By Joel Thurtell
I thought Michigan was bad.
Back in 1993, when I was writing about Michigan school debt, I was astonished to find school districts taking on debt with interest costs at two, three and in one case almost six times the amount of principal they borrowed.
But California always does us one better.
Think 575 percent interest is bad?
How about 1000 percent?
Slimy as it was, nothing in Michigan approached the level of depravity achieved by the Poway Unified School District in San Diego when it borrowed last year to pay for building renovations, computers, fences, security equipment and other purchases deemed necessary to create an educational showplace.
The vehicle for this enormous debt was an innocuous-sounding financial instrument known as the Capital Appreciation Bond.
In August 2011, Poway issued $105 million of Capital Appreciation Bonds.
For 21 years, no payment is due.
Then, in 2033, the first property taxes will be levied to pay $30.5 million due that year. In 2034, $47 million will come due.
So it goes, with interest approaching and then exceeding $50 million a year until the final payment is due in 2051. By that year, principal will be down to $2.2 million.
The interest due on that small remaining principal, however, will be $55 million.
Total cost of paying off $105 million in CABs?
$981,562,328. (There is ambiguity, though. Another, figure is possible: $1,075,645,000.)
Let’s just round it to a billion smackers.
That is not a misprint: A billion dollars in interest to pay off roughly a hundred million in principal.
Ah, the beauties of compound interest!
It gets even better for investors and underwriters.
And worse for taxpayers.
The last two series of CABs, due to be paid in 2046 and 2051, have interest rates of 1279 percent and 2200 percent.
It is a wonderful thing for the investors and for the people who perpetrate these financial Frankensteins.
But for the taxpayers of Poway who haven’t dumped their houses and skedaddled, the payback on debt between 2033 and 2051 is a financial time bomb.
School officials assured voters who approved the bonds in 2008 there would be no increase in taxes.
They had their fingers crossed.
The devils who designed this looming disaster are banking on property values in Poway increasing 300 percent by 2033, 350 percent by 2034 and 400 percent by 2051 in order to generate the tax revenue needed to repay the bonds.
Apparently, these geniuses didn’t read about the nationwide dropoff in real estate values.
Why is increasing value so vital to this scheme?
Under California law, the maximum tax rate that can be charged to a piece of property is $60 per $100,000 of assessed valuation. With the rate of taxation capped, the only way the bonds can be repaid is by hoping for huge leaps in property value.
What if values don’t increase by hundreds of percent?
Taxes will go up, after all.
What if homeowners can’t afford to pay?
Or, what if they WON’T pay?
If taxpayers cannot or will not pay those new taxes, there is an option.
It is called default.