By Joel Thurtell
How does it happen that a retired reporter in Michigan breaks news that could change the way schools are financed in California?
On March 27, 2012, I found a comment here on JOTR warning that a financial crisis loomed for California schools saddled with a peculiar kind of debt known as Capital Appreciation Bonds that threatens the solvency of California public schools.
This was a 20-year-old story for me. I began investigating Michigan schools’ use of CABs in fall 1992 when I was a Detroit Free Press reporter. After I made daily trips to the state Treasury in Lansing over several months, my multi-story, multi-graphic report on CABs was published April 5, 1993. Though CABs were banned in Michigan as a result of my stories, I was concerned that they might resurface elsewhere. In 2009, I posted my 1993 Free Press CAB stories on joelontheroad.
The commenter on my website, it turned out, is a certified public accountant and member of the state-mandated bond oversight committee of her school district near San Francisco. She had discovered that, through CABs, her district had borrowed $16 million that would mushroom to $70 million by the time the total debt was repaid in 40 years. Wanting to learn about CABs, she googled. That’s when she found my 1993 Free Press articles.
California reporters had ignored the complex story. That sounded familiar. The Bond Buyer trade newspaper reported on our 1993 stories, and Business Week followed with a Sept. 2, 1993 cover story about Michigan’s CABs. But mainstream newspapers in Detroit and around the state were silent. CABs don’t show up on general interest news beats, and reporters are mostly unversed in the special lingo of municipal bonds. In frustration, the commenter contacted me, a retired reporter living some 2,300 miles from San Francisco.
“Thank you for keeping this blog up,” she wrote. “You are one of the few journalists that have written about the ugly side of school bond financing.”
In 1993, it hadn’t mattered that other papers failed to beat the CAB drum. In Lansing, Michigan’s capital, then-state Sen. Jim Berryman was outraged. The day the Free Press stories ran, he asked senate aides to draft legislation outlawing CABs. “I read it and I just
couldn’t believe it. It floored me that we put that type of temptation in front of school boards. It’s truly irresponsible – they’re like junk bonds,” he said. In 1994, the Michigan Legislature banned CABs.
For my California commenter, Michigan’s ban on CABs was good news. “Hopefully,” she told me, “Michigan’s (law) will be used as a model today where CAB financing by local agencies and schools (in California) will be banned.”
But how to get the attention of policy-makers and voters? Well, I might be in Michigan, but my website can be read anywhere. I published my first warning on California CABs on April 27, 2012: (“Muni bomb ticks in California”).
My commenter told me about Poway, a San Diego school district that had borrowed $105 million with 40-year CABs and a billion-dollar pay off. Poway would be my poster child. It would illustrate just why these instruments are bad news for everyone but the lucky people who bought the bonds at a 94 percent discount.
I ran my first article about Poway’s billion-dollar CAB deal on May 1, 2012: (“CABs = compound trouble for California”). As I wrote fresh articles about California CABs, I republished my 1993 Michigan CAB stories under italicized leads explaining that these 19-year-old stories are relevant now as examples of the kind of abuses being perpetrated against California taxpayers. Using Michigan cases as examples, I pointed out features of CAB behavior that California investigators might look for, such as free trips given to school officials by CAB-interested financiers, lawyers and financial advisers; attorneys with conflicting interests representing bond underwriters and school districts, and interest rates of hundreds and sometimes more than a thousand percent of principal.
By now, many newspapers, websites, television and wire services have written about Poway and California CABs. The New York Times in August and The Los Angeles Times in November weighed in with CAB stories. The Los Angeles treasurer has called for a ban on CABs; the California state treasurer has ordered a moratorium on schools issuing CABs while the debate on a permanent CAB ban has gone to the California Legislature.
Will California follow Michigan’s lead and forbid these costly bonds?