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More on bond scams

poisonFrom the reporter who covered this story in the 90’s in Michigan:

http://www.joelontheroad.com/?p=8640

…By that time, when California schools are scraping to pay skyrocketing debt service, the school officials who approved these outrageous financial creations will be long gone.

Meanwhile, the bond underwriters, bond attorneys and “independent” financial advisers who urged school boards to approve financial doomsday machines will have enriched themselves by billions of dollars.

What is happening in California today played in a similar way in Michigan in the late 1980s and early 1990s. In 1993, when the carnival of bond profiteering was exposed — in a set of articles reported and written by me and published in the Detroit Free Press — the plunder came to an abrupt halt. A school board member from northern Michigan told me his district was poised to sell high-interest CABs when my stories broke on April 5, 1993. Finally aware of the CAB monster, electors were furious and made school board members aware that CABs were poison.

  1. December 3, 2012 at 2:51 pm

    I’m going to try to summarize my understanding of this issue to date.

    In 2008, McKinleyville voters passed Measure C, authorizing about $11 million of school bonds. The measure required 55% to pass, and passed 55% by 14 votes.

    Typically, bonds are used to pay for major purchases or capital improvements which will be of value for longer than the payback period. In this way they are similar to mortgages, where someone is willing to borrow money to get a house that they will still own and live in after the borrowed funds are repaid. So a typical reason to issue a government bond might be to build a facility that will benefit the community for 20 years, and arrange that the bond will be paid back over that 20 year period, or perhaps less.

    Historically bonds, like mortgages, end up involving payments to the bank that are one and a half to three times as large as the funds received. That is not considered unreasonable. For example, to borrow $200,000 at 3% for 30 years means you pay the bank back $303,556. At 4%, you would pay the bank $343,800, at 5% $386,280.

    The bond campaign’s major financing came from companies connected with the bond sales or in line to do work which the bonds would pay for. David and Penny Elsebusch of McKinleyville charged that the campaign contributions were in violation of Humboldt’s Measure T.

    $7 million of bonds were issued in 2008. I don’t know a thing about them.

    The remaining $4 million of bonds were issued in 2011, and showed up in a database the Los Angeles Times had created to demonstrate outrageous bond deals that school districts have become involved with.

    The LA Times database shows that, in order to borrow $4 million, the MUSD agreed to repay $56 million plus. (That would be like borrowing $200,000 as a mortgage and agreeing to pay back not $300,000 or $400,000, but $2,800,000.) The repayment does not begin until several years have passed, and may not take place until 40 years from now, I don’t know. That was flagged as one of the most outrageous deals in the state.

    The reason the bonds are structured in the way they are appears to be to get around limitations on how much taxpayers can be called upon to pay for the bonds today; I believe there is a limitation of $30 per $1,000 of assessed property valuation, but I’m not sure.

    In the mid-1990s, a Michigan reporter did a set of reports on similar bonds in Michigan, prompting Michigan to outlaw them. This reporter published some blog posts early in 2012, which may be where the LA Times got the idea for its story and database.

    The reporter’s blog post is http://www.joelontheroad.com/?p=8640

    Hank Sims at the Lost Coast Outpost discovered the LA Times story and database, checked to see what Humboldt districts were doing, and found out.

    If anyone has additional information they’d like to add, or corrections to what I’ve said here, that would be great.

  2. Anonymous
    December 3, 2012 at 5:19 pm

    What pisses me off most about the McKinleyville bond is that they could have structured the measure to pay for more teachers, or anything else to improve the quality of education. Instead, they did the routine of only covering construction/maintenance, etc. McKinleyville’s schools are still starving for money along with almost all other schools in California.

    It makes holding a bake sale to scrounge together $300 for a field trip all the more sour because McKinleyville residents have $54 million to repay. We F—‘d ourselves and we’re not even going to get anything out of the experience.

