If this sounds irresponsible, you really, really do not want to hear about pension financing. This is "In return for $1 in the present day, we will pay you $10 in 30 years." Californian state employee pensions are "In return for $1 in the present day, 30 years from now we will reward you with a non-callable perpetuity bond with a $10 a year coupon. Oh, here's your dollar back."
At least with pensions, funds are being invested in assets with direct value that can be recaptured in 30 years; even in the optimistic case where new schools really add value, that value may well just get up and leave if taxes are raised in 30 years to pay for the loan.
The "force multiplier" from education is better than anything else; labour is the greatest single cost to almost all businesses, and the amount of education needed is high and will only increase in the future. Alongside healthcare it's pretty much the best possible use of government money.
Whether these new schools improve education is of course an open question.
On a national level, yes. But on a district level, what proportion of the children who were educated in a given school district end up working there and paying taxes after they grow up?
"Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. 'You'd take that any day,' he says. 'Why would you leave $25 million on the table? You would never leave $25 million on the table.'
"But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. 'It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for,' Lockyer says. 'So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary.'"
No, I would leave that on the table. I wouldn't agree to a sucker loan like that on my own behalf, nor would I agree to it as a public official on the taxpayer's behalf. The problem here is that the public official forgot that he has a fiduciary duty to the public. I wonder if he learned his civics and his understanding of the mathematics of loan interest in a California public high school.
AFTER EDIT: Oops, I almost forgot a rare example of a pithy quotation attributed to Mark Twain that is an actual genuine Mark Twain quotation. This is what he wrote about school boards more than a century ago:
"In the first place God made idiots. This was for practice. Then He made School Boards." -- Mark Twain, Following the Equator (1903) 2:295
AFTER SECOND EDIT: The claim that the school district did well to take out a loan on unfavorable terms to also obtain a loan with a federal subsidy doesn't take into account that all the taxpayers in the district are also on the hook for federal deficit spending, as most of them are federal taxpayers directly and all are part of the national economy.
If you look more completely at the deal it actual is a good deal for the school district. They will pay a total of $34 million over 20 years to obtain $25 million. So their effective total interest is only $9 million, which works out to about 2% per year... an excellent loan rate for anyone. What is hidden in that is that the other $23 million (34-9) in interest that is "free" to the school district is actually paid by all of us as taxpayers. If given the opportunity why not have taxpayers across the country finance your school district? I would fire any superintendent who DIDN'T take that deal. I'm not arguing that this is a morally correct thing to do, just that it makes good financial sense from the superintendent's perspective.
This is not what the article states. The article says they will pay a total of $34 million to receive a $25 million federally subsidized loan. Presumably the principal and interest on the $25 million must be repaid as well, so the actual cost of that $25 million is somewhere north of $60 million.
Fair enough. Let's assume they are getting $27,500,000 (adding the private loan with the federal loan) and let's assume they will repay $70,000,000 after 20 years. We still come up with an effective interest rate of 5%. Still not a bad deal.
Except where did they plan to come up with that money? School budgets don't tend to grow that fast and building a new school adds additional costs. I'm not arguing that new schools shouldn't be built but taking on large debts without clear plans.
>> "Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. 'You'd take that any day,' he says. 'Why would you leave $25 million on the table? You would never leave $25 million on the table.'"
It's maddeningly common for people to neglect that pesky "cost" part of a cost-benefit analysis.
On the contrary, the "cost" is quite clear[1][2]. It's the "benefit" part which requires a highly dynamic analysis.
Bottom-line:
A Loan makes sense for the borrower when the return
on loan proceeds exceeds the cost of the loan.
Since the reporting completely left this out[3], if anyone is aware of models used to measure return on such public investments, your insight would be extremely beneficial to those of us commenting on this article.
[3] The public is genuinely harmed by this type of reporting and it drives me nuts. How can anyone draw a rational conclusion to these difficult policy issues without a best effort cost-benefit analysis of the transaction?
Well, this idiot gets to put "built a brand-new $25 million school" on his resume. He's benefiting himself without any cost, while screwing the taxpayers.
What California needs is the power to issue its own currency, call it the CMB (the California moon beam), legal tender for all California debt, public and private. Well, public anyway. Initially equal to $1. But only initially ...
