Only In California: School Owes $1 Billion On $100 Million 'PayDay' Loan

Tyler Durden's picture

These three letters - C.A.B. - might just be the Dis-Humor story of the day. NPR reports that more than 200 schools across California are coming to the shocking realization that the upfront cash they needed so badly came at quite a price. These 'Capital Appreciation Bonds' are unlike normal bonds (requiring regular coupon payments and principal repayment); instead they provide the 'lent' money upfront and defer all interest and repayment to some magical faery land time in the future (by which time the interest accrued has grown exponentially as the interest accrues on the rising 'principal plus previously accrued interest'). Brilliant - as the Guinness chaps might say. So California schools are now undertaking PayDay or loan-shark style loans defending the idiocy of super-short-term thinking with such statements as "Why would you leave $25 million on the table?" referring to the upfront cash that one Treasurer was able to get his hands on - with clearly no comprehension of the financial instrument's massive convexity. California State Treasurer Bill Lockyer said "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for, so you don't pay for, maybe, 20 years - and suddenly you have a spike... It's so irresponsible."

There has to be some lesson in here - some philosophical reflection on our society's complete and utter inability to see beyond the next cashflow need... Simply mind-blowing...


Via NPR:

More than 200 school districts across California are taking a second look at the high price of the debt they've taken on using risky financial arrangements. Collectively, the districts have borrowed billions in loans that defer payments for years — leaving many districts owing far more than they borrowed.


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.


"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.


'The School District Equivalent Of A Payday Loan'


Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. "You'd take that any day," he says. "Why would you leave $25 million on the table? You would never leave $25 million on the table."


But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for," Lockyer says. "So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary."


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."


A Statewide Problem


The superintendent of the Poway School District, John Collins, wasn't available for comment. But he recently defended his district's use of capital appreciation bonds in an interview with San Diego's KPBS Investigative Newsource.


"Poway has done nothing different than every other district in the state of California," Collins told the program.


And he's right. In some cases, districts are on the hook to pay back anywhere between 10 and even 20 times the amount they borrowed.


But Lockyer says it distresses him to hear school officials defend these bonds.


"It's so irresponsible, that if I were on a school board — which I was, 40 years ago — I would get rid of that superintendent," Lockyer says.


Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times the amount borrowed. Otherwise, says Lockyer, these bonds will be paid well into the future, by the children of today's students.

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Lost Wages's picture

Why do they keep ruining the state I want to move to?

iDealMeat's picture

Don't...  It sucks here.. for all the reasons soon to populate this thread..  California was cool back in the 80s..


Go to Texas..   It's the new CA.

Fluffybunny's picture

Tyler what the fuck? It's just a 20 year zero coupon with a YTM of ~12%. A zero with 20 years maturity is hardly a pay-day loan. 12% doesn't sound excessive when we're speaking of California.


(1 000 000 000/1 000 000)^(1/20) - 1 = 12.2% or so.

chumbawamba's picture

No, yeah, 12.2% is totally reasonable.

I wonder if California judges will let the banks foreclose on the schools as readily as they do the homes.  I hope CalPERS isn't as larded with school bonds as it is with Mortgage Backed Securities, or else our kids will soon be attending class in cardboard boxes underneath freeway overpasses.  Though truth be told, in some cases that might be an improvement.

I am Chumbawamba.

fonzannoon's picture

If it was a 4% simple interest loan these schools would still be sitting here right now scratching their heads. They grabbed the money and did not give a rats ass about what they signed.

AldousHuxley's picture

schools always need money because politicians know people will vote "money for children"

so in the general fund, they spend school money on corporate subsidies, then turn around and ask for more "money for children"


also "money for children" includes 30% going to paying off interest, 30% to their construction buddies to build luxury public buildings in the ghetto (and surprise the politicians' relatives all hold apartment building ownership in a freaking ghetto they know will get subsidied construction project near by), so less than half actually goes to kids.


US spends a lot of money per pupil because the money goes to fancy buildings instead of educators or improving the system.


but on the ballot, it is all "money for children"

how many people vote? how many people read the fine print?

AlaricBalth's picture

Nope. Just reckless district finance managers with the help of bond issuers such as JPM and Citi.

