Incompetence? Corruption? Shocking Financial Revelations Rock Humboldt Schools

update  12/6 North Coast Journal coverage

http://www.northcoastjournal.com/news/2012/12/06/big-borrow/

http://www.northcoastjournal.com/blogthing/2012/12/05/two-more-school-districts-facing-debt-decisions/

this is beyond class warfare….this is generational warfare.

If we want our grandchildren to curse us all we have to do is keep acting the way we are acting.

have a peaceful day,

Bill

A few observations…..

First of all, these are junk bonds. Municipal junk bonds, but still junk bonds. There is a whole category of bonds called municipal junk bonds and dealers who specialize in them. One large muni junk bond fund has a current yield of 5,8% on muni junk bonds. Mactowns School Bonds deliver almost 7% so draw your own conclusions. They are risky for both the borrower (the MUSD) and they lender (the speculators who buy junk bonds.) The risk is that the school district will default, and the bonds become worthless or more usually some amount less than 100% set by some federal bankruptcy judge. Muni junk bonds that default currently return 44% of principal. That is why thier interest rates are high to compensate for the (expected) mathematical expectation of loss on the bonds.

Who owns them? Speculators. Maybe even some pension funds who have been suckered or pressured into buying them, or have bought them for corrupt reasons. People who are hedging against something or are diversifying a large portfolio with a small amount of this risk. These last two are at least rational. All the above is true but most real people don’t buy 40 year zero coupon bonds because who would buy a bond that matures after you are dead?

Can they be recalled? If the legalities can be worked out , yes. Calculating their fair market value is trivial. Maybe the MUSD will have to pay a premium of 1% over fair market to buy them back. They have not existed long enough to have grown in value significantly. The queston is who would refinance them, since MUSD has obviously bumped up against its credit limit. Force the people who put these deals toghether to pay back their fees and commisions. In the Bernie Madoff case they call this a clawback.

It goes without saying that a vice president at Security National, a company whose sole existence is about mortgages and securitized credit and debt instruments should understand the consequences, costs and risks of issuing zero coupon bonds. For him there is no excuse and his failure to communicate this to the community is inexcusable. The same can be said for several other board members. On the other hand there might be other board members there and in other communities around California who are just “good government” types of people, and they might be Republicans or Democrats, and these people might have simply believed what “staff” told them, or more likely what “staff” omitted. These people are victims, just the same as elderly victims of con artists. This is not a left right issue. Around California there is legit outrage at this from both “liberals” and “conservatives.”

But it is more complicated than just corruption. Sure there most likely is corruption at some level. And we will hope that it will be found out and prosecuted. But it is also a symptom of a systematic problem with our economy: over-financialization. Too much of our GDP now is tied up in Wall St. derivative products that have created essentially the biggest casino on Earth (And in the history of Earth!). Not enough is tied up in truly productive assets like factories and schools, and the social safety net, which is certainly a productive investment in our common social capital.

have a peaceful day, Bill

McKinleyville CABs cost $475,000 in fees

http://humboldtherald.wordpress.com/2012/12/05/mck-usd-superintendent-on-their-bonds/#comment-186484

Its discoverable who owns the bonds

http://humboldtherald.wordpress.com/2012/12/05/mck-usd-superintendent-on-their-bonds/#comment-186485

update the real info:  http://www.royceprinting.com/jobs/FOSarchive/2011FOS/02_17_11_McKinleyvilleFOS.pdf

update MUSD responds: http://lostcoastoutpost.com/2012/dec/5/mckinleyville-union-superintendent-its-capital-app/

What was the original purpose for the sale of these CABs by the McKinleyville USD?  Have the proceeds been spent yet, and if so on what?  Were the proceeds used to roll over previous indebtedness, as in Willits?

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

“The case of the McKinleyville Union School District is especially striking. In 2008, residents of the district just barely approved Measure C, which authorized the district’s board of trustees to offer up to $14 million in bonds. (The measure required a 55 percent yes vote to pass.) Of that, the board elected to offer $4.2 million in the form of capital appreciation bonds. Since that debt was structured over a 40-year period, with interest accruing all the while, taxpayers in the district will eventually be on the hook for over 13 times that amount — a stunning $57 million in total.”

via Hank Sims

http://lostcoastoutpost.com/2012/nov/30/paying-56-million-borrow-4-million-school-district/

Some background from the local McKinleyville Press:

http://mckinleyvillepress.wordpress.com/2012/12/02/flashback-measure-c-bond-campaign-financing/

Some debate at the Humboldt Herald:

http://humboldtherald.wordpress.com/2012/12/02/will-mckinleyville-schools-really-pay-56m-to-borrow-4m/

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

more from google on capital appreciation bonds in california http://urlet.com/venture.regency and  http://urlet.com/nor.american

Willits has bond pain too  http://www.ukiahdailyjournal.com/ci_22109768/willits-exotic-school-bonds-more-questions-than-answers

Willits a cautionary tale MUST READ http://www.ukiahdailyjournal.com/ci_22062530/wusd-can-avoid-its-fiscal-cliff-by-borrowing

http://www.willitsnews.com/ci_22029017/wusd-may-be-fiscal-crisis-because-mismanaged-bond

OC Register http://www.ocregister.com/news/bonds-379193-capital-appreciation.html

Wall St. Journal  http://online.wsj.com/article/SB10001424127887324020804578149573438816136.html?mod=googlenews_wsj

Bloomberg http://www.bloomberg.com/news/2012-09-05/california-treasurer-backs-law-to-ban-costly-long-term-bo.html

Voice of San Diego http://www.voiceofsandiego.org/education/article_c3009f24-3a7d-11e2-b15d-001a4bcf887a.html

NYTimes http://www.nytimes.com/2012/08/17/business/schools-pass-debt-to-the-next-generation.html

BondBuyers Online “Unintended Consequences” http://www.bondbuyer.com/issues/121_183/california-school-districts-capital-appreciation-bonds-consequences-1044196-1.html

How do Capital Appreciation Bonds Work?  http://smallbusiness.chron.com/capital-appreciation-bond-work-39357.html

Junk Municipal Bonds http://online.wsj.com/article/SB10000872396390444900304577579512089498968.html

Zero Coupon Bond Calculator  http://www.miniwebtool.com/zero-coupon-bond-calculator/

North County Times (read the comments)  http://www.nctimes.com/business/budget-tax-collector-blasts-poway-unified-bonds-calls-for-reform/article_5dc53f49-9551-5dc3-bc4c-a7319a4f6f62.html

CABs a ticking time bomb in California http://www.joelontheroad.com/?p=8713

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: