Cory, I’m not sure what the lesson here is. School boards shouldn’t get too sophisticated with their finances because the math is hard? Or, never try this on the eve of a general financial meltdown?
No, don’t trust Wall St. They don’t have anyone’s interests in mind but they’re own. Wall St. knows this and so should you.
It’s time to dump these Wall St. guys. They don’t serve any public good.
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Whereas investors who are financially sophisticated can lose billions of other people’s money. (See: Bernie Madoff, Enron, Lehman Brothers…)
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I agree, but tell that to all the neo-libertarians out there who think we SHOULD let the free market run everything…
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With an open mind, I would like to hear your ideas of how to raise money for large capital projects, like building and maintaining schools, while specifically excluding the “Wall St. guys”.
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The same lessons as local councils in the UK learned: Don’t let anyone talk you into seeking out the maximum potential return on your investment regardless of the risk, and if it sounds too good to be true then it probably is.
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the interest on municipal bonds isn’t taxable. (iirc, I’m not a tax attorney).
I don’t like bankers any more than the next guy, but isn’t this story really that Chicago schools lost money in financial markets during the financial turmoil of 2008 (same as everyone else)?
I guess this is another case of banks having the hubris of assuming that markets would not collapse, and it’s maybe greedy of everyone to try to get extra money by taking some extra risks, but It’s a little hard to assume that Chicago “should have known better” when almost everyone in the country in any marktes lost money during that period (and most more than 10%). Many people have made up their losses as the markets settled down, and I’m sure that Chicago (and probably Chicago schools) have taken advantage of low interest rates in various ways over the last 12 years.
Looking at the budget, the major expense is pension obligations. Couple that with funding levels that are arguably inadequete, and what you have is a budget that uses every trick in the book. Combining the operating budget with the Capital budget would likely add more stress.
Everyone needs to remember this little lesson once the next Congress starts making serious noise about turning-over Social Security to Wall Street.
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Yes, good lesson, but we were talking about minimizing the cost of borrowing $1 billion, using standard financial tools for that scale of transaction, not hopping on some too-good-to-be-true investment. According to the original post, the Chicago school board could, in hindsight, have done better by issuing a fixed rate bond, instead of a floating rate bond with a swap.
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yeah, but those swaps were sold as “the low rates of an adjustable rate bond with the security and ease of a fixed rate bond…” At which point somebody should have said “wait…”
Financial engineering promises a free lunch. Sometimes you get it, sometimes you don’t.
By taking it out of general tax revenue.
The idea of issuing bonds for ongoing municipal expenses is bonkers.
All the money raised in bond issues – and the ensuing interest – will be repaid out of taxes. The difference between a direct tax-raise and a bond-issue is that:
a) Rich people pay comparatively little tax, and not raising the money out of a tax-hike preserves that situation (since the poor generally can’t pay any more tax)
b) Rich people buy bonds – meaning that this is a way to take tax from poor people and give it to rich people
The right answer is to raise the operational school budget from general taxes (as many school boards do, including boards in places like NYC), instead of raising it through debt instruments that always cost more in the long run, and transfer funds from poorer people to richer people.
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in an ideal world…
The idea of issuing bonds for ongoing municipal expenses is bonkers.
Yes. Was that the case here? Or was it for capital expenses (building or repairing schools etc.)?
Rich people buy bonds
Yes. So do pensions funds. But are you really saying bonds are bad? I think public debt is a vitally important (if double edged) tool.
The right answer is to raise the operational school budget from general taxes
Agreed on operational budget. Again, was that the case here? I didn’t see in the original article, and so assumed it was for the capital budget. Public debt to fund public capital projects is necessary and serves the public good.
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That and I will also add the point of issuing bonds to fund capital projects is comparable to borrowing money to purchase an automobile. Both have an immediate need, required funds that exceed operational budget, and is what people typically do.
It’s not a problem as long as the current budget allows the added expense and the amount borrowed is expect to be fully paid off. The problem was that bad advice was taken and no examination to what happens to rates over time in the long run. The added expense grew unexpectedly higher–thus making harder to pay off.
It’s interesting you say this, because what came to mind for me immediately was how much this reminded me of the parking fiasco: the City of Chicago asked a large local financial firm to do the due diligence on a private company’s offer to pay a certain number of millions of dollars immediately in exchange for the right to charge for street parking for a significant number of years, with the city continuing to be able to pocket the parking fines as part of the deal. Some of the concessions included allowing them to put up meters on more streets and further into the residential areas off of retail streets, as well as increasing the hours and days the meters would be operational.
Once the ink was dry on the deal, it became quickly apparent that the deal should have been for many more millions of dollars to cover the real - much higher than erroneously estimated - loss of parking revenue. That’s lost revenue for the city which taxpayers will have to make up.
The reason I mention this is because the firm used for due diligence is also the only local firm I was involved with professionally which lost significant money for their clients during the financial turmoil of 2008. And the reason they lost so much money is because they’re proudly “conservative”, which means they didn’t plan carefully for a potential downturn, didn’t recognize the signs, and reacted to the problem by selling a significant percentage of their portfolio at the bottom of the market instead of patiently waiting a year or two (or even a month or two).
In other words, no matter how many times the Chicago School is proven wrong, conservative financiers keep using it as their road map.
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Funny, isn’t it, how some words can come to mean the complete opposite of what they used to?
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why doesn’t the state or federal government itself have a bank in order to provide these kinds of loans? i think nebraska is the one state that still does, whereas all of the other public banks were shutdown long ago.
there’s literally no shield between public money and private finance, and no responsibility and little culpability of private finance to public interests.
i think it’s hard to see it as any thing other than a system deliberately rigged to shift public money to financiers.
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