Home > Uncategorized > Taxpayers Pay Ten Times Over for Schools… and Banks Love It!

Taxpayers Pay Ten Times Over for Schools… and Banks Love It!

February 25, 2015

Taxpayers thrive on simplicity…. Banks thrive on complexity… and in the end those seeking simple solutions to complicated problems pay through the nose while those who understand complexity make money hand over fist.

Ellen Brown’s Truthdig blog post earlier this week explained how this chain of events played out in California… and how taxpayers “easy solution” to a complicated problem turned into “easy profits” for Goldman Sachs.

In the 1970s California voters passed a proposition that capped property taxes and made it extremely difficult for public schools to build new facilities. They did this because they wanted to save money. Over time, School Boards and parents needed to replace decaying and overcrowded facilities but couldn’t do so because of the caps on property taxes. The Governor at the time this confluence of events occurred didn’t want to raise taxes either… so when lobbyists for the banks approached him, the legislature, and key voters with a clever workaround in the form of a product called “Capital Appreciation Bonds” (CABs) everyone signed on… but as the second paragraph below indicates, paybacks on these CABs were daunting!

In 2009, the lenders’ lobbying group then proposed and promoted AB1388, a California bill eliminating the debt ceiling requirement on long-term debt for school districts. After it passed, bankers traveled all over the state pushing something called “capital appreciation bonds” (CABs) as a tool to vault over legal debt limits. (Think Greece again.) Also called payday loans for school districts, CABs have now been issued by more than 400 California districts, some with repayment obligations of up to 20 times the principal advanced (or 2000%).

The controversial bonds came under increased scrutiny in August 2012, following a report that San Diego County’s Poway Unified would have to pay $982 million for a $105 million CAB it issued. Goldman Sachs made $1.6 million on a single capital appreciation deal with the San Diego Unified School District.

Ellen Brown intimates that the sharks in the banking industry took advantage of the naiveté of school boards and administrators, but the real dupes in all of this were the voters who wanted to believe that there was a cheap, fast, and effective way to build new facilities and the politicians who never bothered to look closely at the too-good-to-be-true deal offered by banks. This naiveté on the part of voters and politicians was especially egregious given the melt-down caused by the banks promoting these “payday loans” one year prior it should have been a tip off that reading fine print was necessary. Nevertheless, Ms. Brown pulled no punches in assigning responsibility for these loans, in effect analogizing school districts with those who took out liar loans banks offered for McMansions:

Gullible school districts agreed to these payday-like loans because they needed the facilities, the voters would not agree to higher taxes, and state educational funding was exhausted. School districts wound up sporting shiny new gymnasiums and auditoriums while they were cutting back on teachers and increasing classroom sizes. (AB1388 covers only long-term capital improvements, not daily operating expenses.) The folly of the bonds was reminiscent of those boondoggles pushed on Third World countries by the World Bank and IMF, trapping them under a mountain of debt that continued to compound decades later.

She does offer two ways to solve this problem, noting that the Federal Reserve COULD have issued its own low interest loans to municipalities thereby cutting out the profiteering middlemen or California districts COULD learn a lesson from North Dakota, which is the only state with its own depository bank. In contrast to the legislative debacle that led to interest payments that were ten times more than the face value of the loan:

The state-owned Bank of North Dakota (BND) was making 1% loans to school districts even in December 2014, when global oil prices had dropped by half. That month, the BND granted a $10 million construction loan to McKenzie County Public School No. 1, at an interest rate of 1% payable over 20 years. Over the life of the loan, that works out to $.20 in simple interest or $.22 in compound interest for every $1 borrowed. Compare that to the $15 owed for every dollar borrowed by Anaheim’s Savanna School District or the $10 owed for every dollar borrowed by Santa Ana Unified.

How can the BND afford to make these very low interest loans and still turn a profit? The answer is that its costs are very low. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; pays no dividends to private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesale bank that partners with local banks, which find the borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives. Unlike the vampire squids of Wall Street, it is not motivated to maximize its bottom line in a predatory way. Its mandate is simply to serve the public interest.

A bank that is required to “simply serve the public interest” is an idea whose time has arrived. I know that some progressive economists have advocated such a plan… but this article by Ellen Brown explains how this idea would help public schools relieve their debts and thereby free up more funds to help children in the classroom.


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