> San Diego's Poway Unified School District borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says.
Poway's population is 48,518, comprising 16,128 households. 6,493 households have children, so this is costing them $154,012 per household with children for one expense, at a time when they already had several school buildings that were not old and were in good condition. The population of children is not increasing. It's certainly not the only expense to run the schools either.
How will the 16,123 households pay their $62,003 debt per household?
If they all sell their houses and assets it can be paid back.
Surely they won't be that dumb and will just default via Chapter 9 city bankruptcy? I'm mostly wondering who's dumb enough to trade good cash for bad debt on those terms.
As someone who lives in the area, the PUSD includes (very affluent) parts of San Diego. The district is huge, and its Mello-Roos income is also huge. This is absolutely outrageous. Rest assured, the entire school board will be dumped come the next election...
Too bad the US Constitution was created to deal precisely with this issue. If only it didn't state that "No state shall. . . make any Thing but gold and silver Coin a Tender in Payment of Debts."
Quick, call your representative and ask for the California Moon Beam amendment to be passed!
During one of the recent California budget emergencies (don't remember which one, there seem to be two or three every year), the state issued I.O.U.s to contractors and employees. Initially banks accepted I.O.U.s at the same rate as US dollars, but ever confident about California's legislative wisdom, politely declined afterwards, which led to a whole bunch of entrepreneurial activity on Craigslist "services" section, where you could sell a California I.O.U. for about 75-80 cents on the dollar.
Debt obligations can serve as a proxy for money, so California can already issue those. What they don't have the power to do is to require it to be legal tender, so in a way this inflationary currency would only be accessible to those who have no choice but to accept it (i.e. state contractors and employees).
It's hard to believe people on school boards are given this level of financial power. Even though the California state government is horrible, it's hard to believe they'd be more incompetent than local part time school board members in making financial decisions like this.
Criminal prosecutions may be in order. Certainly there have been financial crimes at the county level in California (Orange County being the famous example).
Government gets less competent as you go down the chain, because the most qualified people want to work higher up. Municipal government is the absolute worst, except in big municipalities like New York City, etc.
Yet, there's a libertarian argument for keeping decisions and programs at the most local level possible, since it's most accountable to individual voters. An annoying opposition of facts.
In a place like Hillsborough or Palo Alto, there may be some hope of a retired or free-time competent executive being a local resident and doing a good job for non-economic reasons. Ghetto parts of SoCal, though, have little risk of that happening.
Maybe some hope, but as far as I can tell municipal government in Silicon Valley is still the domain of the most provincial and short-sighted people in the area.
Occasionally you get lucky and get someone like Bloomberg heading up your municipal government, but even with prestigious gigs like that (the mayor of New York is arguably a more important person than most Governors) quality people are still few and far between.
I wonder if transparency into operations might help solve some of this. Being able to see that a local principal or superintendent is doing great things might attract more prestige within the community, or nationally, vs. "oh, he's another superintendent of schools in a small town". So maybe data tools could help.
The opposition of the fact that local government is vastly more corrupt and incompetent than the federal government vs the theory that they are more accountable to voters is not an opposition of facts.
You get good government when there is enough of a media market to pay for people to spend all day, every day, tracking government. The USFG has that.
Richmond, Hercules, Pinole, El Cerrito, San Pablo and El Sobrante don't.
The Poway School District has a very good reputation and mostly covers upper middle class exurbs with a lot of residents working tech jobs, with Qualcomm, HP, Intuit, Broadcom, Sony, and more having offices in or near the district.
San Diego (especially in the suburbs) has much more of an anti-tax climate than most of California, so I'd guess this is more an attempt by a politician or school board faction to increase services without increasing taxes, George W. Bush-style, with the bill coming due later.
You don’t need to live in the “ghetto parts” to be seduced by a long-term loan that has easy terms up front.
The subprime mortgage crisis was built on respectable hard-working middle-class families that were persuaded to take on debt like this for their own homes.
Really? I was under the impression it was largely those with little or no income. Have you got a breakdown to link to? Not saying you're wrong, genuinely curious.
