San Diego: Financial Suicide and Education

How Poway Unified School District plans to borrow now and pay later (or hopefully never)...

THIS IS a story hardly anyone is telling, writes Bill Boner in the Daily Reckoning.

And no one wants to tell it either. Because it doesn't fit easily into any narrative that people understand. It's a problem that doesn't come with a solution.

The problem is that the leading institutions of the last few hundred years are going broke. And not just financially broke. They're also going broke philosophically... economically... and practically.

On the surface, they're going broke because they're spending too much money. But at a deeper level, they're going broke because they are no longer viable. Or, to put it another way... they've passed the point of declining marginal utility. More 'investments' in these industries are not productive. Instead, they are capital destroying...making people poorer.

Gillian Tett, writing in the weekend Financial Times, shows a bit of what is going on. It involves a school district in San Diego. But the same could be said of many different industries.

The return on educational spending declined to zero about 40 years ago. That's when additional 'investment' produced no positive result. More money was spent. Test scores and other measures of actual school system output remained the same. The additional money was wasted.

But as the authors of Why Nations Fail point out, the elites get control of the government and then use it to prevent innovations and protect their power. The corn-state senators force the nation to put ethanol in gasoline.

Military industry lobbyists insist on tanks that even the Pentagon doesn't want. And education industry lobbyists encourage local governments to keep spending – even when they don't have any money.

In the event, local school districts found it harder and harder to increase their budgets by raising taxes – perhaps especially in California. That left officials with a problem: how to continue spending money? They turned to those nice people from Goldman, JPMorgan, Barclays and other financial professionals, who showed them how to borrow now and pay later.

Which is what Poway Unified, one San Diego school district, did. It sold $105m worth of 'capital appreciation' bonds. As the name suggests, these are not bonds that give you a current yield. Instead, the foregone yield compounds... unpaid... until 2033. Then, the bonds begin paying... and finally are redeemed in 2051.

Shrewd move? Or financial suicide?

When all is said and done, the school district will pay ten times the amount of the initial loan. Which raises a few questions:

First, if it costs ten times as much as the initial loan it presumes that the educational output... the actual result of the investment... must be worth ten times the investment. How likely is that?

Second, if the generation of '33 – '51 has to pay ten times the amount invested by the school district circa 2012, how will it also pay its own educational costs?

Third, will the loan be repaid at all?

And here is where it gets interesting. Because – apart from the corrupt and suicidal institutions issuing the bonds – the situation casts some light on the attitudes of both borrowers and lenders. The former must believe that they won't ever have to pony up the full amount. The latter, on the other hand, are counting on it. One group might be right.

Both won't be.

Cut your costs to buy and own physical gold by using BullionVault...