By Joel Thurtell
California legislators are poised to enact a law meant to reform the way the state’s school districts borrow through Capital Appreciation Bonds.
Cabscam California was reported first on joelontheroad, which made the 1000-plus percent interest as proportion of principal in San Diego’s Poway schools a poster child for the evils of CABs.
While the proposed law would place limits on the way CABs are issued and would put a ceiling on interest, it would not ban the practice of high-interest borrowing by California municipalities.
California school districts could still borrow at rates of interest as proportion of principal that so infuriated Michiganders 20 years ago that the Michigan Legislature outlawed CABs. The Michigan ban resulted from my reports in 1993 on how schools were turning increasingly to this “creative” form of finance with the false promise of “no new taxes.”
Taxes were only postponed by 10 years, with interest meanwhile compounding at times to nearly 600 percent as a proportion of principal.
In California, CABs would be allowed with interest as proportion of principal up to 400 percent. That is still an outrageous amount to charge. It sure upset people in Michigan when they found, for instance, that the $19 million borrowed by Lowell schools in 1993 would turn into $93 million when it came to make payments in 2003.
I warned of this failing in my speech May 10 to the California League of Bond Oversight Committees.
I realized after my visit to Sacramento that, while it worked in Michigan in 1994, state-by-state reform of muni bond practices is not the way to kill CABs.
A federal ban on CABs similar to Michigan’s is the best way to approach reform of this nefarious form of muni debt.
