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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Mon, 12/10/2012 - 20:50 | 3050395 Dkizzle49855
Dkizzle49855's picture

Meat has it right.  My family is leaving after 30 years for Texas in two weeks and we can't leave fast enough.  Each day I become more amazed at the sheer level of stupidly that is proudly on display from the "Golden State". 

Mon, 12/10/2012 - 21:08 | 3050440 AldousHuxley
AldousHuxley's picture

proposition 13 limits real estate tax hikes

while Texas real estate is close to 3%.


also Texas has tons of illegals too.


they get you one way or the other.

Mon, 12/10/2012 - 22:06 | 3050577 eatthebanksters
eatthebanksters's picture

Yes, but a $500,000 house in Texas would be $2.0m in CA...and with no state income tax, thats a fair trade.


Mon, 12/10/2012 - 22:37 | 3050660 Miffed Microbio...
Miffed Microbiologist's picture

Thanks for reminding me we pay 11% state CA tax. I really need to get out of this state. I keep hoping it will eventually return to its glorious hay day in the 70 s and 80s. With all of you leaving that's going to leave just me paying the bills.


Mon, 12/10/2012 - 22:49 | 3050695 A Nanny Moose
A Nanny Moose's picture

plus 8%+ in "temporary" sales taxes to pay for the Northridge, and Loma Prieta EQs

Mon, 12/10/2012 - 23:53 | 3050916 Miffed Microbio...
Miffed Microbiologist's picture

Got to love those "temporary" taxes! Wasn't the federal income tax created as a temporary tax to fund the war? I guess the word temporary is relative. I just wasn't thinking on the proper scale.


Tue, 12/11/2012 - 06:23 | 3051355 Sudden Debt
Sudden Debt's picture

and when all the whites leave, the big question will be on which Gangs land you live and to who you pay up.

Red or Blue bitch!

Mon, 12/10/2012 - 19:45 | 3050182 Antifaschistische
Antifaschistische's picture

It will ultimately provide you with the opportunity of a lifetime in Real Estate if you time it correctly, and have cash.

But it still will not be the California of 50 years ago.  Major metro areas become increasingly disgusting as the years go by.

Mon, 12/10/2012 - 19:46 | 3050184 Popo
Popo's picture

The reason you perceive it to be a state worth moving to has a lot to do with the artificial wealth-effects that went along with it being ruined.

Mon, 12/10/2012 - 20:02 | 3050256 Lost Wages
Lost Wages's picture

The weather and almost-legal marijuana in California are unmatched elsewhere. Washington & Colorado have snow. ;)

Mon, 12/10/2012 - 20:14 | 3050289 JuicedGamma
JuicedGamma's picture


Mon, 12/10/2012 - 21:10 | 3050447 AldousHuxley
AldousHuxley's picture



marijuana = soma



we failed to educate you, develop you, so here take a pill, turn on a TV and be "happy" making tacos with illegal aliens who will soon own the truck.

and please, never protest the systematic corrupt in public. It makes the status quo look bad.

Tue, 12/11/2012 - 19:35 | 3053637 Lost Wages
Lost Wages's picture

The problem with this theory is that marijuana tends to make it easier to see the corruption of the system and tends to make people more anti-establishment.

Mon, 12/10/2012 - 19:48 | 3050194 ball-and-chain
ball-and-chain's picture

This story gives me so much pleasure.

God bless California.  And God bless America.

Debt, swebt.

It's only money.

Mon, 12/10/2012 - 20:12 | 3050267 LasVegasDave
LasVegasDave's picture

Not a chance in the world that loan gets repaid;

The money is for "the children", so the dumb hick administrators who cut the deal for the school district will retire with full pensions while the bank that lent the money will get a bailout from the taxpayers.

Welcome to the new capitalism

Mon, 12/10/2012 - 21:06 | 3050437 SeattleBruce
SeattleBruce's picture

Now that's disgusting - rewarding malfeasance more and more ways to sundown.

Mon, 12/10/2012 - 21:12 | 3050452 AldousHuxley
AldousHuxley's picture

why pay when you can print.


funny how rich chinese think chasing real assets with US dollar pegged currency is to buy a house in California.

Tue, 12/11/2012 - 00:29 | 3051013 JKearney3153
JKearney3153's picture

ZIRP is reserved for the assholes of the world...i guess Cali doesn't quite match the "asshole scale" that Wall Street does

Tue, 12/11/2012 - 22:26 | 3054371 YungHungAndLegal
YungHungAndLegal's picture

The money was used to finance education infrastructure yet it was accepted by individuals who clearly are mathematically inept.  These mathletes are probably getting blazed on their morgages too.  The linearity is profound.

Mon, 12/10/2012 - 19:37 | 3050151 The 22nd Prime
The 22nd Prime's picture

Math, Bitchez!

Mon, 12/10/2012 - 19:48 | 3050172 The Gooch
The Gooch's picture

Math was on the kill list. Executive order. Mandate. 

Change the "a" to "y".   



Also, whomever downticked "Math, Bitchez" must be .gov.

Mon, 12/10/2012 - 21:14 | 3050456 AldousHuxley
AldousHuxley's picture

State will do the math for you.

you just smoke some marijuana, watch hollywierdo fake reality on TV, take out your anger in a video game, sit your ass down in an overpriced ugly house, and just vote for the same ole douchebag.

Mon, 12/10/2012 - 19:51 | 3050209 Beam Me Up Scotty
Beam Me Up Scotty's picture

These idiots have failed every math class since 3rd grade. They couldn't balance a personal checking account.

Mon, 12/10/2012 - 19:52 | 3050213 algol_dog
algol_dog's picture

Is that why they were pushing that "new" math so many years ago?

Mon, 12/10/2012 - 22:50 | 3050702 SeattleBruce
SeattleBruce's picture

According to the spoonfed economic pablum/dogma, it's not necessary to balance anything...that dogma is about to be tested severely.

Tue, 12/11/2012 - 02:27 | 3051199 foofoojin
foofoojin's picture

Funny you mention math. Had my final in finance 101 from CSU Sacramento today. same test was given to the whole finance 101 student body as a way to equally compare everyone. teacher apologized about the test and how easy it was, stated that he way over taught us or this test. 62 multiple choice problems. 59 of them where a,b,c,d. of the three that had an E. all three where E. 12 math problems that where solved with pv,i,pmt,n,fv keys. 3 math problems solved with the CFo, CFn, IRR, and NPV keys. and only TWO problems involving a two step math problem. and the two step problem-- D[0] to D[1] on growth of dividend effecting the price of a stock. 30 gimme question involving the most basic definition of what an annuity it. questions like: "given the choice of 20,000 now or 2,000 every year for 10 years, assuming positive interest , what is the better value? " that is almost word for word one of the problems.   i shit you not. or worse reread the same problem and the question is, what type a problem is this? ;

a) an Annuity requiring you to calculate the net present value of a series of payment

b) a perpituity requiring you to calculate the net present value of one lump sum payment in the future.

 c) a Annuity requiring you to calculate the net present value of one lump sum payment.

d)  a perpituity requiring you to calculate interest on a bond.

if if any problem was even moderately hard the answer was B. what your taught to guess in a test if you don't know the answer in a A,B,C,D test.

oh and this is an aacsb-accredited school.

Mon, 12/10/2012 - 19:39 | 3050159 darteaus
darteaus's picture

If only the rich would pay their fair share!

Mon, 12/10/2012 - 21:14 | 3050459 AldousHuxley
AldousHuxley's picture

rich pay their share after they move out of california.....

Nevada, Texas, Florida

Mon, 12/10/2012 - 19:40 | 3050161 Dre4dwolf
Dre4dwolf's picture

The only reason any sane person would take such a loan is if they have no intention whatsoever of ever paying it back lol.


Its the only logical reason.

Mon, 12/10/2012 - 19:46 | 3050180 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

"The only reason any sane person would take such a loan..."

Maybe they are INsane!

Maybe the person that made the "arrangement" was in business with the loan sharks?

Maybe they would have been better off dealing with the local "leg-breaker" down the street whose name ends in a vowel?

Do they still have lamp posts in CA?

Mon, 12/10/2012 - 19:52 | 3050211 Unprepared
Unprepared's picture

... or if they know they would never be held accountable for their bad decisions. I'm sick of this shit.

Mon, 12/10/2012 - 21:09 | 3050445 jcaz
jcaz's picture

Bingo- that's why the half-life of school superintendents is getting shorter every day-  and of course, they ALWAYS get more money at their next gig......

Mon, 12/10/2012 - 19:57 | 3050236 Catullus
Catullus's picture

Or they're leveraged into more money allocated by the state to their school district.  They're betting the school system is Too Big To Fail.  It's the new bureaucratic double down

Mon, 12/10/2012 - 20:01 | 3050255 XitSam
XitSam's picture

Who loaned it to them knowing that in reality it would never be paid back?

Mon, 12/10/2012 - 20:24 | 3050314 three chord sloth
three chord sloth's picture

They will be gone when the bills come due. Meanwhile, they get to spend their careers in an opulent education palace instead of a dreary, normal old school building.


Mon, 12/10/2012 - 20:27 | 3050323 macholatte
macholatte's picture


have no intention whatsoever of ever paying it back


Maybe govenor Moonbeam will make the loan illegal and claim the lenders took advantage of the illiterate members of the school board, and their attorneys and accountants. Unless, of course, the lenders were big contributors to the Progressive Party, then the oan gets paid.... in 20 years... with another loan.  BRahahahaha!


An intelligent man is sometimes forced to be drunk to spend time with his fools.
Ernest Hemingway

Mon, 12/10/2012 - 21:59 | 3050552 bilejones
bilejones's picture

It may well be that all of these school superintendents are secret Austrian economists who know full well that they'll be paying the bonds back with dollars worth pennies.


Alternately they could just be a bunch of corrupt dumbfucks who know they won't be around when the bill becomes due.

Mon, 12/10/2012 - 19:45 | 3050179 Manthong
Manthong's picture

It's easy for irresponsible liberal morons when they are spending other people's childrens future earnings to pimp their gigs.

Mon, 12/10/2012 - 19:45 | 3050183 Chupacabra-322
Chupacabra-322's picture

Math was never a strong point in public schools. Let’s see, if you borrow one hundred million, defer payments for ten years, and pay five per cent interest compounded quarterly, how much do you owe?

A–I don’t owe anything, the taxpayers do.
B–I will just do what the government does, borrow more to pay the debt.
C–I don’t know, but that isn’t important anyway.
D–It is not really money, just pieces of paper, like the Constitution.
E–One Billion, Huh?

The greatest National Security risks are gullibility and ignorance. 

Mon, 12/10/2012 - 19:53 | 3050221 Unprepared
Unprepared's picture

F. It's worth the price when you see how smart our students are.

Mon, 12/10/2012 - 19:59 | 3050247 Straw Dog
Straw Dog's picture

Ahh yes that's so funny it made me laugh out loud.

Mon, 12/10/2012 - 20:41 | 3050322 centerline
centerline's picture

Terms like that... follow the money.  Someone got paid well, one way another, to make that loan happen.

Pass me a banana please.

Mon, 12/10/2012 - 19:47 | 3050187 Dr. Gonzo
Dr. Gonzo's picture

A billion dollars is a lot of money to pay a baby sitter. 

Mon, 12/10/2012 - 19:47 | 3050188 buzzsaw99
buzzsaw99's picture

i thought sure jpm would be in the final paragraph but alas, no mention of the lenders

Mon, 12/10/2012 - 19:57 | 3050233 Unprepared
Unprepared's picture

I somehow just assumed it was Tony I-break-your-legs-if-money-isn't-ready-by-monthend but then again he has higher morals and his M.O. is actually somewhat moar fairer.

Mon, 12/10/2012 - 20:28 | 3050330 centerline
centerline's picture

That is what I want to know.  Who wrote this thing?  Damn.  Brass balls for sure.

Mon, 12/10/2012 - 19:46 | 3050189 ball-and-chain
ball-and-chain's picture

That's the coolest thing I ever heard.

I am truly proud to be an American.


Mon, 12/10/2012 - 22:28 | 3050637 smiler03
smiler03's picture

Spot the six day old spammer.

Mon, 12/10/2012 - 19:47 | 3050190 notadouche
notadouche's picture

I've got an idea, let the tax payer's vote on a school bond and if they want to pay for and need a new elementary school then the community will come up with the money and there will be no need for such folly.  Don't they have the ability to finance through General Obligation Bonds?  I don't understand this process at all.  Why would the federal government dangle a 25M inducement in front of a school but require 2.5M.   

Wouldn't have been smarter to go to the tax payer and raise 2.5 Million.  I cannot believe that somewhere in California there wasn't a better way to get 2.5M.   All those limosine liberals in San Fran didn't find it in their hearts to donate the 2.5M.  Pelosi and her husband could've foot the bill on that by using just one of her insider trading schemes as a high ranking member of congress.   

This is a prime example of how important the Dept of Education is. (sarc)


Mon, 12/10/2012 - 19:48 | 3050191 swissaustrian
swissaustrian's picture

Come on they just thought that their pupils would be so well educated that they would just pay down all the debt with their extraordinary salaries as a sign of eternal gratitude.

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