Poway-The real “Debt Bomb”

[desmond]

“Borrow $105 million owe $1 Billion”

http://www.voiceofsandiego.org/education/article_c83343e8-ddd5-11e1-bfca-001a4bcf887a.html

[The-Shoveler]

So you put your kids through school over the next 15 or so years, then sell and move to a different state, what’s to hate…
Just kidding.

[ucodegen]

Unfreaking believable. For a 105mil bond to turn into 981mil would require an interest rate over 10% on a gov bond. No wonder there is a no-refinance clause in the bond. The bond issuers got the city by the gills and doesn’t want to let go. The City of Poway should look into whether there was any conflict of interest on any of the advising parties.

One thing I mention to a friend is that if a loan has a pre-payment penalty, then you didn’t get the best deal possible. This is for a simple reason. The entity loaning the money will be looking at alternate options for the use of the money. If the entity loaning the money finds that the return from loaning to ‘you’ is the same as anyone else, then prepayment is not an issue because the entity will just loan it back out to someone else at the same effective rate if it is pre-payed. On the other hand, if the entity finds that they are able to extract a premium in excess of the risk involved, they will want to ‘lock’ that premium in because they could not redeploy the capital somewhere else and get the same profit.

[bearishgurl]

. . . Right now, the district receives about $11 million a year from homeowners towards paying off its bonds.

So, to be able to afford its debt payments 20 years from now, the total assessed value of property within the taxed area would have to quadruple.

That’s possible. In the last 10 years, the total value of property in the school district almost doubled. But if the last decade has shown municipal governments anything, it’s that relying on consistent growth in tax revenues is a risky business.

If the district’s projections don’t come true, homeowners will see their taxes spike to make up the difference.

And there’s no chance of the district refinancing the deal. The loan contains a provision strictly barring the district from refinancing its debt.

The district told taxpayers back in 2008 that it probably wouldn’t have to raise taxes to meet its payments. But it’s fully within its legal rights to do so.

McAllister, whose office is tasked with making sure local school districts pay their bond debts, said his office could be compelled to raise property tax rates to ensure the district can make its payments on the bond.

Of course, many of the residents who voted on Proposition C will be long gone by then. They’ll be dead, or living somewhere else.

But whoever’s left living in the taxed area will have to pick up the tab for the money the district borrowed last year, and for the $877 million in interest the district will have accumulated by then.

(emphasis added)

The $11M bond money currently rec’d by the district from the assessor pays off the bonds they issued in 2002, which were collected from property owners at the rate of $55 per $100K of assessed value. Six years later, in 2008, local taxes should have been raised in order to service the new voted-in Prop C bond debt. But they weren’t.

This HUGE DEBT OVERHANG doesn’t bode well for the future property values within the PUSD. I realize that many areas of the PUSD, property owners are paying MR, as well, the bulk of which likely goes to the PUSD. But this is not an argument for the bond’s proponents to “promise” no new taxes in 2008 to slide Prop C past its voters.

Consider and compare the SUHSD in SD Co’s south bay to the PUSD. Half the residential properties within the district have MR encumbrances of which a big chunk of that goes to SUHSD. Yet, voters in the SUHSD passed prop BB in 2000 and Prop O in 2006 (6 years apart) to be used to help build new schools and refurb old schools. Each owner’s current Prop O portion of their tax is calculated at the rate of about $60.79 per $100K of assessed value. Yet, the SUHSD has a hodgepodge of permanently-skirted trailers with modular add-ons for its HQ, all likely 50-60 years old.

I’m troubled by the PUSD’s all-brick facade multi-level HQ with its (very expensive) dbl-paned “Low E” windows.

[img_assist|nid=16542|title=PUSD HQ|desc=|link=node|align=left|width=100|height=66]

Why did they think they needed to build this “monument” and not tax its property owners to pay for it? I thought there was a “captive audience” of current and aspiring homeowners in the PUSD. Why wouldn’t they approve a new construction bond to build this monstrosity and upgrade its older schools … even if the bonds from 2000 were not yet paid off?

The SDUSD HQ with its 40-60 year-old trailers and add-ons was originally constructed in the ’30’s!

The GUSD HQ was actually built in the ’20’s, yet their taxpayers are currently funding Prop U (which they’re doing great things with, btw)!

[img_assist|nid=16543|title=GUSD HQ|desc=|link=node|align=left|width=100|height=100]

Why are PUSD residents so special that they couldn’t or wouldn’t vote for a bond measure in 2008? The truth is, they might have, or may have voted for a more scaled-down version, but they were duped into voting in this “exotic bond scheme” that will end up blowing up on them in the form of (now exorbitant) property tax hikes to make up the payments for missed principal and interest.

Otherwise the bond debt will end up bankrupting the district.

[CA renter]

So many juicy tidbits here. From the article:

“The bond also had considerable cachet, thanks to a coveted endorsement from the San Diego County Taxpayers Association. Indeed, association President Lani Lutar’s name was first on a list of five local dignitaries named on the ballot as supporting the bond.

Lutar said had she known the full implications of the bond, she would not have recommended the association support it.

