I have written several articles focusing on municipal budgets, pensions, along with other related financial issues. A recent article in the San Francisco Chronicle caught my undivided attention. As I read further, the more I shook my head in complete disbelief. The article centered on School Districts paying dearly for bonds.
The lead-in story was that the Napa Valley Unified School District exercised what they thought was some creative financing to fund a new high school with a loan and called it a capital appreciation bond. Since the taxpayers appeared unwilling to accept the financial obligation for funding a new school, the District embraced another financial instrument – a loan. The article goes on to point out that for the $22 million needed to build the school, the district would be obligated to start paying on the loan in 21 years and by the time the loan is finally over and done with, the district will have paid $154 million 40 years later.
This begs several questions. If the taxpayers were unwilling to commit to pay $22 million to build a school in 2009, why does the School District believe that taxpayers would be willing to pay $154 million over the next 40 years? Over the next 40 years, what type of financing and how much would be needed to maintain the school? And the big question, who or what entity will have the responsibility to pay the loan back?
The article continues to point out there at least 1,350 school district and governmental agencies throughout the Country that have utilized capital appreciation bonds and that voters are usually unaware of the high interest rates associated with these bonds. California has more than 400 school districts and other agencies that have engaged in capital appreciation bond financing amounting to $9 billion in borrowing with a payback of over $36 billion over the next 40 years.
The article quotes California Treasurer Bill Lockyer as stating, "The average tenure of a school superintendent is about 3 1/2 years, so they aren't going to be around, in most instances, to worry about paying that off, nor will the voters, probably, that enacted it in the first place." The article concludes by pointing out other Bay Area School Districts that have engaged in these capital appreciation bond financing activities. Both Lockyer and State Superintendent Tom Torlakson have called for a statewide moratorium on capital appreciation bonds.
I have to pose another question at this point. We have spent a great deal of time talking about the effects of recycling, reusable energy, “green”, and the condition our generation will leave the environment to future generations. I have pointed out that in trying to save our environment, we may be unable to afford to live in it. Are we creating a situation with capital appreciation bonds where future generations will be unable to afford schools in the future?
Capital appreciation bonds may have their place as a financial instrument but creating debt with excessive repayments without voter approval is an unacceptable form of representation for us and future generations.
In another somewhat related article I read in the SF Examiner by Melissa Griffin, she points out that the State has an unfunded retirement liability of $162 billion. She also pointed out that over the next 10 years, the age groups from 0 to 24 will show a decline in population growth, the age group from 65 to 74 will have an increase in excess of 60%, and those over 75 will show an increase of about 35%. Of all of the studies that I have seen in the last several years, the increased growth in an aging population pattern has remained consistent.
If the average age of the population continues to increase, who will be there to pay for the obligations that we are incurring today? With $36 billion in capital appreciation bonds and $162 billion in unfunded pension liabilities, where will the money come from to pay this approximately $200 billion? For many years now, I have talked about deferring the debt we incur to our children and how distasteful that thought becomes. Now, I may have to change the word children to grandchildren and at the rate of increased spending, I might have to consider great grandchildren.
When the idea of a balanced budget is talked about, concerns have to be raised by any prudent eye to financial matters and fiscal responsibilities. With the 39 new members of the State Legislature, perhaps they will see the wisdom of prudent spending and fiscal responsibility in the future.
I would appreciate your comments on this and other issues by emailing me at email@example.com or by phone - 650-573-7359.
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