If this sounds irresponsible, you really, really do not want to hear about pension financing. This is "In return for $1 in the present day, we will pay you $10 in 30 years." Californian state employee pensions are "In return for $1 in the present day, 30 years from now we will reward you with a non-callable perpetuity bond with a $10 a year coupon. Oh, here's your dollar back."
At least with pensions, funds are being invested in assets with direct value that can be recaptured in 30 years; even in the optimistic case where new schools really add value, that value may well just get up and leave if taxes are raised in 30 years to pay for the loan.
"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.'
"But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. 'It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for,' Lockyer says. 'So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary.'"
No, I would leave that on the table. I wouldn't agree to a sucker loan like that on my own behalf, nor would I agree to it as a public official on the taxpayer's behalf. The problem here is that the public official forgot that he has a fiduciary duty to the public. I wonder if he learned his civics and his understanding of the mathematics of loan interest in a California public high school.
AFTER EDIT: Oops, I almost forgot a rare example of a pithy quotation attributed to Mark Twain that is an actual genuine Mark Twain quotation. This is what he wrote about school boards more than a century ago:
"In the first place God made idiots. This was for practice. Then He made School Boards." -- Mark Twain, Following the Equator (1903) 2:295
AFTER SECOND EDIT: The claim that the school district did well to take out a loan on unfavorable terms to also obtain a loan with a federal subsidy doesn't take into account that all the taxpayers in the district are also on the hook for federal deficit spending, as most of them are federal taxpayers directly and all are part of the national economy.
If you look more completely at the deal it actual is a good deal for the school district. They will pay a total of $34 million over 20 years to obtain $25 million. So their effective total interest is only $9 million, which works out to about 2% per year... an excellent loan rate for anyone. What is hidden in that is that the other $23 million (34-9) in interest that is "free" to the school district is actually paid by all of us as taxpayers. If given the opportunity why not have taxpayers across the country finance your school district? I would fire any superintendent who DIDN'T take that deal. I'm not arguing that this is a morally correct thing to do, just that it makes good financial sense from the superintendent's perspective.
>> "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.'"
It's maddeningly common for people to neglect that pesky "cost" part of a cost-benefit analysis.
Well, this idiot gets to put "built a brand-new $25 million school" on his resume. He's benefiting himself without any cost, while screwing the taxpayers.
What California needs is the power to issue its own currency, call it the CMB (the California moon beam), legal tender for all California debt, public and private. Well, public anyway. Initially equal to $1. But only initially ...
> San Diego's Poway Unified School District borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says.
Poway's population is 48,518, comprising 16,128 households. 6,493 households have children, so this is costing them $154,012 per household with children for one expense, at a time when they already had several school buildings that were not old and were in good condition. The population of children is not increasing. It's certainly not the only expense to run the schools either.
How will the 16,123 households pay their $62,003 debt per household?
If they all sell their houses and assets it can be paid back.
Too bad the US Constitution was created to deal precisely with this issue. If only it didn't state that "No state shall. . . make any Thing but gold and silver Coin a Tender in Payment of Debts."
Quick, call your representative and ask for the California Moon Beam amendment to be passed!
It's hard to believe people on school boards are given this level of financial power. Even though the California state government is horrible, it's hard to believe they'd be more incompetent than local part time school board members in making financial decisions like this.
Criminal prosecutions may be in order. Certainly there have been financial crimes at the county level in California (Orange County being the famous example).
Government gets less competent as you go down the chain, because the most qualified people want to work higher up. Municipal government is the absolute worst, except in big municipalities like New York City, etc.
Many years ago, Capital One sent me an offer for a $5000 personal loan with this pitch: "What's the problem with most personal loans? The monthly payments are just too high."
Indeed, their monthly payments were very low, only 1% of the outstanding balance, with a minimum of $15.
But the interest rate looked a bit steep, so I coded up a little amortization calculator for fun and ran the numbers.
If you made the minimum payments, your $5,000 loan would cost you $50,000 to repay. But thanks to those easy low payments, you'd get 105 years to do it!
Would that be such a bad idea? You get the $5,000 now when you need it. In 105 years' time you're most likely either a lot richer than you are now, or dead. It wouldn't suit everyone, but I can see that being a useful loan in several circumstances.
This type of financial irresponsibility drives me crazy. School districts do so many stupid things in the name of the children, when really all they're doing is trying to maintain their elected positions.
If you stay in your seat for fifteen years, then leave the next guy with a ticking timebomb, it's a victimless crime (taxpayers, children, employees), right?
It looks like the banks did fine on this one. They priced the risk appropriately. 10:1 for a 20-30 year loan? Maybe go even higher. Their real sin was saying that junk mortgages were good and not collecting enough interest.
The article doesn't say, but I'm pretty sure the California School District is borrowing the money from the state itself. That makes the interest a non-issue because it doesn't matter if it is 1% or 100% per annum - the money just flows from one part of the government to another. The interest is just a form of accounting.
Now it would be a different matter entirely if the loan was made through a private bank. Then even an interest rate of 0.1% would be a waste of taxpayer funds as there is absolutely no reason not to borrow from the state itself. But that is not how it usually works since governments always are able to finance their loans themselves.
well according to cynwoody this $34m equates to a ~10% interest rate. Not sure why that's so terrible, if anything sounds cheap for a borrower of this credit quality and the duration of the loan (25+ years).
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.
If the school was really so badly needed, why didn't they raise taxes to get the $2.5 million? If they couldn't get the district to pass a tax increase in order to qualify for a subsidized loan 10 time its size, then I'm skeptical on how necessary that new school actually was.
If they couldn't afford $2.5 million up front, what made them think they'd be able to afford $34 million later?
Clearly, at some point it becomes cost-effective for the state to step in and just buy back the bonds at close to par under the implied threat of bankruptcy as an alternative. Almost free money!