The taxpayers association recently started studying capital appreciation bonds to fully understand their impact. Its main case study: Poway Unified.

Last month, the association changed its criteria for endorsing school bonds. In the future, it will ask districts how, exactly, they will finance their bonds. If a district plans on using expensive long-term capital appreciation bonds like Poway’s, it won’t get the association’s backing.”
————

The most frightening thing about this quote is the fact that these are the people who are supposed to understand how bonds work.

It reminds me of a conversation with a relative where she was in the middle of ranting about unions and the irresponsible way the govt spent our money. I agreed that money was indeed spent unwisely but asked her why she thought so many voters kept voting for more bonds (~$54 BILLION since 2006 in California alone). She said that was different because taxpayers weren’t paying for those…bondholders were. When I asked her who was going to be paying the principal and interest payments to those bondholders, her face went blank. Mind you, this is someone who is more knowledgeable about finances than most Americans.

How many other people don’t realize that when the government spends money, it has to take in money in order to pay for it? At least “tax and spend” politicians understand that one requires the other, vs. the “spend, but don’t tax” types who have been in charge for much of the past decade.

[bearishgurl]

The infamous “Eugene Brucker Education Center,” with its nearly four square blocks of the local landmark SDUSD HQ and its hodgepodge of trailers and modular add-ons, houses the administration, transportation, counseling, legal and maintenance staff for SDUSD, a district over four times the size of PUSD.

Built in the early ’50’s, its roof and some of its windows are now sagging.

[img_assist|nid=16544|title=4100 Normal St SD|desc=|link=node|align=left|width=100|height=46]

But hey … it’s good enough for SDUSD and the property owners who live within it will not be gouged unmercifully by a catastrophically stupid business blunder made by the district and their hired “lobbyists.”

[carli]

Hey, BG, if you’re implying that SDUSD is too savvy to ever be duped by one of these bond debacles, think again – http://www.voiceofsandiego.org/education/article_3f780860-e0b7-11e1-821b-001a4bcf887a.html

Also, here’s a very interesting piece that gave national exposure to the Poway story via CNBC – http://video.cnbc.com/gallery/?video=3000107811&play=1

What I don’t understand is, are the bond ratings agencies asleep at the switch on this? If not, why haven’t they lowered their ratings based on this gigantic future debt? Are they counting on increases in real estate values plus inflation to save the day? Crazy. So many questions still unanswered.

Bonds were just approved last week to be placed on the Nov ballot for both Del Mar Union School (encompassing Carmel Valley/Del Mar) and San Dieguito Union High School districts. Gee, I wonder if those will be successful now, especially because those districts are using the same Orange County financial consultant as Poway. Hopefully the voters will have their eyes wide open.

[bearishgurl]

[quote=carli]Hey, BG, if you’re implying that SDUSD is too savvy to ever be duped by one of these bond debacles, think again – http://www.voiceofsandiego.org/education/article_3f780860-e0b7-11e1-821b-001a4bcf887a.html
[/quote]
Lol … thanks for the link, carli! Well, at least we know they haven’t yet spent any of their ill-gotten “funny money” on a new HQ (like “top-down” PUSD did).

SDUSD’s only saving grace is that they likely have 4x the taxpayers to foot their “future interest due” of $1.05B which is only 16.5% higher than PUSDs “future interest due” of $877M. This is taking into account that parts of SR and all of PQ and RB are part of the City of SD and are not within SDUSD but are within the PUSD.

IMHO, this is really crazy-making by these four SD Co school districts. They’re mortgaging themselves (and, as a byproduct, their taxpayers) into oblivion.

Sorry to hear about those school bonds on your ballots, carli. You better hope you don’t have at least 30% registered renter-voters, ESP those renters who live there specifically for their kids to attend those schools.

A large contingent of voting renters is enough to get these bonds passed and they don’t care … ESP if they signed a long-term lease. Renters don’t (directly) pay property taxes.

[The-Shoveler]

Maybe there is a plan,

One wonders if the debt can be done away with through BK.

Plan A, Future BK to wipe out bond holders
Plan B, Future inflation to be over 8% YOY.

If you know your going to have BK in your future anyway, Max out the Cards now….

Just kidding sort of.

[ocrenter]

Reading the comments, it appears the bond was financed at over 8%. Plus the bond can not be refi’d.

Someone need to initiate a recall movement on the members of the PUSD board.

[evolusd]

It’s a negative amortization bond! Must have been underwritten by Indymac.

[paranoid]

The consultant is from orange county? That is the capital of all subprime mortgages innovations!

Democracy at it’s best!

[bearishgurl]

Here’s a more recent interesting article from the (Poway) Patch … written by a PUSD taxpayer and voter??

http://poway.patch.com/articles/poway-unified-school-district-trustees-betrayed-our-trust

…To simplify the events: In 2008, the PUSD needed money to finish numerous facility upgrades that were supposed to have been paid for by Proposition U, which passed in 2002. Why those Prop U upgrades went over budget by tens of million of dollars is a completely different discussion and pales in comparison to this discussion.

