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Are California Munis Paying Loan Shark Rates?

This is a truly astounding story: San Diego’s Poway school district is paying $1 billion to borrow $105 million.

San Diego
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San Diego

And it may not be alone in San Diego or the state paying loan shark rates.

According to a story in the Voice of San Diego, a mostly investigative online news site, the district really had no choice. It was either raise taxes or float what appeared to be just another bond to fix its schools.

“Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.

“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. The key point for the district: It won’t make any payments on the debt for 20 years.”

Never mind the irony of the advice coming from a consultant in Orange County, which once hailed as being the home of the biggest U.S. bankrupt county. This 40-year capital appreciation bond is really a zero-coupon bond that doesn’t require any payments for the first 20 years.

“And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up.

“The bottom line: For borrowing $105 million in 2011, taxpayers will end up paying investors more than $981 million by 2051, or almost 10 times what the district borrowed. That’s wildly more expensive than a typical school bond, in which a district pays back two or maybe three times what it borrowed.”

But wait, there’s more: Reporter Will Carless told me Poway apparently isn’t alone. He’s found another district that is spending $1 billion to borrow $160 million, and another that is on the hook for $280 million as the payment for $23 million.

Enough to make a loan shark envious.

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Disclaimer

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.