Monday, December 10, 2012

Leverage In the School Systems Hits Predatory Status

No, we're not entering some sort of third-world financial hell at all. It's just your silly 'conservative' values blinding you to the truth -
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.

Why would you leave $25 million on the table? You would never leave $25 million on the table.
- Charles Ramsey, school board president, West Contra Costa School District

"We'd be foolish not to take advantage of getting $25 million" when the district had to spend just $2.5 million to get it, Ramsey says. "The only way we could do it was with a [capital appreciation bond]."

Those bonds, known as CABs, are unlike typical bonds, where a school district is required to make immediate and regular payments. Instead, CABs allow districts to defer payments well into the future — by which time lots of interest has accrued.

In the West Contra Costa Schools' case, that $2.5 million bond will cost the district a whopping $34 million to repay. - Bill Lockyer, California state treasurer
Get that? This is how gangsta, banksta, 'modern' accounting works. In order to get back $25 mil that the people paid the Feds in the first place, the district is taking out a $2.5 mil loan that will be payed back at a 17 x 1 ration. Later...of course. But this is not the first run in that TRE readers have had with out of control school districts, nor it is Califormia's -
Lockyer is poring through a database collected by the Los Angeles Times of school districts that have recently used capital appreciation bonds. In total, districts have borrowed about $3 billion to finance new school construction, maintenance and educational materials. But the actual payback on those loans will exceed $16 billion.

Some of the bonds can be refinanced, but most cannot, Lockyer says.

Perhaps the best example of the CAB issue is suburban San Diego's Poway Unified School District, which borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says. "So, over nine times amount of the borrowing. There are worse ones, but that's pretty bad."
 This is the kind of insanity that I point out when liberals (and to a lesser extent, conservatives) attempt to extol the virtues of edumucation. It isn't that there is a problem with higher learning per se, merely that you don't make yourself financially insolvent in order to attain it. Given the atrocious, ahem, cost...of today's higher education, you better be able to service that loan fast in order to keep yourself afloat. Else you end up a slave to the banksta!

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