The Perfect Bond for Generation Greed
Like many Americans of the past 30 years, the people of Poway, California wanted more in government services, in this case new schools, but didn’t like taxes, and weren’t likely to complain as long as they got what they wanted. The future was not one of their concerns. And like many politicians, the Poway school board gave them exactly what the whiniest generation in U.S. history wanted. How they did so has now become a scandal that has received national attention.
“School officials said the long-term bond was needed if the district was to continue with a school construction program in these difficult economic times” according to the San Diego Union Tribune. “Board member Marc Davis pointed to the taxpayer approval of the bond measure in 2008 without a tax increase. ‘We had those parameters and we executed or operated within the parameters you had given us,’ Davis said, adding: ‘There are no backroom deals. There are no shenanigans. There is no fraud.’” Not in the legal sense, I suppose. But there is the fraud that Generation Greed has perpetrated on those coming after, and not just in Poway. As the future no one cares about continues to arrive, and politicians and the media call for “creative” ways to pay for things now that so much of people’s taxes are going to past debts and public employee retirement benefits, New Yorkers should pay attention to what the Poway Unified School District did.
With the eager but expensive help of Wall Street, they floated a 40 year bond with no interest payments for the first 20 years. But not no interest for the first 20 years. Instead, the interest for the first 20 years would be borrowed as part of the bond, leading to a massive increase in debt service costs starting in year 21.
“Last August, district officials obtained $105 million for school construction with the promise to repay investors $981 million under long-term financing known as capital appreciation bonds, or CABs. The deal prevents the district from paying anything on the bond for 20 years as interest compounds, and requires repayment in the 20 years after, reaching the maximum 40-year term permitted for bond repayment under state law.”
“Revelations of the bond deal in recent weeks raised the ire of some local residents who fear taxes will skyrocket to repay the debt. The bond concerns were first surfaced by a blogger in Michigan in the spring, but were picked up by the national media after a recent report by the Voice of San Diego.”
The “Voice of San Diego” is one of the news sources around the country I really admire. Anyway, the bond is uncallable, allows no prepayment, and cannot be paid down, a virtually unique characteristic in municipal finance. And the tax increases required to pay it off in 20 years would be massive, because the school district would end up paying nine times the money they got.
Or, from another point of view, the cost of all that debt is zero. Zero for older generations who are cashing in and moving out. Why should they pay for schools when they can postpone the cost to a future they don’t care about? In fact, why should they pay for anything if they can shift the cost to future generations they have, on average, cared less about than any generation of Americans in the country’s history? (Why should they care for younger generations in general when they have, in many cases, shown no regard for their own offspring or even their own personal futures?)
“Board member Todd Gutschow elicited gasps from the crowd when he suggested how high future taxes could rise. He indicated the average taxes currently paid by district residents who benefited from the bond average $165 per year. By 2033, Gutschow said, taxes could rise to $710, and to $842 in 2051 to repay the debt. He called the figures ‘not insignificant’ but ‘not catastrophic.’ Officials have said the bond payments, along with such tax increase, seem high but decades down the line would be far less in value in today’s dollars.”
They are assuming lots of inflation. They had better get it. Along with every other government that has run up its debts and pension obligations. In reality, it was the massive inflation of the 1970s and early 1980s that saved New York City from ending up like – it might very well end up soon.
Because by claiming that all those retroactive pension enhancements cost zero, New York has done exactly what Poway is doing. Put off paying the principal and interest for more than a decade, adding to the burden at the rate of eight percent a year. Our state politicians formalized the process by allowing the state and local governments around the state to pay their current pension obligations by – borrowing from the pension funds. And at the federal level, where is the federal government getting the money to pay the interest on the national debt? That is being borrowed, along with $trillions more.
So what will happen when this debt-financed MTA Capital Plan comes to an end and the Governor, who wants to run for President, has to come up with a deal to finance the next one? What happens when the hole in the pension funds becomes even larger even as localities around the state are expected to start paying back their past pension contributions? Expect the newspapers, now only read by those 55 and over, to call for “creative” solutions. And praise them when they are quickly approved at 3 am, and not discuss the fine print. Best not to alarm those who might suddenly start voting, and worse running, for legislative offices.
Where will it all end? As long as Generation Greed takes as much as it can and then departs the scene, they don’t really care. And they are in charge. No limits, and no shame. What other “creative” deals have been signed in New York State already?
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