The Morning Report
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Since we wrote about Poway Unified School District’s $105 million in borrowing that will end up costing taxpayers almost $1 billion to repay, the district has gotten a wave of national attention.
Most recently Reuters’ finance blogger Felix Salmon said Poway may still have a way out of its exotic borrowing plan, which the district doesn’t start to repay for 20 years.
As district residents start to ask “what can we do now?” Salmon had some suggestions:
…you can be quite sure that Poway, if it put its mind to it, would be able to prepay some of those horrible 2051 bonds. One obvious way of doing so would be to just go out into the market and buy them: they’re trading pretty much at par, and my guess is that if they offered to pay say 105 cents on the dollar, they’d be able to buy back many if not most of the outstanding debt. Which is a hell of a better deal than paying back 2,300 cents on the dollar, which is what they’re currently contracted to do.
You can also watch Salmon’s video segment:
Here are some other pieces worth reading about Poway’s deal and the type of financing the district used, something called a capital appreciation bond:
• The Financial Times’ Gillian Tett:
At best, this is a case of kicking the can down the road; at worst, a case of the government dancing with loan sharks.
• The New York Times’ Floyd Norris:
Should districts issue such bonds? It is not an easy question to answer. Much of this expensive borrowing is a result of local officials searching for a way to meet their responsibilities at a time when opposition to taxes has become a mantra. This generation will not pay for what it needs, so some of its leaders have decided to saddle future generations with the bills.
• Barry Ritholtz at The Washington Post uses Poway schools’ deal to introduce “The Inviolable Rules for Dealing with Wall Street.” He describes the situation like this:
… allow me to point you to the latest group of suckers to get taken in by The Street’s three-card monte: the Poway Unified School District in San Diego. It took a page from the Greek school of bad finance, agreeing to an exotic and costly bit of Wall Street shenanigans. Despite the district’s strong tax base and good credit rating, its officials bought a complex Wall Street-originated exotic loan offering. …
The worst part of all is that by the time the bill comes due, everyone associated with this awful deal will be long gone. It’s a classic case of “I’ll be gone, you’ll be gone” financing.
Other publications have also looked into the district and its deal:
• U-T San Diego reported Poway school district officials were bought meals, which weren’t disclosed at first, at conferences hosted by the firm that underwrote the controversial bond.
• California Watch reported that multiple community college districts around the state also used capital appreciation bonds to pay for construction projects. (Note: Poway schools isn’t alone in using them in San Diego County either).
Our Will Carless also made several media appearances to discuss the story. Listen to him on Marketplace radio or watch him on several TV segments below:
• Fox Business:
Dagny Salas is the web editor at Voice of San Diego. You can contact her directly at firstname.lastname@example.org or 619.550.5669.
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