It doesn’t have exact numbers, but the tl;dr is that people from every income bracket were taking out subprime mortgages, including middle- and upper-class people who could qualify for prime mortgages but wanted to borrow even more.
Bond issues like this are usually subject to popular vote. Not sure whether there was loophole in the procedure, or public approved such bond terms, but Californian cities do have to get majority of residents to agree to new bond issues.
People often defer to professional administrators. If a school administration asks for something, I think the default is to give it to them, after all, it's "for the kids". And if they only bring one option to the table, even if it's not the best option, it might still be better than doing nothing. So you're still down to needing competent administration, even if the public has some oversight role.
Yeah, you're right. I think the public votes on the intent to issue bonds, and once the intent is approved, the administrators duke it out. I would not attribute everything to incompetence or corruption though - a lot of California municipalities have negative ratings, and school board bonds are least attractive compared to general obligation and other muni papers, so that rate might be in line with market.
IMHO, expecting voters to understand the consequences of these highly-deferred bonds is too much. We elect representatives for a reason, and most people aren't going to put in the research necessary to fully understand a "small" (it's only 2.5 million, of course) local bond issue at the bottom of a 10 page ballot.
> Government gets less competent as you go down the chain, because the most qualified people want to work higher up
Interesting hypothesis. According to this hypothesis, the US Congress members should be among the most intelligent, skillful and talented people in the country. Does the known evidence match the hypothesis?
I was talking about administrators and the rest of the bureaucracy. The political side is different, with a different set of factors in play.
That being said, yes, US Congressmen are much more intelligent than state and municipal legislators as a whole. Congresspeople aren't dumb (in the sense of g factor). When you hear a Congressperson say "stupid" things, he's usually being disingenuous, or is falling pray to the common human tendency to ignore facts in favor of ideology.
Todd Akin, for example, has an engineering degree from a reasonably well-known school and served in the Army Corps of Engineers. He's not stupid, he just believes crazy things. I've met lots of engineers that believe crazy things. Indeed, I've met more engineers that believe crazy things than non-engineers. I think it takes above average IQ, as a general rule, to believe something that goes against conventional thinking. But believing crazy things makes for great political appeal.
There are lots and lots of smart people in local government, and plenty of dumb ones due to the lower bar to getting elected in a weak year.
What makes you think Congress is substantially different? Plenty of safe congressional districts out there, and from what I saw, the primary talent required for higher office was a willingness to dial for dollars for hours on end. If someone says things like the earth is 7,000 years old (significant number of congressmen), why should I assume that guy is smart and being disengenuous rather than taking him at his word?
My wife used to be a lobbyist, so she has experience with both federal officials and state officials.
Yes, there are safe districts, but the competition for the average federal district is just higher than the competition for the average state district. Not e.g. Cook County or LA County versus some random federal district in Montana, but some random federal district in Montana versus some random state district in Montana.
As for people saying the earth is 7,000 years old... there are a lot of smart people who believe that. Even rational people do not apply rationality to all aspects of their life, nor is every person well-versed in one subject well-versed in all subjects. Heck, Bill Frist had some wacko ideas about the ways you could get AIDs, but he had an AB from Princeton and MD from Harvard Medical School. He was a faculty member at Vanderbilt Medical and chief resident in cardiothoraic surgery at Mass. General. He is an objectively smart guy and he thought you could transmit AIDs from tears and sweat.
That's very interesting about a doctor making that comment about tears and sweat so I looked it up. Here's the infamous conversation:
> Stephanopoulos: You’re a doctor. Do you think tears and sweat can transmit HIV”
> Frist: I don’t know…I can tell you..
> Stephanopoulos: You don’t know?
> Frist: I can tell you things like, like..condoms..
> Stephanopoulos: … You believe that tears and sweat might be able to transmit aids?
This is different than the impression from claims that he was saying it could happen. He said he didn't know about those in particular.
Does the HIV virus ever leach out in tears and sweat? Probably, but not in quantities great enough to be of concern. Is there a minute remote chance one could get it from this under some perfect storm of chance? Probably not, but it's conceivable.
It's like the saliva issue. HIV is present in the saliva at extremely small levels thought to be no risk. Six people caught it from dentist David J. Acer, something that was thought, and claimed, to be impossible.
