One would think that Californians would know by now that bonds are nothing more than taxes plus interest. After all, when people were borrowing against their home equity to pay off bills and buy things, didn’t they learn the hard way that the money had to be paid back with interest? Borrowing IS spending. Bonds ARE taxes.

Now a clever way for governments to borrow money has become popular in California that even Democratic Treasurer Bill Lockyer has compared to the deceptive home loans of the last decade. Remember those? The too-good-to-be-true loan packages, where interest payments were deferred for a few years, or “locked in” at lower than market rates until five years into the loan, wherein they would reset at market rates, raising the monthly payment to unsustainable levels? But while consumers started to learn tough financial lessons back in 2008, government is heading for a tough financial lesson today. And the same financial sharks who fled town when the real estate bubble popped five years ago are having a feeding frenzy on the municipal bond market.

We’re talking about Capital Appreciation Bonds. These are loans that, typically, require no payments of principal or interest for between 10 and 20 years, then once this grace period expires, payment of principal plus interest must be paid in full. Other variants of these loans require no payments for the first 10-20 years, then the loan must start getting repaid over the next 10-20 years, with payments based on the new balance which includes compounded interest. What a temptation for politicians who not only can’t raise taxes, but can’t even afford interest payments! Talk about kicking the can down the road.

There is a legitimate justification for issuing bonds that are paid off over decades. It applies when the project that the bond proceeds will fund is a long-term investment in capital and infrastructure that will have a useful life that meets or exceeds the term of the bond. Thus the borrower pays the cost of paying for an asset during the time they are using the asset. But capital appreciation bonds violate this justification, because since they require zero payments during most of the presumed useful life of whatever asset they are financing.

The financial hole that capital appreciations bonds are getting our cities into, as if they didn’t have enough financial challenges meeting current obligations or funding future retirement pension and healthcare obligations for current workers, has been covered fairly well already. On November 29, 2012, the Los Angeles Times published an article by Dan Weikel entitled “Risky bonds tie schools to huge debt,” where they reported on capital appreciation bonds used to finance school construction and maintenance, and had this to say:

“Most school bonds, like home mortgages, require roughly $2 to $3 to be paid back for every $1 borrowed. But CABs compound interest for much longer periods, meaning repayment costs are often many times that of traditional school bonds.

CABs, as the bonds are known, allow schools to borrow large sums without violating state or locally imposed caps on property taxes, at least in the short term. But the lengthy delays in repayment increase interest expenses, in some cases to as much as 10 or 20 times the amount borrowed.”

The LA Times also published a companion article where they provided a spreadsheet that tracked Capital Appreciation Bonds (spreadsheet) just for school districts in California. This spreadsheet showed that $5.6 billion in capital appreciation bonds have been issued to fund education to-date, and that the payments, most of which will not come due for another 20 years, will total $24.0 billion. But the borrowing disclosed on this spreadsheet is just for education, and it is just those borrowings that took the form of capital appreciation bonds. It is only a small portion of the debt.

So how deep is the hole? How much do California’s state and local governments owe? How much of that borrowing is via conventional bond financing, and how much of it is via capital appreciation bonds?

If you think the California State Treasurer’s office would know the answer to this question, you would be wrong. UnionWatch inquiries to that office yielded helpful suggestions to refer to the California Debt and Investment Advisory Commission’s webpage that discloses California Public Debt Issuance – Yearly Totals 1985-2012. From this table you can see both state and local borrowing per year. The biggest borrowing year was 2009, with $95 billion in debt issuance. The average since 2000 is well over $50 billion per year. But how much of this debt was reissuance of old debt? How much of it is new debt? What is the cumulative outstanding debt of state and local governments in California? How much of that outstanding debt takes the form of Capital Appreciation Bonds?

We asked. Nobody knows. They’re working on it. The spokesperson suggested we consult someone with a subscription to Bloomberg online, wherein we suggested they get one for their office. Why isn’t this information a click away, clear for every journalist and policymaker in California to immediately apprehend? The reader may imagine what would happen to any treasurer in any large corporation if their department was unable to instantly produce this data. Such is the state of California’s public finance. This isn’t an unfunded liability for future obligations, such as pensions, where countless variables – including average lifespan, spiking impacts, and rates of return on investments – make precise estimates impossible. This is money borrowed, spent, and owed. It is a number that can be known to the penny. And in California, right now, we don’t know.

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    6 Responses to State Treasurer Doesn’t Know How Much California Owes in Bond Debt

    1. Ken Churchill says:

      Great article. I hope it starts a serious conversation about the kind of future we want for ourselves and our children.

      I hope you will all pass it along to your friends and family and your local newspaper. Write a letter to the editor. Make your voice heard.

