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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A Nanny Moose's picture

our kids will soon be attending class in cardboard boxes underneath freeway overpasses.

They will learn more here than they will listening to some State appointed authority figure, teaching them how to take a bubble test, where the answers are always provided.

SeattleBruce's picture

Fluffybunny: "It's just a 20 year zero coupon with a YTM of ~12%."

Whatever you want to say about 12% compounded interest (Rule of 72 says that that's a 6 year doubling), it's clear entity after entity in Kalifornea - cities, school districts, and of course the state itself - are becoming more and more desperate for cash flow.  Do you suppose when it's time to pay this off, they'll be in a sound position to do so?  Who wrote these bonds up for them?

What a casino it all is...

corvettekenny's picture

The payday loans I've seen run in the 400-700% range.  12.2% seems completely fair for a public entity with questionable ability to repay.

jmc8888's picture

Actually we don't know if it's 20 years.  The guy was giving an example, and maybe a bad one.

Remember they're talking about loans from 2010 causing problems, and it's late 2012.  Not 2030.

prains's picture



Trav has a condo you can use

4exNinja's picture

Switzerland's increasing their Social Security (AHV) payouts...because they can afford to ;)

Also hilarious how some people freaked out about their unemployment rate of...wait for it...3.1%!! Last time the US achieved that we were in the 50s.

That's what you get when the people actually vote directly about issues instead of paid sock democracy ftw! Also helps if you have 10+ parties instead of just 2...mostly because the world isn't black or white and having only 2 options forces you to be partisan instead of focusing on the real issues on hand.



Chuck Walla's picture

Trinidad - Tobago.  Irresponsible, mindless spending is the Progressive's hallmark move.



Ookspay's picture

Ditto, I escaped from L.A. in '87. Mexifornia is becoming Greecifornia.

ZeroAvatar's picture

I just scored the Escape From L.A. to APOCALYPSE by..


Some cool pics of Snake sportin' his eyepatch.

SeattleBruce's picture

Kurt Russell trivia - it's been a long time since The Computer Wore Tennis many respects...

ZeroAvatar's picture

Thanks for that SeattleBruce.

A Nanny Moose's picture

FUBAR, Big Time

Name that Kurt Russel movie.

Bay of Pigs's picture

Seeing the CA real estate shills here earlier today on the Charles Hugh Smith thread was almost too much to take. 

The state is falling apart everywhere you look yet they say "housing is back"?  Wtf is that all about?

max2205's picture

Financial geniuses. They probably get $299k per yr retirement too

JohnnyBriefcase's picture

The land and scenery in California are fucking beautiful. Seriously it doesn't get much more amazing than the redwoods, yosemite, shelter cove (or a thousand other places).


It's the people that make california a horrible place. And they make it their full time job to make it horrible. They take that shit seriously.

Freddie's picture


Yup. CA is a gorgeous place due to God, Gaia, or whatever.  The people there make it hell on earth.  Mianly lefty unions.   See Miami Beach and other places too like Connecticut.  Beautiful places - nasty vile people.

AldousHuxley's picture

same every where in the world.


good weather = stupid people (no penalty for not saving), bad government (latin countries, greece, etc.)

bad weather, harsh environment = smart people (dumb ones who don't save in the summer died off in the winter), small government (they have to be good to keep people living there especially now we have AC to cool off hot weather lands)


Europe: England, Germany, Paris, Sweden, VS Greece, Italy, Spain, etc.

even in china, smarts, univerisities, governemnt is in cold Beijing, southern areas are farmers and gambling towns.

Asia: Korea, Japan, Beijing VS philipines, indonesia, vietname, etc.

smiler03's picture

I love your list:


"England, Germany, Paris, Sweden, VS Greece, Italy, Spain"


England isn't a country, Paris isn't either.

Terminus C's picture

England is indeed a country, and I assume he is referring to northern France rather than all of it.

Lost Wages's picture

How is Texas the new California? I find it difficult to find a parallel to Los Angeles or Venice Beach. Austin might be a little like Portland, but that is in Oregon.

iDealMeat's picture


[walks away shaking my head after junking you.. ]

Lost Wages's picture

I meant to say "Bay Area or Venice Beach." Texas is still lynching people, I'm pretty sure.

1100-TACTICAL-12's picture

Austin is Sodom or Gomorrah, infested with freaks,fags,commies & panhandlers not to mention Tx.Gov. I hate it when I have to go there, The burbs are cool but Austin is the poster child for the fucked up mindset that is killing liberty, Also it is a testing lab for Agenda 21 and the nwo..

AldousHuxley's picture

Austin is Sodom or Gomorrah, infested with freaks,fags,commies & panhandlers

Sir have you been to Castro in San Francisco?


Also , sort of expect it in a city that is a state capital.

