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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dvfco's picture

Oh, and I forgot - he's yelling at his wife, "Fucking Liar - How dumb do you think I am?  You think I'm stupid enough to believe Hostess went out of business?  Bring me some fucking Twinkees."  

(Wife thinks: "I thought you were 1/2 a twinkee and that's why you went to work on the airlines.")

WAMO556's picture

You got junked for being retarded. Frigging statist! Do you actually think that a piece of paper measures your intelligence? Did you ever watch THE RIGHT STUFF? Sorry fuck you buddy, you don't fit the right profile. A liberal education is needed to include mathematics, history, foreign language, etc...

The current education system does NOT provide for a classical liberal education. However, we do have the education system that we paid for, and WE GOT YOU.


Aurora Ex Machina's picture

Wasn't talking to you, Mr Magee. Stop glasping another man's coat tails, yes?


Hint: rule #4, muppet.

LarryDavis's picture

Sorry for my remedial inferential prowess........are you saying in earnest that you can get someone's medical records from his/her/its handle on Zero Hedge? I would love to learn about whatever the fuck you are talking about. You absolutely shat all over Davo's face and made him do some cuckolding covered in feces. What a lawnmower man type thrashing. How can I use some of these tricks to make money or get more pussy (I like hot girls models/actresses/etc so if this shit only works on fat girls just stick to getting me paid)?


Dave Thomas's picture

No he's just a homo that plugs someones nickname into Maltego and thinks he's a hacker.


Aurora Ex Machina's picture

Actually, it was more alerting people to the possibilities of what's able to be done.

I was, obviously, just fucking around; green'd anyhow.


12-12-12 - 21-12-12

Cathartes Aura's picture

still, quite the butt-pucker. . . thx for the WARNING even if it arrived covered in goatsheads. . .

new moon, juuuuuuust before Uranus goes direct, whatever was *up* in July is going to get a re-do, emotionally and otherwise, inner/outer/space'd.  banana peels til year's end. . .

Surprise, surprise, surprise!

Unprepared's picture

Paging the Bernanke re: ZIRP? Call a CAB

QE49er's picture

Our prosperity has been purchased by stealing from the future.

SanOvaBeach's picture

I don't give a shit.  Thje young vs old, fuck you!  I don't give a shit about future generations.  Just like congress.  Are we teaching are kids about the wonders of capatalism?  Got mne, fuck u.................

Samsonov's picture

I can just see those school board presidents 25 years ago, sulking in math class and muttering, "I'm never gonna need this shit."

Richard Head's picture

This Charles Ramsey has got to be the dumbest public official on the planet.  The $25 million was not free money!

centerline's picture

Someone might want to audit Mr. Ramsey - or his wife, etc.  No one could be this stupid.

Dr Benway's picture

Never underestimate people's capacity for idiocy.

razorthin's picture

... It's so irresponsible

Maybe, but the mere existence of such an instrument is pure banker evil.

Dr Benway's picture

They even have exactly equivalent instruments targeting grannies, called reverse mortgages.

Rearranging Deckchairs's picture

Hey people its not just School Districts which are math challenged and easily swindled. The UC System has become equally tainted by Wall Street scum.



Bastiat's picture

Take the 360th payment on your mortgage for comparison.  The payment will be nearly 100% principal but you have paid interest on that principal for 360 periods.  At 12% that would be .12 whatever the payment is, say .12 X 2,000 X 30 or 7,200 in interest paid on that.  9,200 paid back on on 2,000 borrowed. 

The difference with CABs is that you are, essentially, borrowing the interest payments as well.

As far as performance goes, you might have a number of long term level amortizing bonds that  mature in years before the CAB is due.  In terms of cash flow you might be just extending you current level debt payments for a few years, paying the amount of the reduced debt service into a sinking fund.  So no cash flow shock.

Not saying pro or con, just offering a bit of insight.  Every debt transaction should be looked at through it's own a cost/benefit lens.

But in the case of the guy who borrowed $2.5 to get $25 free in exchange for paying back $38 in the distant future:  unless you are ignorant of the time value of money, that is a compelling deal.


odatruf's picture

What sucks is that any asshole thinks the money coming from the federal government is free. Worse, for these fucktards in CA, they have to send more than a dollar for every dollar they get back from DC (according to the Tax Foundation, CA is generally a donor state).

Why would you leave $25 million on the table? Because you are an asshole, Charles Ramsey. That's why.


HoaX's picture

Apres nous, le fuckin deluge bitches.

surf0766's picture

When do the calif's get their bailout like Detroit wants?

Why Not's picture

Its a zero coupon bond. So what. You seem upset about the rate or the structure. It is a financing. Are the Treasurers that stupid not to understand how they finance their district? Maybe they are, but let's not pile on. No wonder the state, county and municipal governments in California gave away tax payers' wealth to the unions that elected the incompetents and/or corrupt.

hannah's picture

...collect in 20 years right..? from who, the chimps that will rule the post apoc world...? cue monkey witha bone hitting other bones on the ground...

q99x2's picture

Go bankrupt on that crap. Give up the schools and build new ones. There will always be a retard bankster to give you more money. They are idiots.

MikeMcGspot's picture

Sure the sellers were touting tax benefits, I would like to see the risk analysis from the loan underwriters and the cost benefit analysis from the school board, Better yet I would love to see the investment directed to kids so they can be taught how to calculate the thinking process in some manner and be involved in the process that they will eventually pay for, rather than just being a bunch of stupid little fuckers in a nice building.

ItsDanger's picture

These loans were a way to circumvent the annual budgets of these various areas.  Defer the interest until later leaves a lot more in the annual budget for the unions, govt salaries, pet projects, payoffs, etc.  Probably the originators arent even in office anymore.  What a mess.

User 3461's picture

Debts that can't be repaid...

ThisTimeIsDifferent's picture

Hey, there are worse ways to borrow & spend.

Take the core European countries:

borrowing through banks to bail out Greece to bail out the same banks.

Go on America to build schools & infrastructure.

Who cares about the creditor haircut in 20 years, they could have known better.


j0nx's picture

I think it's sound business. They won't be paying any of those loans back and they got all that free shit for nothing. No way cali pays back anything to anybody. Anyone that invests in cali deserves to be fleeced. Same goes for any liberal run municipality. Anywhere there is financial chaos there is almost certainly a municipality that has been run by liberals for the past 30+ years. Chickens home to roost bitches.

hannah's picture

funny but WE TAXPAYERS are already 'paying' because the money that was borrowed was 'created' out of thin air by the fed and anyone holding usdollars is getting fucked. so in a way, we are paying for this shit right now...

Bazza McKenzie's picture

Of course, given Bernanke's destruction of the currency, in 20 year's time the repayment will be pocket change.  So brilliant move by the borrower, but you have to wonder about the lender.

squexx's picture

Yep, by the time they pay it, that $1 billion will buy a postage stamp. Doing it Zimbabwe style!!!!!

toomanyfakeconservatives's picture

What a mess... brought to you in no small part but the *teachers unions*.

icanhasbailout's picture

The assholes who signed these contracts ought to be prosecuted.


The assholes who lent the money ought to be defaulted on.

earnulf's picture

And here I thought Usury was illegal.    Hell, Guido and the boys would have given a better deal than what the districts were shafted with (whoops, excuse me, the future tax payers).    Live beyound your means and you will eventually have to face default or bankruptcy.

Some lesson these districts are teaching.   Funny, Faux News didn't have anything on this, neither did the other lame stream media.   Took PUBLIC radio to pull the covers off this stinking mess and then the folks that made the mess are trying to defend thier actions   "Yes yer Honor, we shit in the bed and we like it that way, look at the shiny toilet we got because we defecated in the bed, instead!

theprofromdover's picture

Perhaps they were expecting hyperinflation ......

dadichris's picture

Fire their asses

Trenchf00t's picture

Who markets these products? Lemme take a wild guess... TBTF investment banks, yes? Where's my cigar?