'Zero Coupon' Bonds Raised As Magic Bullet
Emeryville Plans To Defer Debt For The Center Of Community Life
Speculation ended about how the little town of Emeryville can raise $125 million to build the Center of Community Life when sales of normal 'general obligation' bonds can only net about $45 million, given our tax base. Most of the difference will be made up with 'zero coupon' bonds, the magic bullets for over leveraged municipalities, and bond underwriters told city and school district officials Monday night these bonds can be counted on for another $50 million for a total of $95 million. Kick in about $25 million from the City's coffers and some hoped for grants from the feds and we're fully financed, ready to break ground.
The bond underwriter explained to a dumbfounded School Board the arcanery of zero coupon bond financing as a way to make up for Emeryville's fiduciary deficiencies for the expensive school/community center project. These exotic financing products are sold to investors at no interest for the first ten years, deferring payments and accumulating interest to be paid back at a much higher rate later on. Sometimes called 'discount' bonds, they are bought at a lower price than their face value, with the face value repaid at the time of maturity.
This kind of borrowing is great for buyers of the bonds but not so good for sellers in the long run. In Emeryville's case, the $95 million Measure J bond initiative slated for November 2 will net bond buyers about an extra $25 million in 10 years in interest payments with the inclusion of the zero coupon bonding . Emeryville residents however will be on the hook for more than double the total debt as compared to normal general obligation bond financing. The term of the payments has also increased and talk of a 45 year debt retirement was kicked around.
One resident who wished to remain anonymous called the financing scheme fiscal chicanery foisting a millstone around the neck of our future, a "mortgaging of the next generation". Another resident told the Tattler the total payments Emeryville will have to make will be more than a quarter billion dollars, and the cost per student will be more than $150,000.
Emeryville it seems is prepared to use up it's money generating capacity and then some. This is analogous to a 'payday loan' on a grand scale, one attendee at the meeting later said.