My life's work to collect what little I have means nothing while things like this are going on. I might go borrow millions of dollars too, because everyone is under the assumption that no one is paying anything back when the whole ship goes down.
I'll contribute to the fund that supports teachers/admins getting an MBA for cheap. They must sign something saying they'll come back to the school district.
No, it doesn't exists as far as I know. Please go start it.
[+] [-] patio11|13 years ago|reply
[+] [-] friism|13 years ago|reply
California is pretty deep in...
[+] [-] dylanvee|13 years ago|reply
[+] [-] gwern|13 years ago|reply
[+] [-] sageikosa|13 years ago|reply
[+] [-] wildgift|13 years ago|reply
[+] [-] spoiledtechie|13 years ago|reply
[+] [-] nekojima|13 years ago|reply
[+] [-] tokenadult|13 years ago|reply
"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.'
"But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. 'It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for,' Lockyer says. 'So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary.'"
No, I would leave that on the table. I wouldn't agree to a sucker loan like that on my own behalf, nor would I agree to it as a public official on the taxpayer's behalf. The problem here is that the public official forgot that he has a fiduciary duty to the public. I wonder if he learned his civics and his understanding of the mathematics of loan interest in a California public high school.
AFTER EDIT: Oops, I almost forgot a rare example of a pithy quotation attributed to Mark Twain that is an actual genuine Mark Twain quotation. This is what he wrote about school boards more than a century ago:
"In the first place God made idiots. This was for practice. Then He made School Boards." -- Mark Twain, Following the Equator (1903) 2:295
AFTER SECOND EDIT: The claim that the school district did well to take out a loan on unfavorable terms to also obtain a loan with a federal subsidy doesn't take into account that all the taxpayers in the district are also on the hook for federal deficit spending, as most of them are federal taxpayers directly and all are part of the national economy.
[+] [-] sputknick|13 years ago|reply
[+] [-] csallen|13 years ago|reply
It's maddeningly common for people to neglect that pesky "cost" part of a cost-benefit analysis.
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] rorrr|13 years ago|reply
[+] [-] cynwoody|13 years ago|reply
Issued in: 2010. Principle: $2,999,949. Due in 26.1 years: $33,820,000
That works out to an interest rate of 10.495%. How does that compare to your mortgage interest rate?
http://spreadsheets.latimes.com/capital-appreciation-bonds/
What California needs is the power to issue its own currency, call it the CMB (the California moon beam), legal tender for all California debt, public and private. Well, public anyway. Initially equal to $1. But only initially ...
[+] [-] droithomme|13 years ago|reply
Poway's population is 48,518, comprising 16,128 households. 6,493 households have children, so this is costing them $154,012 per household with children for one expense, at a time when they already had several school buildings that were not old and were in good condition. The population of children is not increasing. It's certainly not the only expense to run the schools either.
How will the 16,123 households pay their $62,003 debt per household?
If they all sell their houses and assets it can be paid back.
[+] [-] cheese1756|13 years ago|reply
Quick, call your representative and ask for the California Moon Beam amendment to be passed!
[+] [-] rdl|13 years ago|reply
Criminal prosecutions may be in order. Certainly there have been financial crimes at the county level in California (Orange County being the famous example).
[+] [-] rayiner|13 years ago|reply
[+] [-] prostoalex|13 years ago|reply
[+] [-] Stratoscope|13 years ago|reply
Indeed, their monthly payments were very low, only 1% of the outstanding balance, with a minimum of $15.
But the interest rate looked a bit steep, so I coded up a little amortization calculator for fun and ran the numbers.
If you made the minimum payments, your $5,000 loan would cost you $50,000 to repay. But thanks to those easy low payments, you'd get 105 years to do it!
[+] [-] lmm|13 years ago|reply
[+] [-] debacle|13 years ago|reply
If you stay in your seat for fifteen years, then leave the next guy with a ticking timebomb, it's a victimless crime (taxpayers, children, employees), right?
[+] [-] xedd|13 years ago|reply
[+] [-] monochromatic|13 years ago|reply
[+] [-] logn|13 years ago|reply
[+] [-] bjourne|13 years ago|reply
Now it would be a different matter entirely if the loan was made through a private bank. Then even an interest rate of 0.1% would be a waste of taxpayer funds as there is absolutely no reason not to borrow from the state itself. But that is not how it usually works since governments always are able to finance their loans themselves.
[+] [-] retube|13 years ago|reply
[+] [-] donaldc|13 years ago|reply
Charles Ramsey, president of the school board, says he needed that $2.5 million upfront, but the district didn't have it.
If the school was really so badly needed, why didn't they raise taxes to get the $2.5 million? If they couldn't get the district to pass a tax increase in order to qualify for a subsidized loan 10 time its size, then I'm skeptical on how necessary that new school actually was.
If they couldn't afford $2.5 million up front, what made them think they'd be able to afford $34 million later?
[+] [-] sethg|13 years ago|reply
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] blacksqr|13 years ago|reply
[+] [-] ck2|13 years ago|reply
[+] [-] gizmo686|13 years ago|reply
[+] [-] krakensden|13 years ago|reply
On a related note: http://www.networkworld.com/community/node/16331
[+] [-] Rhymenocerus|13 years ago|reply
[+] [-] nazgulnarsil|13 years ago|reply
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] lifeisstillgood|13 years ago|reply
I keep seeing "Market will sort it out comments" when the market cannot play in this, Market.
School boards are a fairly unique US thing but they are like a canary in the mine.
[+] [-] namank|13 years ago|reply
I'll contribute to the fund that supports teachers/admins getting an MBA for cheap. They must sign something saying they'll come back to the school district.
No, it doesn't exists as far as I know. Please go start it.