Poway School Bonds

[XBoxBoy]

I can’t decide if this is an incredibly irresponsible act or a brilliant plan. Poway is issuing bonds to raise 105 million, but with interest it will cost over a billion to pay them off. But interest payment isn’t due for 35 years. If there is little to no inflation over the next 35-40 years this will turn out to be horribly irresponsible. On the other hand, if there is hyper-inflation this will turn out to be brilliant.

http://www.businessweek.com/news/2012-08-06/payments-on-105-million-school-bond-will-top-1-billion

[Coronita]

repost

http://piggington.com/powaythe_real_debt_bomb

[sdrealtor]

The crux of the issue seems to be 20 years with no debt service. At moderate long term municipal bond interest rates the debt will increase 4 times before repayment begins. Why wait 20 years? Repayment should begin immediately and if they cant afford it they shouldnt be buying it.

[The-Shoveler]

sdr,

As was stated on the first thread I think this is more of a max out the cards because you know BK is coming type of thing,

It’s a lot harder to make a case for Long term inflation being over 8% (but that would work as well).

Besides I think there was something about a promise of no new taxes.

[ocrenter]

This is essentially setting up the district for almost certain BK.

so sdr or SDR, what’s the property value implication on homes in a school district planning on filing for BK in 20 years?

[Coronita]

[quote=ocrenter]This is essentially setting up the district for almost certain BK.

so sdr or SDR, what’s the property value implication on homes in a school district planning on filing for BK in 20 years?[/quote]

Nothing. Because it just means in 20 years, the bond holders get shafted, and the Poway School District gets a fresh clean slate….Kinda like…

Orange County….Last time I checked. Orange County property value is still pretty pricey.

I guess the lesson to be learned here…Avoid muni bonds?????

[desmond]

Orange County paid the money back in full. They had to borrow money and extend the payback period but they paid it back.

[ocrenter]

the amazing thing is PUSD blew $150 million on Del Norte. How in the world do you waste that much money on just a high school???

[Anonymous]

Has anyone actually done the math?

What’s the effective interest rate on these bonds?

A comment in the other thread cited 8% and that seems to be consistent with my back-of-the-envelope calculations (don’t have the precise numbers, but we can make a reasonable estimate.)

It’s a 40 year bond, folks. 8% may be above current market rate for a bond with these characteristics, but it’s really not that outrageous, and not outside historical norms at all. It is by no means a recipe for fiscal disaster.

Perhaps the outrage should be that Piggs don’t seem to understand how long-term compounded interest adds up….

[The-Shoveler]

[quote=ocrenter]the amazing thing is PUSD blew $150 million on Del Norte. How in the world do you waste that much money on just a high school???[/quote]

Well that’s different, were only talking what maybe
6 or 7 high schools.

[desmond]

[quote=harvey]Has anyone actually done the math?

What’s the effective interest rate on these bonds?

A comment in the other thread cited 8% and that seems to be consistent with my back-of-the-envelope calculations (don’t have the precise numbers, but we can make a reasonable estimate.)

It’s a 40 year bond, folks. 8% may be above current market rate for a bond with these characteristics, but it’s really not that outrageous, and not outside historical norms at all. It is by no means a recipe for fiscal disaster.

Perhaps the outrage should be that Piggs don’t seem to understand how long-term compounded interest adds up….[/quote]

Harvey, They are not making payments for the first 20 years and then:

“Apart from its overall cost, there’s another reason why Poway’s massive capital appreciation bond should matter to taxpayers.

In 20 years, the school district will be on the hook for its first payment towards last year’s loan. That payment will be a little more than $30 million, $24 million of which is interest.

The following year, the payment will balloon to almost $47 million. And, for the next 18 years after that, until 2051, district taxpayers will have to pay about $50 million every year towards the debt — essentially paying off their initial loan every two years for the next two decades”

The school district now receives $11 million a year from property taxes to pay their bonds.

I’m outraged you didn’t read the article………..

[The-Shoveler]

It seems the real Idiots are the ones who loaned them the money thinking they were going to clean up.

If it sounds too good to be true…

Yea I have learned this one a few times myself.

[Anonymous]

[quote=desmond]
Harvey, They are not making payments for the first 20 years and then:

[bunch of stuff about payments with big number that may sound scary]
[/quote]

So I take it you didn’t do the math.

The stuff you cited is sensationalist crap written by someone who obviously doesn’t understand basic finance. Yeah it’s likely they overextended and are paying higher than market rates, but quotes like “That [first] payment [after 20 years] will be a little more than $30 million, $24 million of which is interest.” is hysteria.

In case you don’t know, on practically every bond in the real world the first payment is mostly interest. There’s nothing unusual about that characteristic of the terms.

If the city’s tax receipts grow only at the rate of inflation, then they would be in trouble in 20 years time, but it is very unlikely that Poway will not grow and see property tax revenue increase at a much higher rate than inflation. Do you really think Poway will not see population growth, property improvements, and have effectively zero real estate appreciation over the next 20 years? That $11 million in tax revenue could easily be 5x bigger in 20 years.

I’m not arguing that this plan is wise, and I agree may not be an example of effective negotiation by the city. But the terms and expectations are not nearly as outrageous as they are being presented.

[CA renter]

[quote=harvey][quote=desmond]
Harvey, They are not making payments for the first 20 years and then:

[bunch of stuff about payments with big number that may sound scary]
[/quote]

So I take it you didn’t do the math.

The stuff you cited is sensationalist crap written by someone who obviously doesn’t understand basic finance. Yeah it’s likely they overextended and are paying higher than market rates, but quotes like “That [first] payment [after 20 years] will be a little more than $30 million, $24 million of which is interest.” is hysteria.

In case you don’t know, on practically every bond in the real world the first payment is mostly interest. There’s nothing unusual about that characteristic of the terms.

If the city’s tax receipts grow only at the rate of inflation, then they would be in trouble in 20 years time, but it is very unlikely that Poway will not grow and see property tax revenue increase at a much higher rate than inflation. Do you really think Poway will not see population growth, property improvements, and have effectively zero real estate appreciation over the next 20 years? That $11 million in tax revenue could easily be 5x bigger in 20 years.

I’m not arguing that this plan is wise, and I agree may not be an example of effective negotiation by the city. But the terms and expectations are not nearly as outrageous as they are being presented.[/quote]

Funny how you think these are reasonable assumptions here, but go off on hysterical tirades when pension funds use the same kind of numbers. (And, no, I don’t think either of them is going to get it.)

[Anonymous]

[quote=CA renter]Funny how you think these are reasonable assumptions here, but go off on hysterical tirades when pension funds use the same kind of numbers. (And, no, I don’t think either of them is going to get it.)[/quote]

Funny how you constantly put words in my mouth.

I don’t have much of an issue with the numbers pensions use in their investment assumptions (although in CalPERS case, they have been overly aggressive) and their models have not been the point of my posts.

I do have an issue with who bears the investment risk vs. who receives the benefit.

In the case of government pension, the taxpayers bear all of the risk and a small portion of the population receives the benefit.

In the case of school bonds, the creditors bear the risk. (Hint: other people here get this, the word “bankruptcy” should have been your clue)

Huge difference between the public impact of these bonds vs. pensions.

Here’s the point, for the umpteenth time: Nobody should receive exclusive access to taxpayer-backstopped, guaranteed investment returns. Especially unrealistic returns.

[Author]

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