California to reform school bond practices

By Joel Thurtell

California legislators are poised to enact a law meant to reform the way the state’s school districts borrow through Capital Appreciation Bonds.

Cabscam California was reported first on joelontheroad, which made the 1000-plus percent interest as proportion of principal in San Diego’s Poway schools a poster child for the evils of CABs.

While the proposed law would place limits on the way CABs are issued and would put a ceiling on interest, it would not ban the practice of high-interest borrowing my California municipalities.

It would still be possible for school districts to borrow at rates of interest as proportion of principal that so infuriated Michiganders 20 years ago that the Michigan Legislature outlawed CABs. The Michigan ban resulted from my reports in 1993 on how schools were turning increasingly to this “creative” form of finance with the false promise of “no new taxes.”

Taxes were only postponed by 10 years, with interest meanwhile compounding at times to nearly 600 percent as a proportion of principal.

In California, CABs would be allowed with interest as proportion of principal up to 400 percent. That is still an outrageous amount to charge. It sure upset people in Michigan when they found, or instance, that the $19 million borrowed by Lowell schools in 1993 would turn into $93 million when it came to make payments in 2003.

I warned of this failing in my speech May 10 to the California League of Bond Oversight Committees.

I realized after my visit to Sacramento that, while it worked in Michigan in 1994,  state-by-state reform of muni bond practices is not the way to kill CABs.

A federal ban on CABs similar to Michigan’s is the best way to approach reform of this nefarious form of muni debt.

 

 

About Joel

Retired 2007 after 23 years as a Detroit Free Press reporter. Thirty years in the news biz. Trained as a historian, never had a Journalism class. At Free Press, wrote many articles about lakes, streams and boats. Wrote more than 80 major stories about the Rouge River. In June 2005 with Free Press photographer Patricia Beck paddled a canoe 27 miles up the Rouge River through Metro Detroit. May be the farthest anyone has canoed up the Rouge, though pioneers used it as a road. Our book, UP THE ROUGE! about the adventure is to be published by Wayne State University Press next year. I'm writing a second book about the Rouge, trying to find out why with billions spent on cleanup, so many American rivers are not fit for humans to touch. DIRTIEST RIVERS will arrive about the time UP THE ROUGE! comes out. I earned a B.A. in history and German at Kalamazoo, graduating in 1967. In 1968, I earned an M.A. in history at the University of Michigan. In 1970, I passed all exams for the doctorate in Latin American history, but have not quite gotten around to finishing my dissertation. I lived in Mexico for a year doing research on a Ford Foundation fellowship. I was a Peace Corps volunteer supervising school and well construction in Togo, West Africa 1972-74. I was a reporter at the South Bend Tribune and editor of the Berrien Springs Journal Era before joining the Free Press in 1984. I've written four novels, four kids' books and in addition to the two Rouge books am completing a journalism text called SHOESTRING REPORTER: A MANIFESTO FOR SAVING JOURNALISM OR HOW I GOT TO BE A BIG CITY REPORTER WITHOUT GOING TO J SCHOOL AND HOW YOU CAN DO IT TOO!
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