Explaining Southern California's economy

Why capital appreciation bonds aren't as bad as they sound

School Bonds - 13

Maya Sugarman/KPCC

A playground for kindergarten students under construction. It's being build in part with capital appreciation bonds.

Capital Appreciation Bonds. CABs for short. They're getting a very, very bad name and have invited some very, very bad press over the past few months. My KPCC colleague Vanessa Romo is the latest reporter to take a dive into these financial instruments, which school districts in California and other states have been using to borrow money.

Why the bad name? In exchange for making no payments on principal or interest for, in some cases, decades, school districts trying to build facilities borrow tens of millions today and can end up paying six times that when the bill comes due, well into the future, after the interest has "accreted," in the lingo of finance.

The cost of present-day, voter-approved borrowing is passed on to a completely different generation of taxpaying voters.

School districts do this when property taxes aren't adequate to fund projects and when raising taxes is politically unpalatable.