Hundreds of California school districts are using a form of financing that has been called risky, and it's leaving them with debt in the billions of dollars. They are called capital appreciation bonds.
A lot of school districts have turned to this form of financing during the hard economic times, mostly because they don't need to start repayment until decades down the line. But that's leaving huge costs to the future.
Capital appreciation bonds are very popular now among school districts. Almost 200 school districts in California have used them for financing. The bonds allow school districts to borrow large sums of money, often in the millions. But they don't need to start repayment until decades down the line, sometimes 40 years later. That postpones the need to raise taxes immediately on taxpayers to come up with the money to pay off the bonds.
Here's the catch: in some instances, the interest accumulated over the decades can balloon the total to 25 times the original amount borrowed.
California State Treasurer Bill Lockyer says it's a sneaky way to get financing.
"Frequently it's because they don't want to go to local voters and ask for a tax increase," says Lockyer. "So this is a back door way to spend the money and postpone the necessity of the tax increase."
A little over 2 dozen school districts across the Central Coast have taken out these bonds in recent years. About $200 million in capital appreciation bonds combined for Central Coast school districts will turn into $1.06 billion dollars in owed money over time. Surprisingly, one Central Coast school district superintendent even claimed he didn't know what these bonds were, even though his district will owe over 4 million dollars in 15 years due to capital appreciation bonds.
Says Lockyer, "it's a terrible deal. This backdoor financing is imprudent and unwise. And my view is nobody should be elected who is doing these kinds of deals."
Over $3 billion has been borrowed across the state. The total amount due in more than 25 years on all the bonds in the state will be more than 16 billion.
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