Taxpayers must defend against broken bonds

www.dailyherald.com news story

Suburban Illinois taxpayers might have thought tax cap laws that allow school districts to take more money than voters thought they had authorized was the worst financial news along these lines. Turns out it was but the tip of a very expensive iceberg in many districts.

A Daily Herald investigative team showed last year that tax caps created to protect property owners from ever-escalating bills did not prevent taxpayers in 25 school districts from paying $263 million more than they thought they had approved.

A new investigation directed by Assistant City Editor Tim Sheil and reported by Jeff Gaunt and Emily Krone shows many are paying excessive loan costs, too. This is despite the fact that such tax-exempt bonds are backed by captive taxpayers who represent the ultimate collateral, giving districts access to low-cost financing options about which home buyers can only dream.

Since 2000, voters in 81 suburban school districts authorized taxpayers to take on $3.2 billion in debt. Sixty-five of them used "innovative" financing techniques that are illegal in many other states. As a result, taxpayers will pay back almost $6 billion, at least a billion dollars more than they should have expected to pay.

Because of the cheap loan options accorded governments, taxpayers should expect to pay back about $1.50 per $1 borrowed. That number is based on a Daily Herald analysis of typical government bonds, financed using methods recommended by national financial experts.

More than half the bond repayments we studied exceeded that amount. Using that $1.50 per $1 figure, taxpayers who approved that $3.2 billion in debt should have expected the cost of paying it back to be about $4.8 billion. In Illinois, they paid almost $6 billion.

Some districts did well, executing deals that committed taxpayers to repay only $1.30 per $1 borrowed. Others committed taxpayers to far worse, some repaying as high as $3 per $1.

How? That’s easy. Taxpayers get to authorize the amount of the loan. But public officials, financial consultants and bond houses get to arrange the financing. Our study assures us that many put maximizing available dollars well ahead of minimizing taxpayers’ costs.

Taxpayers should study closely today’s story and those that will follow. Understanding is worth the effort. The series will even provide a list of questions to ask. Look for a few specific terms that should raise red flags.

• Premiums are supposed "gifts" of money to a school district in exchange for it agreeing to pay higher interest rates. Premiums allow a district to exceed its statutory debt limit and the amount taxpayers authorized. When it’s time to pay the bill, that premium will no longer look like a gift, but rather another cost for taxpayers to pay — in the form of higher interest.

• Capital appreciation bonds allow districts to defer interest payments and keep tax rates stable today. But the interest is compounded, meaning interest is paid on interest. That increases costs and makes the loan more akin to credit card debt when it should be cheaper than a mortgage.

• Back-loading, paying less now and more later, can make sense if the intent is to defer costs until new residents in growth areas can share the burden. But it commits taxpayers to huge future debts, often without their knowledge.

In Illinois, school districts and other taxing bodies are enabled by the General Assembly, which created these opaque laws, often with the help of those who benefit most from them financially. Worse, it has failed to fix them when the real cost to taxpayers was made plain, as in the case of tax cap law.

Thus, taxpayers must defend themselves by insisting on detailed repayment plans before approving local bond debt and then making sure school officials follow through.

Taxpayers must arm themselves with knowledge and commit themselves to ending this financial abuse at the hands of those who are supposed to be representing their interests, but often don’t.