  3. Anonymous
    December 3, 2012 at 6:19 pm

    Times-Standard has BREAKING NEWS FROM MCKINLEYVILLE.

    Wait for it….

    GAS STATION ROBBED!!!!!

  4. Anonymous
    December 3, 2012 at 6:20 pm

    Using bonds to pay teacher salaries is the most asinine thing I have ever heard.

    They should only be used for capital projects like new buildings and major renovations, one time expenses NEVER FOR ONGOING EXPENSES. If the Mck Service District has agreed for the taxpayers to pay $56 million to pay back a $4 million bond then shame on them. The practice when used correctly is sound.

  5. December 3, 2012 at 6:36 pm

    Dang! I hate undefined acronyms. What the hell is a “CAB?”

  6. Walt
    December 3, 2012 at 6:45 pm

    Ya gotta love the spin, here: average Joes running a school district are bilked by PRIVATE COMPANIES (who made scads of money and will make more). . .and who is the bad guy? The bilkee! Same thing happened in 2008-present. . .folks who signed up for loans the “experts” offered them are losing their houses, while the experts are laughing all the way to the bank. . .and blaming the crash on the government they want to drown. They commit the crimes, make big profits. . .and get bailed out!

  7. December 3, 2012 at 6:45 pm

    CAPITAL APPRECIATION BOND (CAB) – A municipal security on which the investment return on an initial principal amount is reinvested at a stated compounded rate until maturity, at which time the investor receives a single payment (the “maturity value”) representing both the initial principal amount and the total investment return. CABs typically are sold at a deeply discounted price with maturity values in multiples of $5,000. CABs are distinct from traditional zero coupon bonds because the investment return is considered to be in the form of compounded interest rather than accreted original issue discount. For this reason only the initial principal amount of a CAB would be counted against a municipal issuer’s statutory debt limit, rather than the total par value, as in the case of a traditional zero coupon bond.

    http://www.msrb.org/msrb1/glossary/view_def.asp?param=capitalappreciationbond

  8. Walt
    December 3, 2012 at 6:49 pm

    Municipal Securities Rulemaking Board says this about CABs:

    CAPITAL APPRECIATION BOND (CAB) – A municipal security on which the investment return on an initial principal amount is reinvested at a stated compounded rate until maturity, at which time the investor receives a single payment (the “maturity value”) representing both the initial principal amount and the total investment return. CABs typically are sold at a deeply discounted price with maturity values in multiples of $5,000. CABs are distinct from traditional zero coupon bonds because the investment return is considered to be in the form of compounded interest rather than accreted original issue discount. For this reason only the initial principal amount of a CAB would be counted against a municipal issuer’s statutory debt limit, rather than the total par value, as in the case of a traditional zero coupon bond.

    So would YOU sign up for one?

  9. December 3, 2012 at 7:10 pm

    Walt,

    As I understand it the head of the school board is the Vice President for Accounting of Security National and another school board member is the Comptroller of Murphy’s Markets. Are we really supposed to assume they lack understanding of financing?

  10. Anonymous
    December 3, 2012 at 7:11 pm

    I like it Walt, picture three Humboldt bumpkins, Mitchell, Hooven and Zabel, dumb as stumps, getting fleeced by the big city slickers. We can find a cameo for Alto too.

    We could make a frickin movie!!

    Do you think Humboldt Film Commish will kick us down some funding?

    Or how about a reality tv show!!

  11. Anonymous
    December 3, 2012 at 7:56 pm

    So what did then Superintendent, Dena McCullough get out of the deal..Is there a way to follow the money they used to do the construction? Now she has left stating she is going to help her husbands construction company. Seems very suspiciuous to me. How could all of these board members not understand what they were doing to all the folks of Mckinleyville? If David were still alive he would be even more pissed. I think he would be saying I told you so!

  12. Just Watchin
    December 4, 2012 at 4:46 am

    I see another segment on Jimmy Kimmel coming!!

