Monday, September 13, 2010

Exotic Finance Bonds Presented For Controversial School Rebuild Project


'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.

4 comments:

  1. This is pretty basic economics. This is exactly how financeing works. It's the same when you take out a 30 year mortage. At the end of 30 years you have most likely paid over twice the loan amount. 30 years is more than one generation too, but few people would advocate that those who can afford it should not buy a house because the laon takes too long to pay off.

    If we do not approve a bond measure to modernize the school facilities, how will this be done? Where will the money come from? School districts all over the state have approved bonds for modernization becasue that's one of the few ways to finance a project like that.

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  2. Actually, this is more like a sub-prime mortgage with a crippling balloon payment.
    Nora Davis is acting like Al Davis---she is going to bankrupt our city to build a giant monument to herself. This new school is akin to that $576 million school LA built on the old Ambassador Hotel. Another Taj Mahal.

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  3. Emeryville voters need to know about this.

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  4. more re city council fiscal irresponsibility- i have been critical of emeryville city council for not dismissing city mgr okeefe when we have budget deficit on his watch, for refusing to allow competition for his over 200k/year salary + benefits, for refusing to allow competition as well for city atty biddles' over 200k/year salary + benefits, for refusing to remove bukowski despite convictions for ethics and pac violations..
    a sf chronicle article 9/16/10 indicates ag brown is suing city of Bell,population of some 40000 people, for several reasons, including the $787,637/year salary of their city mgr- who has resigned;

    Emeryvilles' population of approx 10,000 is one fourth that of Bell; city mgr okeefe's salary is over 200k/year and represents proportionally then about 25-27 % of the Bell city mgr's salary; that is equally outrageous, disgraceful and, per ag brown in the article,could also be deemed an "enormous and obscene" salary...

    I think ag brown should be investigating emeryville as well...hopefully someone will ask the attorney generals office to act... I also think the voters should remove the city council members who are complicit in this asap..

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