1100-TACTICAL-12's picture

No sir, have not had the plesure to visit Ca. & I forgot the brainwashed, drunkard UT snot nosed brats..

4exNinja's picture

In short: Austin's the place where the cool non-bigot people hang it :D

Also hilarious how you mention "killing liberty" just after dissing the liberty of entire groups of your fellow citizens. The irony is strong in your post ;)

I suggest you stop listening to Alex Jones and Glenn least if you're interested in real information instead of comedy gold...

Missiondweller's picture

Well for one, all the CA jobs are moving to Texas due to our ridiculous regulations including anti business tax policies and a new Cap-N-Trade program that will raise costs on everyone.

eatthebanksters's picture

I'm moving my one year old start up from my beloved native golden state to Texas...The freakshow is here and it's chasing us natives away.  People don't give a shit anymore...they aren't engaged in iiving, they have their faces buried in their smartphones or Ipads.  Sad, California is a beautiful place.

StychoKiller's picture

Be sure to close all yer banking accts, in order to keep CA Govt's slimy fingers off yer FRNs.

SeattleBruce's picture

Uh, we're talking about an economics parallel between the old California, and the present day Texas.

A Nanny Moose's picture

Austin and Bakersfield were switched at birth.

hedgeless_horseman's picture



Go to Texas..   It's the new CA.

Ten Texas high schools now have stadiums with 16,000 or more seats. More than 100 have video scoreboards and more than 500 have artificial turf fields, according to Robert McSpadden, who maintains a database of more than 1,200 gridirons.


The Allen Eagles now play in the state’s most expensive high school stadium, a $60 million facility with a high-tech scoreboard, Wi-Fi, and 18,000 seats. 


Educators and debt hawks have criticized the spending spree, especially since state legislators last year slashed $5.4 billion from the two-year schools budget.

1100-TACTICAL-12's picture

No shit, right up there with using corn for fuel while people starve. 

AldousHuxley's picture

they don't need illegal aliens to compete with Bush for Yale spots.


they do need next generation of gladiators to entertain them.

also nice school buildings keep illegals happy that they live in America, althought lessons are in Spanish, teachers are bottom dwellers.


meanwhile, American imports smart people via H1B program from China and India where school buildings are decrepit and student teacher ratio is 100 to 1.

Ookspay's picture

18,000 tickets even @ $5 each = $900,000 per game. Should be able to service a $60 million dollar note. 

1100-TACTICAL-12's picture

Thats not the point, it's wasted money & resources on bread & circus while they teach our children the founders were terroist. And the good ol' boys argue about a fucking game. the damn field we played on had sandburs & the coach would tell us quick to man up & quit bitchin. It is also about a 100* + when 2 a days starts here im suprised they did'nt enclose the damn thing.

eatthebanksters's picture

Why is the money wasted if its working?  It built a stadium where a team plays in front of 18,000 people from their community and the bills are paid thanks to the program. What do you have against good old boys?  If the field is new it's probably momentum turf and their aren't any sandburrs in momentum turf.  Every kid who plays footbaall experiences two a days in the heat.  So tell me, why are yo whining?  

krispkritter's picture

Because I used to be able to go see the football game for fucking free and sit on the bleachers my goddam tax dollars helped pay for. Now I've got to shovel out $5 for a ticket and $6 for a fucking hot dog and my taxes are higher than ever. You call that progress? When they start selling the stadium naming rights and then the school naming rights then what? Your kid graduates from Coke High and played for the Schlitz Malt Liquor Bulls and you're shelling out $30 for a ticket and $10 for parking? STOP THE FUCKING MADNESS...

1100-TACTICAL-12's picture

Whats wrong with the good ol'boys? They dont fuckin get it..Fuck momtem turf lets raise another generation of everyone gets a trophy pussies. my good ol'boy friend..

hedgeless_horseman's picture



18,000 tickets even @ $5 each = $900,000 per game. Should be able to service a $60 million dollar note. 

CORRECTION: 18,000 tickets even @ $5 each = $90,000 per game. 

krispkritter's picture

The irony in there just blows your fucking mind...

TheFourthStooge-ing's picture

h_h said:

CORRECTION: 18,000 tickets even @ $5 each = $90,000 per game.

...and that's assuming a sell-out crowd. Imagine a few seasons with shitty teams:

3,000 tickets @ $5 each = $15,000 per game.

Ookspay's picture

Oops, Foreclose on that fucker!

Sudden Debt's picture

He was just hedging his revenue X10... everybody does that so why not?

LarryDavis's picture

if your post contains a calculation unless its vector calc be sure you get the fucking right answer........whats 18,000 times 5? I understand anyone can make a mistake but fucking multiply right people.

A Nanny Moose's picture

Putting this is context, USC doesn't even have it's own football stadium. My local university, has no football program, mostly because of title IX. It's all bread and circuses anyway.