Dan Walters: Hypocrisy prevails on big California debt
07/04/2013 12:00 AM
07/04/2013 9:27 AM
A half-decade ago, while too many Californians were taking out too many home mortgages with teaser interest rates and artificially low payments, hundreds of California school districts were being similarly shortsighted.
They were issuing "capital appreciation bonds," on which only interest would be paid initially and payments on principal would be postponed for years or even decades. They allowed school officials to promise voters that new bonds would not immediately raise their taxes.
Poway Unified School District became the poster child for CABs, as they were dubbed, having issued $105 million in construction bonds that, over 40 years, would cost its property owners nearly $1 billion in taxes.
While school districts were issuing CABs, local governments – especially cities – were also engaging in fiscal flimflam.
They were sharply increasing pension benefits on the assumption that an ever-rising stock market would cover costs with no burden on taxpayers – a fiction promulgated by the California Public Employees' Retirement System.
When the assumption proved false, many cities compounded their folly by issuing bonds to pay their rising pension obligations.
City officials, who had already been fooled by CalPERS, were fooled again by smooth-talking bond underwriters that the "pension obligation bonds" would not only be cost-free but would actually make money through reinvestment of proceeds.
However, the reinvestments didn't turn out to be the bonanza that the bond promoters had promised.
The largest single bond issue that Stockton lists in its bankruptcy petition is its pension obligation bond. Ironically, it wants to force the holder of that bond, or its insurer, to take a haircut.
A big pension bond is also pushing the small city of Pacific Grove to the brink of insolvency.
State Treasurer Bill Lockyer has made reforming the school district CABs a personal crusade, denouncing "long-term balloon debt" and sponsoring legislation to curb its use.
The legislation, Assembly Bill 182, has cleared the Assembly and is moving toward Senate approval.
CABs should be reined in, but aren't Capitol politicians who echo Lockyer's criticism about shifting debt burdens to future taxpayers being a little hypocritical?
The budget that the Legislature just passed and Gov. Jerry Brown just signed ignores a deficit in the California State Teachers' Retirement System that's growing by $17 million a day and needs $4.5 billion more a year to cover.
It also ignores an ever-growing unfunded liability in state retiree health care and turns a blind eye to what everyone knows is a growing deficit in the state retirement system.
Ignoring those liabilities does exactly the same thing that CABs do – push off debt to future generations of taxpayers.
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