Americans live in a consumer culture. We like to buy things. When we can’t afford to purchase something we really want, we turn to credit cards and loans, even though we end up paying more due to interest payments. Over half the population paid interest on credit cards in the past year. “Buy now – pay later”. This mindset has resulted in the plague of personal debt many families are struggling with. Unfortunately the “buy now – pay later” mentality is not limited to the individual consumer, Americans are also inclined to incur debt to fund government projects we can’t afford. But with government projects, “buy now” doesn’t necessarily mean we will have to pay later. Future generations will be on the hook instead.
In California local school districts have become some of the worst abusers of passing on debt to future generations. Since 2007 school districts in the state have used capital appreciation bonds to spend over $7 billion to fund various construction projects. In some cases interest payments alone on the debt total almost 10 times the amount borrowed.
Santa Ana Unified School District used capital appreciation bonds to borrow $35 million to build new classrooms. The tax obligation to repay the loan will not begin until the year 2026, when taxpayers will have to repay an accumulated balance of $340 million to repay the original $35 million.
Folsom Cordova Unified School District will have to repay $630 million on a $164 million bond, and an additional $514,000 bond will cost taxpayers in the district $9.1 million.
Poway Unified School District borrowed $105 million to “modernize school buildings”. For borrowing $105 million in 2011, taxpayers will end up paying investors more than $981 million by 2051. That’s almost $1 billion to repay just over $100 million borrowed. Elected officials, who want to buy what they can’t afford, and the public, who don’t want their taxes raised, are complicit in passing on huge debt to generations that aren’t even born yet.
Los Angeles County Treasurer, Mark Saladino, issued a warning to school finance officials in California about the consequences of long-term capital appreciation bonds.
“Apart from its overall cost, there’s another reason why Poway’s massive capital appreciation bond should matter to taxpayers.
In 20 years, the school district will be on the hook for its first payment towards last year’s loan. That payment will be a little more than $30 million, $24 million of which is interest.
The following year, the payment will balloon to almost $47 million. And, for the next 18 years after that, until 2051, district taxpayers will have to pay about $50 million every year towards the debt — essentially paying off their initial loan every two years for the next two decades.”
School districts will be burdened with debt and decaying infrastructure passed on to them from decisions made by people who are no longer in office, taxpayers who may have moved out of the district, and in some cases, by those who are no longer even living. Those who incur this debt get the immediate benefit of the money spent, and bond holders rake in a fortune - all at the expense of those who have the misfortune of repaying this debt for years to come.
This complete disregard for future taxpayers is shocking. It’s like having a credit card we don’t personally have to repay. We buy now – someone else pays later. Former California Governor Arnold Schwarzenegger referred to bond debt as a “gift from our future”. That debt is not a gift, its theft.
America has a spending problem that is leading to a debt problem. Spending is restrained when funds are limited. When there is no skin in the game costs are irrelevant. Responsible spending requires that we spend within our means. If Americans continue to feed their appetite for purchasing what we can’t afford, and passing the costs on to future taxpayers, this generation will be remembered for leaving a dreadful legacy.