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.

5 comments

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  1. Kevin Dayton, Labor Issues Solutions, LLC
    Kevin Dayton, Labor Issues Solutions, LLC 29 November, 2012, 09:57

    I consider it a great victory that the Los Angeles Times reported on the practice at all. Too bad it wasn’t published BEFORE voters in 87 K-12 and community college districts in California authorized their elected boards to borrow money by selling bonds. The amount of school bond debt in this state (state and local) nowadays is incredible. Blame Prop 39 in 2000 for this situation and for the use of bond proceeds to buy iPads. (Yes, that’s legal because of language included in Prop 39.)

    One of my suggestions for the California Republican Party’s alternative program of governance, under “Slow the growing debt burden on future generations,” is “Require the ballot language of bond measures to indicate the current bond debt of the government entity, estimate the total debt from the proposed bond measure (including financial transaction fees and interest), and explain that selling a bond means borrowing money and paying it back with interest through tax increases.” This would give voters an understanding of what they’re doing beyond “It’s for the kids!”

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  2. Rex the Wonder Dog!
    Rex the Wonder Dog! 29 November, 2012, 10:04

    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.
    ==

    It was much less 30 years ago…

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  3. FestivalofLight
    FestivalofLight 29 November, 2012, 13:28

    Well, Prop.13 has completely distorted local budgets in California vastly limiting what local municipalities can do. But still, borrowing using CAB is a rather poor idea from an economic point of view and I applaud the LA Times for reporting on the practice.

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  4. Rex the Wonder Dog!
    Rex the Wonder Dog! 29 November, 2012, 14:38

    Prop 13 has done nothing, taz revenue has gone UP every year (untl recently) since prop 13 was passed, but the money all goes to salary and benefits, not facilities. Average CA student cost is $30K per year with bond issues.

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  5. Hondo
    Hondo 30 November, 2012, 13:17

    I hear that prop 13 dog whistle.
    Hondo….

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