"The way this works is it does eventually get paid through property taxes, and the thing is that there is a certain levy on property taxes that goes towards paying off all of the school district's debt. And the hope is that the property values will rise by so much, that come 2031, when this debt has to stop being paid off, the levies that there are right now will be so much bigger and that they'll have so much more money coming in. That can happen in the next 20 years; nobody knows what will happen, but if that doesn't happen, that means that property taxes will spike in order to make up the difference."

Mortgaging the future to pay for the present. Sounds familiar! No worries though, at the rate we are going these districts will be able to pay off these bonds with one crisp, new $1,000,000,000 dollar bill which most of our grand kids will be walking around in their pockets with for chump change.

Transformer's picture

The bonds will never be repaid.  OR, maybe in Zimibabwe money.



eatthebanksters's picture

Everyone wants theirs now...every deal is to good to pass debt is the answer. If you believe that then look out your windw and watch the pigs flying by.  Gotta have new schools because we didn't take care of the old ones.  I am so sick of this mentality.

trav777's picture

Schools are awash in benefit.

If you want one of those "good schools" that you always hear about, pack it with whites and asians.

A school with the opposite will never be considered good no matter how much money you throw at it

akak's picture


A school with the opposite will never be considered good no matter how much money you throw at it

Stop beating around the bush.  Say it Trav.


We all know you're thinking it.

Miffed Microbiologist's picture

The sad thing is Akak, the Poway school district is filled with whites and Asians. One of the best districts in San diego if not all Cali. Not meaning to give Trav any ammo... Just sayin.


akak's picture

It's amusing, and ironic, how many downarrows I have received here on ZeroHedge for merely putting into Trav's hate-filled and bigoted mouth the word "nigger" which we all know is what he is thinking and driving at, even when (and especially when) I do NOT agree with his racist sentiments in any way.

Apparently, even here, one can be condemned for mere words rather than the entire thoughts and comments in which they are used.

Miffed Microbiologist's picture

Akak, I didn't down arrow you if that's directed at me. I know what you are saying and I agree. I did though thought it fair to point out the fact there are mostly Asians and whites in the district. I used to live there. Now regarding their " superiority"? I'll leave the fact they owe 1 billion on their bond speak for itself :-)


akak's picture

Sorry, MM --- my last comment was neither explicitly nor implicitly directed at you.

Miffed Microbiologist's picture

No worries. I just don't want to foster any misunderstandings . Now with Trav back, I assume it will become more volatile on the threads.

foofoojin's picture

how do you know he didn't mean the hispanic population? or jewish? or all women? or all men? you cant prove a negative? and your putting words into someone mouth? both down voteable.


also, be careful. someone might smite your smug ass comment with hard statistical data and thne you have to resort to name calling. like saying people are racist. ... oh wait. you already went there implicitly. K thanks BYE.


JamesBond's picture

i just wrote this to see how narrow the reply will go

JamesBond's picture






chumbawamba's picture

Look, trav is a nigger.  Why do you invest so much emotional energy battling him all the time?  Have you ever considered that if you just left his comments to stand as the monuments to stupidity that they inherently are that he'd simply be appropriately ignored?

I am Chumbawamba.

Miffed Microbiologist's picture

Good point, however we all have our issues ( joos, anAnonomous....even uteri! )that just seem to evoke such fervor we just can't help but jump into the discussion and throw some monkey shit. Sometimes it can be quite comical but sometimes too predictable. I'm guilty as well.


AldousHuxley's picture

only the bond holders 20 years from now.

bond holders today get paid.


actually california needs to do more of this.

just sink the credit rating, declare bankruptcy, get bailed out and face reality now than later.


but then where would PIMCO get their pension funds to play with and CA bonds to invest in?

Telemakhos's picture

I was kind of wondering about that.  Are the schools betting not only on higher revenues from property taxes (yeesh, if you can't raise a few million now, how are you going to raise that much more with compounded interest in the future?) but also on (hyper)inflation?  Take the example of the school that issued these bonds to get $2.5 million in order to get $25 million; they'll be repaying $34 million, but they may be betting that $27.5 million now is roughly equivalent to or less than $34 million (nearly double) in ~20 years.  For comparison, $27.5 in 1991 dollars is $44.7 in 2011 dollars.  They may simply be assuming that loans taken now against not even a Zimbabwean future but just the normal progression of American wealth destruction are, in effect, free money.

Of course, I also wonder if CDS are available on these school systems.

Diogenes's picture

Let's see. They can borrow $2.5 million to get a free grant of $25 million to build a school. But the $2.5 million will cost them $34 million in 20 years.

