Wednesday, August 8

CA school district offered 12% bonds??

Story this morning out of California about stupid school district execs says a lot about why government at all levels is in such bad shape.

Seems a couple of school districts borrowed money by selling bonds that had...uh...unusually high interest rates. So for example, the Poway Unified SD borrowed $105 million that over the life of the bond will cost homeowners there a whopping one Billion dollars to pay off, or about nine times the amount of principal.

By comparison, over the full term of a 30-year mortgage you wind up paying back about three times the amount you borrowed. So the school bonds were bringing in a lot higher interest rate than an individual mortgage--which doesn't make sense since the entire taxpayer base guarantees the bonds, instead of all depending on just one homeowner to pay.

Don't know the exact rate on these bonds but the district borrowed other sums at the astronomical rate of 12.6%--and this was in the last ten years or so!

But wait--it gets better: Once the school district's execs had negotiated such a canny deal on the high interest, the underwriters included a provision that they couldn't be paid off early!

Wow, what skilled negotiators the school district had!

The author of the linked article notes drily, "A Poway official declined comment."

I'll just bet he/she did.

Author also notes that the terms on these bonds are so unusual that the State of Michigan outlawed this type of bond years ago.

Point of the story is, 99.5 percent of all city officials are NOT Rhodes scholars or SAT kings. What they are, obviously, is human, and so can be bribed or conned into making decisions that most of us would characterize as dumb.

The problem is that so many cities now handle such enormous amounts of money that canny bond underwriters seem to see them as marks. The underwriters can throw out bullshit numbers and the city exec doesn't have the data to call bullshit. Add a sweet scholarship for the exec's kids and the deal is done.

I don't pretend to know what percent of outrageously predatory municipal bond deals happen because of bribery and what from simple lack of savvy on the part of city negotiators, but where I live they caught one firm outright bribing an official and it was a big deal for about three years as they unwound the details.

One big aspect of the thing is that underwriters make a percentage of the deal regardless of whether it's good or bad for the city. What they want is a bond offering, period. And city negotiators have zero incentive to really push hard for the best deal for the taxpayer. With one-sided incentives like that, the outcome is predictable.

Kudos to the folks who ferreted this out. We need more reporters this diligent. At one time there were more.

And on a related note, I see that the former police chief of Bell, CA--a guy who was drawing $770,000 per year in salary and benefits--has now sued the city seeking severance pay after he was fired.

The chief was able to wrangle such an outrageous pay package because the city's former Chief Administrative Officer--guy named Robert Rizzo--was knocking down even more. This from a town of something like 30,000 people.

How stuff like this can go on without igniting a revolution and heads on pikes is a mystery to me. And the astonishing brazenness of suing for severance pay after years of raping the local taxpayers is nothing short of...words fail me.


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