As a doctor Frist likely was familiar with cases such as that of Dr. Acer. His statement, the actual statement he made which is "I don't know", is not unreasonable.
Come on. The federal debt is >$40,000 per person, and that's not including unfunded liabilities. At the worst, a municipal level government can have an orderly bankruptcy that causes no systematic damage. When the treasury market finally crashes, the entire world is going to look like an exploding hemorrhoid.
The difference is that the treasury market never has to crash because the feds can print money. A municipal government, on the other hand, has to live under the law of "what goes up must come down".
That is true for people in meritous systems, but in general:
1. The level of incompetence designed into the system rises at the federal level faster than the level of average individual incompetence. For example, large municipal debt can be reduced by municipal employees and councilors who could never get a job in Washington. In Washington, there are thousands of brilliant people who can do nothing about debt and poor choices.
2. Many of the most competent believe crazy things and rise to the federal level to inflict them on the government and us. The most brilliant, careful financial manager in the world can become secretary of treasury, and all of their work can be undone with an enormous war, creation of homeland security, etc.
Many years ago, Capital One sent me an offer for a $5000 personal loan with this pitch: "What's the problem with most personal loans? The monthly payments are just too high."
Indeed, their monthly payments were very low, only 1% of the outstanding balance, with a minimum of $15.
But the interest rate looked a bit steep, so I coded up a little amortization calculator for fun and ran the numbers.
If you made the minimum payments, your $5,000 loan would cost you $50,000 to repay. But thanks to those easy low payments, you'd get 105 years to do it!
Would that be such a bad idea? You get the $5,000 now when you need it. In 105 years' time you're most likely either a lot richer than you are now, or dead. It wouldn't suit everyone, but I can see that being a useful loan in several circumstances.
Create enough loans like that and there's an incentive for the loan industry to lobby Congress to make it so that children and descendents are liable. Trans-generational debt slavery.
This type of financial irresponsibility drives me crazy. School districts do so many stupid things in the name of the children, when really all they're doing is trying to maintain their elected positions.
If you stay in your seat for fifteen years, then leave the next guy with a ticking timebomb, it's a victimless crime (taxpayers, children, employees), right?
Yes, well because we all know the officials aren't on the take. It's not like the UC Board of Regents doesn't have massive ties to the financial elite, do they? That's just a well known example.
It looks like the banks did fine on this one. They priced the risk appropriately. 10:1 for a 20-30 year loan? Maybe go even higher. Their real sin was saying that junk mortgages were good and not collecting enough interest.
The article doesn't say, but I'm pretty sure the California School District is borrowing the money from the state itself. That makes the interest a non-issue because it doesn't matter if it is 1% or 100% per annum - the money just flows from one part of the government to another. The interest is just a form of accounting.
Now it would be a different matter entirely if the loan was made through a private bank. Then even an interest rate of 0.1% would be a waste of taxpayer funds as there is absolutely no reason not to borrow from the state itself. But that is not how it usually works since governments always are able to finance their loans themselves.
well according to cynwoody this $34m equates to a ~10% interest rate. Not sure why that's so terrible, if anything sounds cheap for a borrower of this credit quality and the duration of the loan (25+ years).
In 2010, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed $2.5 million to help secure a federally subsidized $25 million loan to build a badly needed elementary school.
Charles Ramsey, president of the school board, says he needed that $2.5 million upfront, but the district didn't have it.
If the school was really so badly needed, why didn't they raise taxes to get the $2.5 million? If they couldn't get the district to pass a tax increase in order to qualify for a subsidized loan 10 time its size, then I'm skeptical on how necessary that new school actually was.
If they couldn't afford $2.5 million up front, what made them think they'd be able to afford $34 million later?
Clearly, at some point it becomes cost-effective for the state to step in and just buy back the bonds at close to par under the implied threat of bankruptcy as an alternative. Almost free money!
My life's work to collect what little I have means nothing while things like this are going on. I might go borrow millions of dollars too, because everyone is under the assumption that no one is paying anything back when the whole ship goes down.
I'll contribute to the fund that supports teachers/admins getting an MBA for cheap. They must sign something saying they'll come back to the school district.
No, it doesn't exists as far as I know. Please go start it.
