We need a federal ban on CABs

By Joel Thurtell

According to California Treasurer Bill Lockyer, those school board members at San Diego’s Poway Unified School District who authorized bonds with a 10-to-1 ratio of debt to principal ought to be recalled.

“Stupid,” was Lockyer’s description of Poway’s 2011 Capital Appreciation Bond issue borrowing $105 million with a billion-dollar balloon payback.

Lockyer was keynote speaker at the second annual conference of the California League of Bond Oversight Committees Friday, May 10, in Sacramento.e

I was gratified that Lockyer mentioned recall. Guess who one year ago was calling for a recall of the Poway board — yours truly, the ever-restrained proprietor of joelontheroad.

As I digest what I heard from various CaLBOC speakers, I realize that reform of CABs should not be done piece meal. Yes, Michigan banned CVABs, period. But it’s evident that the Michigan model is not likely to be adopted elsewhere. It is too tough on the people who make their living screwing taxpayers with these monstrous debt-generators.

I’m calling for something else now: a federal ban on CABs.

California’s solution is a bill in the state Assembly that would ban CABs with a debt:principal ratio more than 4:1.

That is no ban at all.

I pointed out in my speech to CaLBOC that most of the CABs that enraged people 20 years ago when I wrote about Michigan CABs would easily pass the proposed California test. Yet those CABs had interest piling up at two, three, four and nearly six times principal.

That kind of payback may be great for investors, and certainly is terrific for the underwriters who sell the schools on issuing them. But they are terrible for the taxpayers who believe school officials’ lies that there will be no new taxes with CABs.

My conclusion: that we need a federal ban on CABs.

More soon…

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