School bonds could trigger fiscal shock

Gillian Tett:

That has left schools in a bind. So, local financial advisers have offered some "innovative" solutions. Last year, Poway Unified, one San Diego educational district, issued some $105m worth of "capital appreciation" bonds to finance previously planned investment projects.

These are similar to zero-coupon bonds, meaning the district does not need to start repaying interest or capital until 2033.

As a result, Poway's local authority has been able to promise to keep local taxes unchanged while completing previously promised investments (building projects, computers and so on).

But, there is a big catch: to compensate for this payment deferral, these bonds are paying double-digit interest rates and cannot be redeemed early. When the bond is repaid in 2051, the total bill will be more than 10 times the initial loan.

Posted by Jim Zellmer at August 11, 2012 3:36 AM
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