  13. Plain Jane
  14. December 4, 2012 at 7:40 am
  15. December 4, 2012 at 7:53 am

    Four more answers to moviedad’s question about capital appreciation bonds.

    For anyone who’s ever had a mortgage, you might understand CABs in this way. The bank loans you your money. You don’t have to begin paying it back right away. In fact, you might not have to pay the bank anything for forty years. In exchange for these generous terms, the bank charges a high interest rate. In forty years, you discover that you owe 13x what you borrowed, and the bank takes your home.

    If you are a politician, you can understand capital appreciation bonds this way. You get money now, and the poor suckers who will pay are just now being born. Plus, maybe you’ve enriched some friends who can enrich you sometime in the future: one hand washes the other, donchaknow. The only danger is you’ll be exposed as a fool or a crook, so you’d better make sure the press is asleep or in your pocket. In some areas, that’s a pretty safe bet.

    If you are a “fiscal conservative,” you can understand CABs in this way. You buy some, and you’ve crippled your district’s ability to borrow for the foreseeable future. Maybe you’ve even made it impossible to keep promises that have already been made, like agreements to past employees. It’s like breaking kneecaps, only less messy.

    If you are a voter, you can’t understand capital appreciation bonds. It probably means you really appreciate the loaned capital. Now just leave it to your school board, you elected them because you trust them. Such nice people, such lovely smiles.

  16. December 4, 2012 at 8:15 am

    CABs have all of the elements of a Ponzi scheme. Instead of expanding the pool of suckers horizontally, they have figured out how to expand the pool of suckers (in this case taxpayers) into the future. Meanwhile the central players are reaping salaries, pensions, benefits and construction contracts, not to mention fees associated with financialization.

    This is worthy of criminal investigation.

    have a peaceful day,
    Bil

  17. December 4, 2012 at 8:28 am

    The following document is floating around the internet. It appears to deal with the Series B bonds from this bond measure, but it also is talking about $7 million in issued bonds rather than $4 million. It may or may not represent the terms of the final arrangement.

    If it represents the final arrangement even approximately, it shows what the board members MUST have read if they were carrying out their legal responsibilities. Page 12 shows the difference in accumulated interest between the Series A $7 million bonds (not CABs) and the Series B $7 million CAB bonds. Interest on series A is $14 million. interest on series B would have been $71 million.

    http://www.royceprinting.com/jobs/FOSarchive/2011FOS/02_17_11_McKinleyvilleFOS.pdf

  18. December 4, 2012 at 8:32 am

    It’s disappointing that, as yet, there’s been no followup from Hank Sims at the LCO, who broke this story. It’s also disappointing that NO school board member or district staff, current or past, has chosen, as yet, to explain anything: not here, not at the LCO, not anywhere on the net so far as I can tell.

    Has any local politician had anything to say about this? Anyone on the Board of Supervisors? Anyone on the school board? Anyone in the McKinleyville Community Services District? Anyone in county planning? Anyone in the DA’s office?

    When the school district goes bankrupt, what happens to promises made now to employees and past employees? Are the bondholders ahead of them in line?

    Can the bonds be paid off early? So far, it looks to me like the answer to that is “no,” but I don’t know.

  19. December 4, 2012 at 8:51 am

    The district needs to find some cash to fill in the fenced-in hole in the middle of the WHS campus where the science buildings were to be built.

    WUSD can avoid its ‘fiscal cliff’ by borrowing more in bonds

    By Jennifer Pooleukiahdailyjournal.com
    Updated: 11/24/2012 11:52:57 PM PST

    The Willits News

    WILLITS – The “good” news on the Willits school district’s financial crisis is that the district can avoid fiscal insolvency by borrowing more in bonds to help make a nearly $5 million balloon payment on an earlier bond loan.

    That payment, due in July 2014, also would require the use of an estimated $3.7 million in remaining construction monies from the first round of bond sales, which were supposed to be used to build science buildings at Willits High School and Baechtel Grove Middle School.