      Unless we put the brakes on this new ploy to put off paying for what we do today, right now, we will be simply destroying our future.

      The bottome line is that our elected officials know very little about finance and how to spend money wisely. And the senior administrators of most counties and cities are happy to borrow money to avoid layoffs and pension reform. It is as simple as that.

      Here in Sonoma County we have let 53% of our roads completely fail. Now they need complete reconstruction at 5 times the cost of maintenance. We only have the money to maintain 14% of our roads but we can pay the highest pensions and and salaries on average than any county in the state.

      Why can’t we take care of the roads? Because from 1991 to 2000 the County spent $10 million per year on pensions and From 2001 to 2010 if we were to have paid off the growing unfunded liability each year we would have spent $114 million per year, ten times the previous decade’s cost. And now it is predicted to double over the next decade.

      It is absolutely insane.

      But we have the power to change the system if we speak out and work together to elect reformers who will serve the people’s and our children’s interest over the government employee unions and the special interests.

      We still live in a democracy. Lets start acting like it. The wrong people have taken over our government an it is our job to take it back.

      Visit us and http://www.newsonoma.org.

      • Tough Love says:

        Serious conversation, really ?

        Since when are Public Sector workers held “accountable” to appropriate standards, with anything but the most miniscule possibility of job loss for poor performance.

    2. marincountyman says:

      This is generational theft..pure and simple. This is not just a moral crisis of the first order, this is the moral crisis of our age. We are collectively endangering our children’s economic futures without giving them the slightest say in the matter. We are doing this systematically and with malice aforethought. Worst of all, we are pretending not to notice. Shame on the unions and their crony toadie union politicians that have sacrificed our children’s future by consuming future budgets for the next 30 years. Los Angeles is predicted to be BANKRUPT by 2014, San Francisco by 2016, Marin County – 5000 current and retired employees and the BOS allowed them to run up over $3 billion in unfunded obligations (that’s $600k per retiree and employees..most for the latter). Now we see the plundering by these union fiscal thugs throughout Orange County. It’s a ponzi scheme worthy of making Madoff blush. Predictably, entire budgets are swept to pay the new $100k – 300k for life for folks retiring in their 50’s and on the take for 20 – 35 years plus free medical (that does a millionaire make and does not represent “middle class”) these unions have created the new elite – the new bourgeois – by clearly gaming and bribing the system to enrich themselves over our children and future. Pathetic….and shame on the politicians for enabling them and accepting public employee union bribes. The absolute power these unions have over all of us is frightening…for me, its simply stunning that these pirates have gamed this system so well, that even with bright flashlights of truth and excesses, they don’t blink, let alone run. They believe this is their right…they are worth it…and with a straight face tell taxpayers “good luck trying to change the rules…we made em.” This Counties, cities, many States and perhaps our Country, have been hijacked by these government
      employees who, sadly, supposedly work(ed) for us. They don’t…our Legislators, City Councils and Governor (and President), work for them…..and the credit card bills they have racked up…is undeniable evidence that. Today, tragically, they are right. God help us and we owe an apology to our children for letting this fiscal abuse of the next generation by 4% (public employee unions) of the US population occur.

    3. Wayne Martin says:

      A few years ago I tried to find out how much Bond Dept California had. I called a number of people in Sacramento, until someone finally told me about some department that was supposed to keep track of this information. I called, and asked if they could provide this information to me. The man who answered the phone admitted that I was “in the right place–but was there at the wrong time”. He went on to explain that all of the various bond obligations were tracked in 15 different data bases (if memory serves). He went on to say that they only reconciled the total bond debt once a year, or so–and he had no intentions of providing that information to me until that time.

      This sort of fragmentation in the major financial accounting systems is not unheard of. It is, on the other hand, something that is so unacceptible that the people involved should be dismissed for cause.

      With 1TB disc drives costing about $100 these days–it’s very difficult to fathom how the tracking of the State’s finances can be in such a bad way. It is really hard to have any respect for people in government who have created these problems. Sadly, the media doesn’t have a clue as to what is important, and what is “fluff”. So–things just get progressively worse.

      • Tough Love says:

        Quoting …”This sort of fragmentation in the major financial accounting systems is not unheard of. It is, on the other hand, something that is so unacceptible that the people involved should be dismissed for cause.”

        A Public Sector worker “Dismissed for Cause” ? LOL

    4. Todd Smith says:

      Unions have not only destroyed our education system, but they have also destroyed the auto industry, airline industry, post office, steel industry, manufacturing, public sector and the latest tragedy Interstate Bakeries (aka Hostess/Wonder Bread).

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