Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

www.voiceofsandiego.org

Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools.

In many ways, the deal was unspectacular. Some of the money was used to pay off previous debts from delayed and over-budget construction projects. The rest went towards finishing upgrades that Poway taxpayers had been promised as far back as 2002. To a casual observer, it was just another school bond.

But Poway Unified’s deal was far from normal.

In 2008, voters had given the district permission to borrow more mone

(visit the link for the full news article)


Related News Links:
www.sfgate.com
www.nbcsandiego.com

I really don't know where to start criticizing this school district. First, I hate to yell, but, "YOU HAVE GOT TO BE KIDDING ME"?

The administrators of this school district should have been fired last year when they signed this agreement. I just can not believe that any elected official would do such a thing...

And, "With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond."

I wonder if this guy works for Goldman Sacks or some other TBTF bank. This guy should not have a license to sell anything or give advice if he leads them to this kind of raping.

How anyone can call this program a success I find amazing. The program started at $198 Million but needed another $179 Million

"Voters had agreed back in 2002 to allow the district to borrow $198 million to bring state-of-the art facilities to 24 schools. But by 2008, the district was asking for $179 million more to finish the job."

www.voiceofsandiego.org
(visit the link for the full news article)

This is jsut standard compounding interest as far as I can see - it's a stupid decision for sure, and shifts what looks liek a massive repayment burden 2 generations into the future..... but apart from that there's nothing particularly strange about it is there??

reply to post by Aloysius the Gaul


No, not simple interest on these bonds

www.sfgate.com...

Zero-Coupon


Tax-exempt capital-appreciation debt is similar to so- called zero-coupon bonds, except that the investment return on the principal is reinvested at a compound rate until maturity. The securities usually yield more than coupon bonds to compensate investors for the longer holding period before they receive any income.

or How about this one?

www.marketplace.org...

Jeff Horwich: I know we're done with "the numbers," but here's one more fun one: 834 percent. That's the interest a school district near San Diego will pay to private investors who funded a recent bond referendum. The Poway Unified School district borrowed just over $100 million for building renovations.

reply to post by fnpmitchreturns

.....except that the investment return on the principal is reinvested at a compound rate until maturity.....

How is that not compound interst??

The two posters in the thread have both made a point. In one look it is simply compounded interest which is used/done/forced/agree upon everyday in the banking/investing world. On the other hand, as the other poster pointed out, compounded interest is ridiculously absurd.

Very very absurd.

Compounded interest should never be tied into an agreed upon investment/loan/money product. As a penalty for non payment or late payment to repay the value of potential money loss by the lender, that could be understandable. But to agree to it during the before a loan has matured is crazy.

Un- -believable!

How on Earth did this get through? Did they drug people unconscious until it was all over? No one said anything? It does not take a financial genius to see this is rape and pillage on an obscene scale.

Yet if someone broke into somebody's home and stole chump change, they would go to jail. Amazing.

"...under certain economic conditions..." this can be valuable. And what would those be? If the repairs and rebuilds were utterly impervious to wear and SDUSD area home values increased by 50,000% and taxpayers are able to pay $27 Million in interest the first year it comes due with no problem with no short falls anywhere else?

Call me paranoid but these municipalities in California are making way too easy for privateers to come in once the local government goes bankrupt. Hell, they can put this one on the calendar when it will happen.

Originally posted by Aloysius the Gaul
reply to post by fnpmitchreturns

 

.....except that the investment return on the principal is reinvested at a compound rate until maturity.....

How is that not compound interst??

I guess I don't see it as that since it is capitalized for 20 years before payments even start?

Silly me, I don't think this simple,??? in a distorted way it probably is.... but clearly I am no financial genius but neither are these guys!

"except that the investment return on the principal is reinvested at a compound rate until maturity"

reply to post by fnpmitchreturns


I'm not a guru either - so I'm keen to get an understanding

As I read it, the "investment return" is not beign paid off for 20 years, so it is being added to the capital, and then interest is due on the increased amount - hence compound interest. (sorry if the following appears to be me trying to teach you how to suck eggs!)

I didn't notice what the interest rate was in the article - but say you borrow $100 at 5%, then you owe $5 in interest after 1 year. If you do not pay that $5 then it is added to the $100 and you now owe $105.

In the 2nd year you have to pay 5% of $105 =$5.25. Again if you do not pay this off it gets added to the capital - now you owe $110.25.

In the 3rd year you have to pay $5.51 interest, etc.

IIRC if you are paying 5% the capital will double in 15 years, if 6% it will double every 12 years, if 7% it almost doubles (1.97 x) in 10 years (so will be almsot quadruple in 20 years!), and so on.

So at 5%, after 20 years you now have to pay back a loan that is 2.65 times the original (or 3.2 times if at 6%, or 3.87 times if 7%) - and now you are paying interest on that increased total amount as well as trying to pay down the principle.

it's really REALLY bad deal for the next generation!!!

But hey - you can do it without paying extra taxes as long as your lender thinks you are going to be around that long!!

reply to post by ABNARTY


I share your and paranoia.

What is this? Strip mall Payday Loan Sharks on a grand scale? Oh, yeah, more of that "creative", "exotic" financing that got homeowners into a mess, and brought down the economy on a global scale. I wonder if anyone at the school district got a kickback. I wonder if any of the "cost over runs" could have been avoided, or businesses knew that the taxpayer would pick up the tab anyway.