But by that time, the $34 million will only be worth $8 million but the school building will be worth $100 million. Except it will be worn out, so then they build a new school and  take out a  $1 billion dollar mortgage on it, and use part of the money to pay off the old loan.

They will then have until 2052 to figure out what to do about the $1 billion dollar loan, which by that time will have grown to $13.6 billion.

AldousHuxley's picture

well come 2031 citi won't exist so what do they care?

StychoKiller's picture

Seems to me that a bunch of someones OD'd on Delusionol™!

TheFourthStooge-ing's picture


but on the ballot, it is all "money for children"

Yeah, well, it wouldn't go over all that well if they told the truth and called it "debt for children".

If those kids only knew that they (and their kids) are the ones expected to pay it back in twenty years...

Jreb's picture

They used to teach compound interest in school back in the 80's when i was a kid. Maybe they shouldn't have dropped that part of the curriculum??

"Compound interest is the most powerful force in the universe." Albert Einstein


AldousHuxley's picture

come on...einstein knows that nukes he helped to create are the most powerful force in the universe right now.


they are not trying to prevent Iran from teaching compound interest. They are trying to prevent nukes from being built.


nuke = seat at the table.


China is trying to get compound interest from US and US said fuck you we have nukes, we own aerospace, so you get to compound ZIRP for years.

Samsonov's picture

Einstein had little to do with the creation of atomic bombs.

AldousHuxley's picture


he didn't make them himself, but he pointed at fingers at Germany and said we need to beat them.

Samsonov's picture

I'll point my finger at Bernanke and say we need to beat him.  Remember to give me credit!

AldousHuxley's picture

politicians are pointing at Japanese Central Bank and telling Bernanke, we need to beat them with lower rates than 0.01%!





Jreb's picture

Sort of makes you wonder - should we be placing sanctions on Iran or Goldman Sachs???


Incubus's picture

Chosen people are above the law.


Laws are for common dogs like you and I.

eatthebanksters's picture

The school board members went to college and majored in math with Maxine Watters...none of them ever learned how to use their calculators either.

Fluffybunny's picture

You do realize that these districts are ripe for default? No one in their right mind would lend to them at the same rates as a municipality in New Hampshire for example.

Mr Lennon Hendrix's picture

So they default on the bonds and no one will lend to them again.

Genius business model.

SeattleBruce's picture

At that point, they'll really put the lockhold on the property tax payers...until they finally say NO again. (Prop 13 redux).

AldousHuxley's picture

Americans live in a Union correct? In the end you will be paying to bail out California.


Californians know this. YOU are the enabler.

but with 1 out of every 10 americans living in California, which politician wants to anger that state?


also reason why kids don't study is because education don't pay. fix that and  you will see parents making their kids study hard instead of them trying out sports and singing contests.


Chuck Walla's picture

but with 1 out of every 10 americans living in California, which politician wants to anger that state?

The pols not getting elected or funded from there?


EscapingProgress's picture

Allowing the governments to take over education was the first genious move.

This is what you get people. This is what you fucking get.

Save the gov't the trouble and just bash your child's skull with a rock.

Northern Lights's picture

Yes, with interest rates that high, the lenders will hope to get all of the money they lent back, and then hope for some extra before the school system goes bankrupt.  They'll have made their money and just won't lend out again. I see everyone home schooling in the near future.  In fact, I wouldn't be surprised if we go back to the days where you wake the kids up in the morning, take them over to the next door neighbour on the street where you'll see all the other kids from the street.  The basement will have been turned into a quasi classroom and one of the parents will be teaching Monday Tuesday, then someone else will Do Thursday Friday and so on........................

NidStyles's picture

Going to be interesting having parents teach children. Most adults barely have above a grade school understanding of the world. This includes college graduates.

JuicedGamma's picture

I just got my new credit card with 24.99% interest rate, if you fail to pay 26.99% penalty rate.  I have sterling credit and always pay credit cards off monthly.  

This shit should be illegal and so should letting aherns run the funding at school districts.

AldousHuxley's picture

no, it shouldn't be illegal to give retards who worship rappers but hate math get raped with usury.

invest in a credit card company instead

ncdirtdigger's picture

If you pay for your groceries in cash, why do you give a flying fuck what the store charges in interest. Or are you just full of chit when you claim to pay your balance off every month.