School Tricks

In my recent item about the Herald-News' lack of coverage, I referred to schools abusing the power to issue bonds after winning a referendum. This issue finally got some coverage in the Herald-News in the past few days thanks to two guest columns concerning the upcoming Lockport Township High School (LTHS) referendum to build a new high school.

The basis of how schools borrow more than they asked for at referendum is that instead of issuing $100 million of bonds at 5% interest and getting $100 million to spend; they issue $100 million of bonds at 8% interest and get $120 million to spend. The extra $20 million is called a bonus by the company that purchases the bonds. This is not some nice gift or really even a bonus. From the buyers perspective $100 million at 8% is the same at $120 million at 5%. They are just inflating the interest rate and then paying more than the face value of the bonds. To the buyers it is just semantics. But, to the school, the difference is that they have borrowing limits imposed by state law. These bonuses do not count towards their borrowing limits. This seems highly dishonest to me.

Beyond being dishonest though, it is financially irresponsible. The borrowing limit is in place because the State of Illinois does not want local governments to be able to borrow away all the property of their citizens. When a school, city, or county borrows money, it is your property that is the collateral. The bond owner may not be able to come and take your house, but they can force the taxing body to raise taxes to pay the debt; and if you cannot pay those taxes your home can be taken by the government. A school district that issues bonds with bonuses attached is being irresponsible with the finances of its citizens. Any government that would do this is irresponsible, however so far this type of financing scheme has been limited to schools.

LTHS has publicly stated that they will be issuing bonds with bonuses if the referendum passes and they have stated that they are doing so with the purpose of getting around their borrowing limit. They also have stated that the bonds will be back loaded so that most of the cost are postponed and payments get larger in future years. Their reasoning for this is that in the future there will be more taxpayers and property values will have gone up, thereby increasing their tax revenues. This sounds a lot like the logic used by people a couple years ago when they bought homes using interest only loans. They figured that by the time the payments went up in the future, they would be making more money and their homes would be more valuable. Many of those people are now experiencing foreclosure and losing their homes. Now, our schools want to take us all down this same road or financial uncertainty and gambling on the future.

I commend LTHS for being honest about issuing debt that is back loaded and manipulating their way around their borrowing limit. But, telling someone that you are planning to rob them before grabbing their wallet does not make you any less of a thief.