“If you had raised taxes in the beginning in order to have money coming in to be able to borrow in a normal way,” Carless said, “it could have ended up being much cheaper at the end of the day because you wouldn’t have had to have this crazy exotic financing.” Source: Poway Unified to Pay Nearly 10 Times What it Borrowed: Report | NBC 7 San Diego

Penny wise, pound foolish.

Originally posted by Aloysius the Gaul
reply to post by fnpmitchreturns

 

I'm not a guru either - so I'm keen to get an understanding

As I read it, the "investment return" is not beign paid off for 20 years, so it is being added to the capital, and then interest is due on the increased amount - hence compound interest. (sorry if the following appears to be me trying to teach you how to suck eggs!)

I didn't notice what the interest rate was in the article - but say you borrow $100 at 5%, then you owe $5 in interest after 1 year. If you do not pay that $5 then it is added to the $100 and you now owe $105.

In the 2nd year you have to pay 5% of $105 =$5.25. Again if you do not pay this off it gets added to the capital - now you owe $110.25.

In the 3rd year you have to pay $5.51 interest, etc.

IIRC if you are paying 5% the capital will double in 15 years, if 6% it will double every 12 years, if 7% it almost doubles (1.97 x) in 10 years (so will be almsot quadruple in 20 years!), and so on.

So at 5%, after 20 years you now have to pay back a loan that is 2.65 times the original (or 3.2 times if at 6%, or 3.87 times if 7%) - and now you are paying interest on that increased total amount as well as trying to pay down the principle.

it's really REALLY bad deal for the next generation!!!

But hey - you can do it without paying extra taxes as long as your lender thinks you are going to be around that long!!

edit on 7-8-2012 by Aloysius the Gaul because: (no reason given)

HA HA HA NO, insult taken or I am not even offended... As dumb as I am I still would know better than to agree to this deal!

Wasn't this what they used to call Loansharking? Making sure you borrow more than you can pay so they can get more money from you. Come to think of it that's the way all the credit card companies work. I thought there were laws to protect us from this. Maybe a new form of Mafia like entity is running the country.

I'm not sure where the outrage is here.

If your school district needs something, and your boneheaded electorate have tied their hands as to making that happen, what are they supposed to do? Half of their constituency is screaming "What about the children???" and the other half is screaming "Stop taxing me, bro!!!" so what do they do?

Same as most people do -- put it on credit and hope that some "magic in the future" can manage the payments.

This loan is pretty standard to tell you the truth. The only thing I don't get is why would they go for a differed payment loan knowing that this is the reason hundred of thousands of people ended up losing there homes because of loans like these.

The interest is about right. A homeowner can be able to expect to pay for their own house about 3 times over with the interest accrued over a thirty year loan.

I think these guys have made the same stupid mistake many homeowners make when they go to buy/refinance a house. They know their going to pay a higher interest rate to defer payments. Thinking that maybe they'll be able to free up their monthly income by not having a mortgage, thus allowing them to take that extra monthly money and save it or invest. But, like everyone else, they end up using the extra monies to bury themselves in deeper debt. Then when it comes time to pay the piper, they're screwed. Just another bad decision by local policy makers. Nothing new really.. Sad, but nothing new.. I'm not suprised one bit.

The only thing that makes this a story is the "B" word. Other then that, everything seems normal. I sold mortgages for some time and these interest rates and ammortization is standard for any deferred payment loan

Some day these local government and state governments will stop milking the federal teet. Take back some of their liberty and be able to finally move forward.

Just imagine what a state could do if all or say, 80% of all taxes deducted from our checks went to the state instead. What a wonderful world we'd live in. The government can keep their failed Social Security and let our great states care for the citizens. States managing there own social security and universal health care system would spur competition between states and generate millions in tax revenues while trying to beat each other to draw citizens to their respective states...

Foodstamp for President!!!

Originally posted by Aloysius the Gaul
reply to post by fnpmitchreturns

 

I didn't notice what the interest rate was in the article - but say you borrow $100 at 5%, then you owe $5 in interest after 1 year. If you do not pay that $5 then it is added to the $100 and you now owe $105.

t long!!

edit on 7-8-2012 by Aloysius the Gaul because: (no reason given)

Not exactly...

It's more like this.

Amortization changes everything. So, If you borrowed 100,000 at 6% on a thirty year loan. approx 98% of all your monthly payments are going towards interest. So on a 600 a month payment. 590 or so is going to interest. All interest is being paid first in a home loan. Not even 50% of your monthly payment is going to principle even at 15 years into a 30 year loan. That's how the banks getcha. Amortization....

So if your paying 300k in interest over thirty years on a 100k loan at 6%. That 300k in interest is going to be paid first during those thirty years before you even start paying on the principle.. Well, not ALL of it goes to interest. But 90-98% does. At least dfor the first 15years or so.

Forgive my math. I'm totally shooting from the hip, but you get the idea..

Some one on the school board works at the Bank!
they just got robed. well Ever one is doing it.
especially governments.

reply to post by fnpmitchreturns


the actual ammount borrowed totalled 377million - you try borrowing 377 million over 40 years

reply to post by fnpmitchreturns


California.

What else is there to say?