School District Owes $1 Billion On $100 Million Loan

NPR ^ | 12/9/2012 | Richard Gonzales

[RLM]

More than 200 school districts across California are taking a second look at the high price of the debt they've taken on using risky financial arrangements. Collectively, the districts have borrowed billions in loans that defer payments for years — leaving many districts owing far more than they borrowed.

[RLM]

No surprises here. If you’ve ever had business dealings with school districts, you quickly learn that school administrators are not the brightest lights on the string. Most have been promoted from teaching positions in a K-12 classroom where they gained most of their business experience, and it shows. Board members typically don’t have any business experience either, and many are also school teachers or administrators. When we were actively involved in school construction 15 to 20 years ago, a very nice elementary school would typically cost $7 million. Now the cost for a similar size school costs three or four times that amount. There is no logic to what they do. One of the later schools where we shared in the construction even has a glassed-in elevator in a small atrium, something like a high end hotel. That school cost somewhere around $30 million. Clearly the cost of K-12 school has far outpaced the rate of inflation, partly attributable to state regulations, and partly attributable to school boards and administrators that lack basic business sense.

[SkyDancer]

That’s one heck of a vig. to pay.

[FlingWingFlyer]

“Help us Obama! Save us!”

[twister881]

One of the Poway Unified school board members who helped create the $1B mess had the hubris to run for city council. He tried to distance himself from the actions of the board...he was trounced in the election.

[CriticalJ]

Conservatives and education reformers have not done the voucher movement any favors by ignoring the financial impact of vouchers. They always want to concentrate on quality of education, which is important, but the fail to bring up the cost savings.

If it cost a state 10k per year to education a student, a 5k voucher nets the state 5k for every student who leaves. Fewer students in the system means fewer employees so fewer benefits and salary. Fewer students means fewer buildings and no need to build more facilities. Fewer students means less busing.

Finally, vouchers would be an economic boon for construction. As it gained momentum, schools would be built or existing buildings converted to schools (a potential good use for derelict shopping centers).

[BigBobber]

Big time investors and banks are in bed with the government. Nothing new here. The school district gets a new building, the banks get a huge profit, and we all get stuck holding the bill.

[Hojczyk]

It is a loan they cost more to pay back....any fool knows this????

[CurlyDave]

Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. "You'd take that any day," he says. "Why would you leave $25 million on the table? You would never leave $25 million on the table."

I used to get similar offers every month when the economy was better. Offers of credit card balance transfers, offers of second mortgages, all kinds of stuff like that. "Free" money now and repay through the nose later. The repay part was always in the fine print.

Unlike the school district, I knew that these were a trap and I shredded them.

[SkyPilot]

For the last few decades, the liberals in the Education mafia have complained:

"See! The military gets all this money, and education does not get enough government aid!"

What a lie. In truth, our government is heading toward collapse in part because of the education mafia. We guanantee those Trillions in student loan debt - that King Bath House Barry wants to "forgive" in whole or in part. Those Trillions have kept colleges and universities in clover. That's why they can afford to pay "Diversity Chairwomen" mid and high six figure salaries. Moreover, colleges and universities can just raise their tuition every year because that just means more government backed student loans, and more for the greedy education mafia.

Not to mention out of control property taxes at the state level that feed the school union Thugocracy. Here in New Jersey, a modest, but decent home now commands five figures in annual property taxes, which the schools immediately rip off the top to the tune of 68%.

Oh, and the Billions spent at the Federal level for the Dept of Education, which has seen its budget rise 400% since Reagan left office.

Communism didn't die. It flourishes in America's education establishment.

[Bob]

Of course. But NINE TIMES the principal in interest??

[vette6387]

“No surprises here.”

You’ve “broken the code!” The problem with “public education” is “public educators.” School superintendents are the country’s highest paid “migrant workers.” And as far as school boards are concerned, with them “it’s all for the children” never mind the costs involved.
We had “fiscal problems” here where I live ( in the same county as the West Contra Costa School District mentioned in the article). Our superintendent “resigned and was immediately hired by the City of Berkeley ( lets you know where he stood politically), and we had two (not one but two) immediately successive unexplained fires at our ed center which destroyed all the pertinent records surrounding the superintendent’s financial misdeeds.
My wife and I were PTC presidents during our kids sojourn though the PS system and were actually personally threatened by the then superintendent because we were proposing to provide noon duty supervision at the PTC’s expense and he didn’t like the idea. What I told him at the time cannot be printed here.

[RetiredTexasVet]

Why all the squawking? It’s the socialist way. Live it up now on your grandchildren’s dime.

[Logical me]

Schools = Unions. Unions are controlled by the worst corruption America has ever seen. Shadow government will destroy much of America.

[nothingnew]

The only "white" person I see in that picture is way in the back, and he resembles hitler.

FMCDH(BITS)

[CodeToad]

The old MBA 3/5 plan: A plan doomed to fail in 5 years but the authors take a bow and are out in three to a hero’s farewell. Anyone that could do basic math knew the plan only kicked the can down the road and doomed the school district.

[ltc8k6]

Didn’t the citizens of California vote to approve these bonds?

[danielmryan]

That’s one heck of a vig. to pay.

It's not that bad if you consider the time factor. Ever hear of zero-coupon bonds? You might not have, because they've faded from view, but they were fashionable in the 1980s. Sometimes, they were promoted as the perfect investment for an IRA.

Essentially, a zero-coupon bond is a bond whose coupons (interest payments) are stripped off and sold elsewhere. What's left is the principal payment on maturity. You can take a 30-year Treasury bond and make it into a "zero" by splitting the interest payments from the bond itself and assigning them elsewhere. Zero chop shops sold the coupons to different clients.

Since these bond pay nothing - nada - until the maturity date, they sell at a huge discount to the payoff at maturity. In essence, the huge discount is compensation for the nada you get over the life of the bond.

Back in the mid and late-1980s, you could still get 8% on long-term Treasuries. A twenty-five year zero would pay nothing over the life of the bond, except at the end. To yield 8%, a $1,000 twenty-five-year zero-coupon bond would have to be sold for only $146.

That's how the math works. In order to yield 8%, that zero has to be sold at about 1/7th of face value. The huge payout at the end is compensation for being locked out of any payment for the entire twenty-five years: for getting nothing until the big payday.

A "capital appreciation bond" is a zero-coupon bond. From that article, I inferred that one of them had a wait period of forty years (!) No joke: a forty-year CAP that pays off $15 per dollar of original loan yields a wee bit more than 7%. Seven percent per year: that's how the compound-interest math works out.

So the vig looks huge only because it's pushed back into a lump sum at the end.

(I found that, when some dealie seems outrageous, that it's best to imagine I'm on the other side of the transaction...)

[SkyDancer]

Sort of like a balloon payment then. The investors don’t see a dime until the bond matures? Then the borrower can file bankruptcy and not pay and those bond holders are out their investment. Right???

[danielmryan]

Sort of like a balloon payment then. The investors don’t see a dime until the bond matures? Then the borrower can file bankruptcy and not pay and those bond holders are out their investment. Right???

Doesn't look too good when you're on the other side, does it?

That's why the early zeroes (or "strip bonds") sold to the public were stripped U.S. Treasury bonds. Theoretically, Treasuries have zero credit risk.

What you pointed out did happen at the end of the '80s in the junk-bond arena. The whizzes at Drexel started peddling so-called "payment in kind" junk bonds, which were essentially zeroes. Your interest payment was more junk bonds of the same issue.

Needless to say, those deals didn't end all that well.

[bigfootbob]

They signed on the bottom line, didn’t they? I’ll bet you each board member responsible ran an election campaign stating they were the best qualified to lead the district. So, it doesn’t matter that the repay amount is 9 times the amount borrowed, they agreed to the contract. Perhaps, it is time to tweak the law a bit to make school boards liable for fiasco’s like this.

Perhaps then the Democrat Politician Incubator’s, also known as an elected school board position, will cease being the entry level position for would be congressmen and other incompetent politicians. Make them pay for their early mistakes before they head off and cause the rest of America trouble.