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CABs Tantamount to Intergenerational Theft

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Cash-strapped and tax-adverse local governments in Texas are coming to rely more heavily on exotic public financing tools in order to help them secure money today at the expense of tomorrow’s taxpayers.

This type of intergenerational theft was the focus of Chuck DeVore’s piece published online earlier this week in the Austin American-Statesman. In the article, DeVore singles out capital appreciation bonds, or CABs, as being particularly insidious as they delay principal and interest payments for 20 years, resulting in yet-to-be born taxpayers owing as much as $10 for every $1 borrowed.

While many local governments are guilty of using this form of financing to get them through today’s tough times, there are some local governments that have seemingly become addicted to this kind of debt, such as Leander ISD.

When the recession hit, Leander ISD discovered that it had borrowed too much and overbuilt. Instead of looking for ways to cut back their expenses, they chose to refinance their debt using $389 million in CABs with payments delayed for 20 years “so as to preserve cash today and not ask local taxpayers to shoulder the burden of the school board’s overborrowing.”

As a consequence, “Leander ISD will end up paying back about $9 for every $1 borrowed.”

Aside from an outright ban on this kind of public financing—a measure that the Foundation fully supports—the Legislature should also consider steps to increase local government debt transparency, so that taxpayers are more informed about the debts they or their children are on the hook for.