L.A. Times’ analysis on crazy school borrowing omits why it’s done

Nov. 29, 2012
By Chris Reed

The Los Angeles Times has printed an analysis piece on the insane borrowing by dozens of California school districts using “capital appreciation bonds” (CABs), which delay any repayment for 20 years and often cost 10 times or more the amount borrowed. It does a good job of explaining the bonds and the financial risk they pose. But it does a laughable job explaining why school districts are issuing them, accepting state Treasurer Bill Lockyer’s assertion that they were pushed into the deals by fast-talking bond salesmen:

“This is part of the ‘new’ Wall Street,” Lockyer said. “It has done this kind of thing on the private investor side for years, then the housing market and now its public entities.”

But school boards and district superintendents are not complete idiots, for the most part. There’s a reason they will accept such bad deals. It’s the same reason they use “construction” bonds to pay for everyday maintenance and short-lived electronics. It’s the same reason they try to charge fees for school supplies that the state Constitution says should be free. It’s the same reason they constantly raise funds with pressure tactics on parents of schoolchildren.

That reason: a commitment to pay practices that give automatic annual raises to most teachers, typically for 15 of their first 20 years on the job. Over time, this means employee compensation eats up nearly the entire operating budget — especially when the state economy is weak and revenue stops growing.

In San Diego Unified, employee compensation consumes 93 percent of the budget. The norm in many school districts is 90 percent. There’s not much left for anything else.

This isn’t a minor detail. It explains why CABs, which have been around for decades and were banned long ago by the state of Michigan, are suddenly popular. School districts are often extensions of the local teachers union, and local teachers want to get paid. If it means intergenerational fiscal child abuse, that doesn’t bug them a bit. Leave the bills for future generations to pay.

But the L.A. Times accepts the bamboozlement argument. In this case, it was the Times that was bamboozled.