In 2007, the school board (President Jeff Mangum and Trustees Linda Vanderveen, Andy Patapow, Todd Gutschow and Penny Ranftle) decided to ask voters for money to finish school repairs and upgrades and to essentially extend the pay-off date for the Proposition U bond. However, by 2007, people were tired of being taxed to death with little to show for it and the country was in the initial stages of an economic free-fall.

So the school board promised that passing the bond would allow them to finish the projects with no tax increase. The length of the taxation would be extended but the tax itself would remain the same. It didn’t seem like such a bad deal at first blush.

However, instead of disclosing to voters the trustees’ intent to use a highly risky financial instrument known as a capital appreciation bond, they simply said on the ballot the funds would be raised with “general obligation bonds.” They certainly knew including the words “capital appreciation bonds” would have been a red flag that the district planned to mortgage our future to the hilt. Capital appreciation bonds are the equivalent of what sub-prime loans were to low-income borrowers and collateralized mortgage bonds were to lenders during the housing bubble of the last decade.

And look where that got us.

So between hiding critical information and repeating the predictable mantra “it’s for the children,” we were intentionally deceived to the tune of a billion dollars. Right, billion with a “B.”

Predictably, Poway has become the laughingstock of the financial world. CNBC intoned this is “the worst loan ever!” The Financial Times said, “At best, this is a case of kicking the can down the road; at worst, a case of the government dancing with loan sharks.” Now, bad financial planning by school districts can be referred to as “pulling a Poway.”…

Sounds like “outraged” is the prevailing PUSD taxpayer sentiment.

http://powayblog.blogspot.com/2012/08/pusds-prop-c-naysayers-were-right.html

I wonder why the school board couldn’t have just told its voters in 2007, “Due to rising labor and material costs, we don’t have enough income from the school construction bonds you passed in 2002 to rehab these schools (or your District HQ, lol) in the manner which you think your children should grow accustomed to. If you won’t vote in another school construction bond, we will not be able to make all the repairs and complete all the construction projects we set out to do.”

See? Was that so hard?

If the voters didn’t wish to vote for another bond measure, then they get what they pay for. That’s the way it’s done in ALL CA public school districts. Why should PUSD be the exception?

No more taxes? Then time to take delivery of trailers, modular units and stucco patch.

Now, no one trusts the board members who voted in this preposterous scheme or even the school board itself. Of course they are all gone now except for one, who is current running for mayor …

[img_assist|nid=16555|title=Yikes!|desc=|link=node|align=left|width=16|height=16]

What did this “paternal role” of “deciding” for their taxpayers where the (Prop C) money would come from and HOW it would become available and then “duping” them into voting for it do for the District? The city??

Spiraling down a black hole into eventual BK is what it will do for them.

It would have been far better to face reality with the taxpayers’ full knowledge than to feed into their fantasies by mortgaging their future away under terms they would never be able to pay back whilst still being able to operate the District’s day-to-day activities.

People who think the PUSD will be able to begin amortizing this humungous sub-prime loan and eventually retire this debt due to increased assessed values are smoking fairy dust.

…Unfortunately we have already learned the loan cannot be pre-paid or refinanced, so we need to start planning for the future payments now. And the very tax increase that the board said they wanted to avoid will undoubtedly come to fruition, either by a voter referendum with the money earmarked for future payments or by the far more drastic step of the County Tax Assessor forcing a tax on property owners to ensure repayment

Either way, we need to begin a process of earmarking dollars now. As a result of their actions Mangum, Vanderveen, Patapow, Ranftle and Gutschow have virtually guaranteed us a triple-digit tax increase to cover their mess. …

(emphasis added)

[CA renter]

That is a seriously messed-up situation for Poway residents, BG. IMHO, people should investigate how/why the construction costs ran so much higher than anticipated, as there is plenty of reason to believe that some “back door” deals were made there. If not, idiots were managing those projects and should be held to account, as well as creating safeguards that prevent it from happening ever again.

After that, they should look into who, specifically, knew the details of this loan and went ahead with it in the first place. The fact that it cannot be prepaid is one of the most egregious aspects of it.

Thanks for the additional info.

[davelj]

[quote=ucodegen]Unfreaking believable. For a 105mil bond to turn into 981mil would require an interest rate over 10% on a gov bond. No wonder there is a no-refinance clause in the bond. The bond issuers got the city by the gills and doesn’t want to let go. The City of Poway should look into whether there was any conflict of interest on any of the advising parties.
[/quote]

Yup, if this was a zero coupon 40-year bond it would yield about 5.75%, but… if you start straight-lining the interest and principal payments (just to simplify) beginning on the 20th year, you get a rate just north of 10%. So these muppets got their faces ripped off.

If Uncle Sam can borrow for 30 years at 3% you’d think that a local government could borrow for 40 years in the 5%-6% range. These folks got horsef*cked. How difficult is it to ask what the assumed all-in yield is on the instrument, and then compare that to other alternatives? Apparently quite difficult.

I’m hoping there’s more to this story that makes it look considerably less moronic.

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