    The loan, known as a bond anticipation note (BAN), is backed by the district’s general fund, so without sufficient funds to pay it off, monies used to pay everyday expenses including paying teachers and district staff would be at risk.

    The district has three options, when it comes to selling more bonds to make the payment on the BAN, said Lori Raineri, president of Government Financial Strategies, who was hired by the Mendocino Office of Education to do an analysis of the district’s bond plan.

    Option one is to sell a minimum issue of $1.425 million in regular seven-year bonds, which will require $1.615 million to finance, and give the district only $1,500 of proceeds available to use for projects after paying off the BAN.

    If the district borrows the maximum it is allowed in regular bonds–$1.65 million it will cost $1.87 million to finance, but will garner $222,000 in proceeds for the district to use.

    The district needs to find some cash to fill in the fenced-in hole in the middle of the WHS campus where the science buildings were to be built.

    A third, very expensive option would be for the district to issue an extra $1.655 million in controversial capital appreciation bonds in addition to the $1.65 million in regular bonds, leaving the district $1.8 million in proceeds to use for projects. Selling that extra $1.655 million in capital appreciation bonds would require eventual repayment of $17.655 million, a repayment ratio of 10.7:1.

    According to the current district administration, the $4.97 million balloon payment “just came to light,” and nobody in the district office or on the school board at the time has acknowledged knowing they’d signed on to the big lump sum repayment.

    But according to a June 16, 2010, Willits News story, “Kubin cautious on bond sales,” the risks of taking out a bond anticipation note in an environment of declining property values were known at the time by the district administration, if not fully understood by the district or the school board.

    http://www.ukiahdailyjournal.com/ci_22062530/wusd-can-avoid-its-fiscal-cliff-by-borrowing

  20. Plain Jane
    December 4, 2012 at 9:01 am

    This is another way of looting the future and reducing future taxpayers’ abilities to control their own spending priorities. They claim to be so worried about leaving debt to their grandchildren with budget deficits that they starve our schools of funds today to keep their taxes low and shovel today’s school maintenance expenses onto the future (and create a lot of profit for a few) when they will be faced with paying off the bonds at many times the borrowed amount and pay for current maintenance or take on more debt. It isn’t debt the looters object to, per se; but debt that doesn’t benefit them directly. They don’t mind outrageously excessive military spending, no-bid contracts, etc. because they can buy shares and profit. They don’t really hate govt. debt or credit downgrades because they are major purchasers of govt. bonds and make more profit from higher interest. They hate government spending on the poor who should instead be forced to work for what is offered or starve. They hate government spending on education because a dumbed down populace is easier to fool and control. They hate government when their narrow self-interest isn’t the only interest considered in setting policies.

  21. Plain Jane
    December 4, 2012 at 9:18 am

    Holy Cow, Bill! The good news is that they can use what is left from the loan ($3.7 M) intended to build new science buildings and issue more bonds to make the balloon payment of $5 million and get another loan to pay off the earlier loan – but they still don’t have the new science buildings??

    This is a similar to the situation we have with regulation of complex financial transactions. Few people understand them and fewer still in Congress do so how can they be expected to regulate them effectively? How many school board members have the financial backgrounds required to understand the consequences of mortgaging their communities’ future with CAB’s and BAN’s?

  22. wall street bond advisor
    December 4, 2012 at 10:48 am

    Yup, my professional advice is to refinance the bonds, over and over. Make sure my fees to advise you are included.

  23. December 4, 2012 at 5:36 pm

    wsba, I just think you are leaving the plum out of the cake, so that Little Jack Horner has nothing for his thumb. This would be the profit multiplier of slicing and dicing this kind of debt for others to buy, in the same way as the housing loans were.

    Of course, only the big boys back on Wall Street, The City, Singapore, etc. get to participate….I think. But maybe, there’s more…

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