Outsourcing Finance

In previous articles I've talked about how Capital Appreciation bonds (CABs) allow the School District to borrow funds without making payments to the creditor (bond investor) for many years. This arrangement tries to keep the tax rate level but stretches out repayment (and raises total repayment costs). One effect is to shift tax liability away from residents leaving Piedmont and onto residents who move in with higher property assessments. For CABs, by the time we make our first payments we're also paying interest compounded for the years when no payments were made and we keep paying for compounded interest for the term of the bond. Residents who stay the full life of a CAB will always pay more in taxes (a.k.a. repayments) compared to bonds that act more like a home mortgage (CIBs).

I tried and failed to get any analysis regarding CABs from the current School Board or any other School Board candidates. Emails to the Board on this topic are outsourced to the "bond expert" KNN Public Finance.

Neither the KNN presentation of last September 11 nor the minutes of the Board meeting that day reminded anyone that the Board decided last summer to borrow $12 million and promised to pay $64 million to the bond investors (the Series E seismic bonds). KNN did mention the ratio of these two numbers being 5.33 – but who noticed we just borrowed money charging 433% interest over 30 years with a CAB? KNN never mentioned compound interest let alone quantified it. KNN also doesn't discuss the tax shifting nature of CABs.

I discovered these aspects by reverse engineering the calculations in the KNN presentations using public information on CABs. I ended up with a bond comparison tool on my website customizable to your assessed valuation.

If an elected Board member just "did the math" on behalf of voters and taxpayers, our disclosures would be easier to understand while giving a more complete picture. The final analysis should be much easier to understand than the work that went into it. This underscores the importance electing "financial experts" on the Board who will do this math in addition to consulting investment bankers or subsidiaries of an investment bank.



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