance industry care? Their job is to make money, doesn't matter how. Does it?

So this is a natural consequence of allowing money into politics. You know you can count on people to vote for school bonds. Perhaps moreso Democrats than Republicans, I don't really know, but in my limited experience bond issues pass more often than not. This is a sound business model.

#21 | Posted by snoofy at 2013-02-20 02:39 AM | Reply | Flag:

1 These bonds don't appear to me to be illegal, unwise yes, but not illegal. 110% sure they should have been auctioned NOT negotiated!!!

2. Have you never heard of a Zero coupon bond? CABs are zero coupons that turn into coupon bonds in the future.

3. SD's have been doing idiotic moves for decades. Just another pie hole in California!

4. And yes the bonds may be renegotiated down the road due to 'default or malfeasance' a standard line in the bond indenture that allows wiggle room in extreme circumstances.

#22 | Posted by DavetheWave at 2013-02-20 07:49 AM | Reply | Flag:

BTW these were NOT subprime borrowing conditions. You get issue a 38 yr Zero, watch out for what that's going to cost!!!!

Also...ANYTIME you hear grandiose plans, like in this case with drawlings of future gyms, fields, buildings...to be funded by borrowing...put your hand on your wallet and back towards the door.

Case in point, BHO plan to 'invest'. Watch out we are all about to get screwed in the biggest way.

#23 | Posted by DavetheWave at 2013-02-20 07:57 AM | Reply | Flag:

This can be traced to another Investment Bank. The deal is a violation of California Law. The Bonds profits are tax free, 23 times their face value and cannot be recalled. A sweet deal if you can wait 35 years for your payback.

But not to worry, by 2028 a loaf of bread will cost $30, so its really a good deal, even if you only make $15,000/year.

#24 | Posted by nutcase at 2013-02-20 08:14 AM | Reply | Flag:

The bond's profits aren't tax free; the interest is received tax free. There's a big difference, if you sell before maturity.

#25 | Posted by uglyblinddate at 2013-02-20 08:23 AM | Reply | Flag:

This is the type of malfeasance that bio wants to sweep under the rug. Who here from the Dr left, can tell us bho demands accountability? Bho wants even more money for 'schools, education, children'.

How dare anyone challenge helping children with state of the art public schools. Pay up suckers.....its for the children!

#26 | Posted by DavetheWave at 2013-02-20 09:27 AM | Reply | Flag:

The shame is that these same fools are in charge of overseeing the education of local children.

#27 | Posted by danv at 2013-02-20 12:48 PM | Reply | Flag:

#15 | Posted by uglyblinddate

Funny, I always thought you were kind of an a**, but I don't remember RisR saying much that was ban worthy. You must have gone off on a couple of rants that I missed.

BTW, why shouldn't school districts walk away from bond debt, just like RisR thought it was okay for people to walk away from upside down mortgages?

#28 | Posted by Whatsleft at 2013-02-20 01:06 PM | Reply | Flag:

"Bho wants even more money for 'schools, education, children'."

The president has NOTHING to do with local bonds. Ye gods, even I know that.

The problem with this president and education is not that he thinks preschool is good or wants to support education but that he, like most politicians, suffers from overreliance on standardized testing.

#29 | Posted by pragmatist at 2013-02-20 01:15 PM | Reply | Flag:

"BTW, why shouldn't school districts walk away from bond debt, just like RisR thought it was okay for people to walk away from upside down mortgages?"

school districts have other assets and plan on operating.

people who walk away from upside down mortgages usually have no other assets and no real net worth anyway....nothing for a creditor to attach itself to.

#30 | Posted by eberly at 2013-02-20 01:30 PM | Reply | Flag:

#29 maybe you haven't heard the 50 or so separate times bho has told us that cut backs would cost 'teachers, police, and firemen' their jobs.

No I am sure you have heard it, you just take the low information approach, act dumb, and attack me!!!

You are putting your boot to the throat of this s.d.

#31 | Posted by DavetheWave at 2013-02-20 03:31 PM | Reply | Flag:

Just thank the authoritarian liberals, interest doesn't count, borrowing money does't count, after all it isn't their money, and best of all it make the liberals look like they are trying.

So we can see these authoritarian liberals are making the school systems and the cost worse yet very few are screamin. Take use from 25 to maybe 50th and still nothing will be done yet the authoritarian liberals will still be blaming some republican from 20 years back.

#32 | Posted by moneywar at 2013-02-20 03:36 PM | Reply | Flag:

"No I am sure you have heard it, you just take the low information approach, act dumb, and attack me!!! "

You think that was attacking you? Wow. You're not a newbie, Dave.

Low-information approach? To correct your implication, an implication that itself was low-information? Oh, you mean you were hinting poorly at some larger argument? Jeez, write clearly and we won't have a problem. Except that yes, cutbacks will cost those people their jobs. Gee, gosh, I'm seeing right in my district 20 percent of the faculty cut for next year. Bond issues are separate from regular school budgets. Disconnected. The decision-makers in this district have acted extremely poorly, as decision-makers in districts often do, but it has nothing to do with Obama. You're reaching even to get to your apparent point. But feel free to make it clearly so I can understand what you meant by bringing criticism of the president into a local issue.

#33 | Posted by pragmatist at 2013-02-20 04:39 PM | Reply | Flag:

"You are putting your boot to the throat of this s.d."

I have nothing to do with this school district, nor did I comment on their stupidity before my post #33, and in that post, I called them out. What are you talking about?

#34 | Posted by pragmatist at 2013-02-20 04:42 PM | Reply | Flag:

Who here from the Dr left, can tell us bho demands accountability?

There are over 12,000 school districts in the United States.
You want the President to take a direct oversight role in all of them?
Oookay...

#35 | Posted by snoofy at 2013-02-20 05:44 PM | Reply | Flag:

Just thank the authoritarian liberals, interest doesn't count, borrowing money does't count, after all it isn't their money, and best of all it make the liberals look like they are trying.

Taking your hyperbole as "read..."
If you personally stood to get rich off this deal, would you feel bad about it?

#36 | Posted by snoofy at 2013-02-20 05:46 PM | Reply | Flag:

I wonder if this type of financing arrangement is legal elsewhere in the world. Anyone know?

Apparently it was illegal in California... but for some reason right-wingers don't take that into account when determining if contracts need to be honored.

Poor Shylock, having to pay his pound of flesh after all.

#37 | Posted by snoofy at 2013-02-20 05:51 PM | Reply | Flag:

#33 What garbage. Read my posts, I rip the deal. Only an idiot would float negotiated muni's versus auctioned ones. Much less 38 yr zero's!

The whole point of my posts were that things shouldn't be bought if the can't afford to pay them. Having trouble reading?

#38 | Posted by DavetheWave at 2013-02-20 06:11 PM | Reply | Flag:

#37. Who says contracts don't matter? You want to break em., then don't complain to me when funding dries up. (by the way I agree and quote the actual language which should be used to do exactly that!) I haven't sold a single California domiciled muni in years, nor Illinois, Nevada, Ct., or Detroit.

#39 | Posted by DavetheWave at 2013-02-20 06:22 PM | Reply | Flag:

Funny part is Orange County had a bankruptcy issue in the 90's and you'd think they watch out for all county debt.

As for muni debt fraud, the big one has been yield burning. Crops up every few years, and the IRS does NOT like it, nor the MSRB. For geniuses like donner I won't bother explaining you obviously don't need me to explain!

Another very significant problem SD's and counties have incurred are interest rate swaps. Peddled by WS and sold to officials as a good way to hedge against higher rates. Problem is they blow up, and besides, rates cratered. I'd been warning about that here since 2007....

#40 | Posted by DavetheWave at 2013-02-20 06:29 PM | Reply | Flag:

Who says contracts don't matter?

I'm saying contracts do matter.

They matter enough that contracts arrived at via illegal means should be abrogated, on a priori grounds. Otherwise the notion of contract law becomes meaningless. Why must it be this way? Because contract law is a necessary component for an antiquated economic system called capitalism.

#41 | Posted by snoofy at 2013-02-20 06:40 PM | Reply | Flag:

"The whole point of my posts were that things shouldn't be bought if the can't afford to pay them. Having trouble reading?"

I completely agree with sentence #1. So enlighten us: Why did you bring the president into it? Having trouble reading?

And don't tell me I did x regarding the district when I didn't. Having trouble reading?

#42 | Posted by pragmatist at 2013-02-20 07:00 PM | Reply | Flag:

#41 securities laws are completely different then what the average person, even the average lawyer would know.

#43 | Posted by DavetheWave at 2013-02-20 07:26 PM | Reply | Flag:

I'm bringing the president into this because he himself is pretending Fed budget belt tightening will affect teachers, police, and firemen. Has said so dozens of time.

#44 | Posted by DavetheWave at 2013-02-20 07:42 PM | Reply | Flag:

Davethe wave

Are you talking about the president that proposed and got passed the sequester bill? Then 18 months ago stood in front of cameras and said any bill to change the sequester he would veto? The same president that, now that he is re-elected, wants congress to clean up the mess that he made?

As far as school systems are concerned most districts with the highest per pupil cost happen to have the absolute worst schools, and lowest graduation rates. Not all mind you but most. Point is throwing money at the schools does not improve schools and graduation rates. Do you think it might make sense to look at other factors? Naw, that would just make sense.

#45 | Posted by gtjr at 2013-02-20 09:29 PM | Reply | Flag:

There is a big difference between a homeowner who takes out a loan secured by the home who sees the home value fall, and so it's a rational decision to walk away. The homeowner mails in the keys, because the mortgage is secured by the home, and that's that--in most states. A school district bond is backed by taxpayer dollars and property taxes. It's a different contract. If the want to walk away from the bonds, that is a bankruptcy for not only that bond issue, but for all of them.

#46 | Posted by uglyblinddate at 2013-02-20 10:42 PM | Reply | Flag:

#41 securities laws are completely different then what the average person, even the average lawyer would know.

Making them an easy mark for banking industry fraudsters (and their lawyers) who know exactly what they are doing: Fleecing the public.

#47 | Posted by snoofy at 2013-02-21 02:05 AM | Reply | Flag:

"I'm bringing the president into this because he himself is pretending Fed budget belt tightening will affect teachers, police, and firemen. Has said so dozens of time."

One more time: The bond issue is separate. Fed contributions to school district budgets (from our taxes) do not go to bond issues. You're conflating two issues to serve your agenda.

"Do you think it might make sense to look at other factors? Naw, that would just make sense."

Sure, let's start with parenting, as in the lack of.

#48 | Posted by pragmatist at 2013-02-21 07:42 AM | Reply | Flag:

I'm not he is, you really are thick aren't you!

He's the President, he's said it DOZENS of times. We never heard you take exception...till now!

#49 | Posted by DavetheWave at 2013-02-21 07:46 AM | Reply | Flag: