School board math doesn’t always add up

dollar's flow in black hole

If one has ever had to sit through a handful of school board meetings, it readily becomes apparent where the US hatches and nurtures its petty-tyrant class.

While many well-intentioned folks serve on school boards, there are plenty who do it not because they have the best interests of children or their communities at heart, but because they enjoy the recognition and power that goes with the position.

Unfortunately, as a National Public Radio report demonstrates, these folks often rank below Congress and even banana republic dictators when it comes to being responsible stewards of public dollars.

Consider: In California, San Diego’s Poway Unified School District borrowed approximately $105 million through a capital appreciation bond. But “debt service will be almost $1 billion,” according to NPR.

When faced with the bad logic of their decisions, school board members, at least in California, often refuse to admit the ill-logic of their decisions.

But California State Treasurer Bill Lockyer had no problem sizing up the situation.

“They are terrible deals,” Lockyer told the Los Angeles Times. “The school boards and staffs that approved of these bonds should be voted out of office and fired.”

Unfortunately, the Poway Unified School District case in not an isolated example of fiscal foolishness.

In 2010, officials at the West Contra Costa School District, near San Francisco, needed $2.5 million to help secure a federally subsidized $25 million loan to build a much-needed elementary school.

The district needed to provide the $2.5 million upfront but didn’t have it, according to school board President Charles Ramsey.

“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 said.

But the only way the district could do it was with a capital appreciation bond. Known as CABs, capital appreciation bonds 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 – allowing oodles of interest to accrue.

In the West Contra Costa Schools’ case, that $2.5 million bond will cost the district a whopping $34 million to repay, NPR reported.

Ramsey, however, insists it was a good deal, because his district is getting a brand-new $25 million school.

“You’d take that any day,” he said. “Why would you leave $25 million on the table? You would never leave $25 million on the table.”

That it will ultimately cost at least $34 million appeared to be lost on Ramsey. But, of course, he will likely no longer be on the West Contra Costa school board when the chickens come home to roost, so it won’t be his problem.

Instead, he’s now able to revel in having brought a new school to his district, no matter what the cost down the road.

The bottom line is that hundreds of school districts in California alone have been using capital appreciation bonds, which, while allowing them to defer payments for years, has left many owing far more money than originally borrowed, according to NPR.

CABs are not unusual and have been popular with school districts in states with fast-growing student enrollments, according to Fitch Ratings.

Nearly 30 percent of capital appreciation bonds have been issued in California, according to Reuters.

“It’s the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for,” Lockyer said. “So you don’t pay for, maybe, 20 years – and suddenly you have a spike in interest rates that’s extraordinary.”

Lockyer is reviewing a database compiled 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.

While NPR did note that Michigan, for example, has banned school districts from turning to capital appreciation bonds for funding, it did not identify which other states tend to rely more heavily on the risky financing venture.

Given the secretive nature of many school boards, and the desire of some members to either use their positions as stepping-stones to higher office or to build personal legacies through capital expansion – whether needed or not – don’t look for any to willingly admit to the use of these foolish financing instruments, either.

(HT: Cafe Hayek)

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3 thoughts on “School board math doesn’t always add up

  1. The purpose and nature school boards, not unlike our national defense spending and corporate welfare, requires supervision.

    Kick backs and favored loan companies have all been part of our financial history since the Greeks.

    How is it that NPR and Reuters knows more of this example of financial smoke and mirrors than the residents of San Diego?

    In the end, these “deals” are no more than fancy Ponzi schemes with a twenty year ticking bomb attached.

    How is it that States have no resources for town school boards to advise on financial arrangements?

    How is it that no one in any of these various communities has any interest in where or how their schools are financed?

    No one has access to the internet?

    Here’s some relevant information:

    Municipal Securities Rulemaking Board (MSRB)
    “To protect investors, municipal entities and the public interest by promoting a fair and efficient municipal market, regulating firms that engage in municipal securities and advisory activities, and promoting market transparency.”

    http://www.msrb.org/msrb1/glossary/view_def.asp?param=CAPITALAPPRECIATIONBOND

    Far from some specter of power mad self absorbed zealots this article suggests, school boards cannot simply act without any supervision, unless the communities they serve wish it so.

    • Ultimately, you’re correct. School boards are doing the bidding of those that elect them. But school boards are also notorious for obscuring pertinent financial information inside all kinds of fiscal doubletalk, making it difficult for residents to make heads or tails about whether a deal is a good one or not.

      And part of the problem lies in the fact that everyone wants their school to have all the latest gizmos and gadgets, whether they’re actually needed. It’s become a competition in some areas to see who can have the fanciest school, not who can provide the best education. The latter is an intangible that is difficult to measure, while the former is all about “keeping up with the Jones.”

      • “school boards are also notorious for obscuring pertinent financial information”

        If the consequence of devious intent is financial collapse, the offense of obscuration is no less criminal than bank robbery with a mask.

        Where the community sponsors and then pays for their own fleecing with no system of analyzing financial decisions or penalty, the criminal in the mask of public servant will thrive.

        Your observation of “keeping up with the Jones” as a compulsion to disaster then spreads the cause to the citizen for the school boards’ vulturism and we land then in the black hole depicted above. Honest and cheerful, as always.

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