Across Pennsylvania about a decade ago, school board directors bought into complex financial deals called “swaptions” sold by Wall Street bankers. The gamble on swaption contracts turned out to be a very costly mistake in most cases. Seeing school boards go for short-term gains without understanding the risks became a cautionary story, or should have been.

In those deals, Wall Street investment bankers sold school boards, whose members are generally unfamiliar with complex financial contracts, on deals that sounded too good to be true. The bankers said school boards simply needed to sign off on a bet on interest rate changes and in return, the school would be paid upfront cash, often hundreds of thousands of dollars.

Desperate for money and knowing voters don’t like property tax increases, school boards signed up. But most of the deals were, in fact, too good to be true. The upfront payments were usually dwarfed a few years later by the millions of dollars spent to pay off the banks to get out of deals that had gone bad.

Swaptions were an example of elected officials making stupid longer-term decisions for some short-term gain.

Not surprisingly, swaption contracts are not the only example of elected officials making dumb financial decisions, that ultimately cost taxpayers.

The latest example is something Wall Street financiers call capital appreciation bonds. The idea behind a CAB is that no interest payments are made on the loan for 20, 30 or more years. Making no payments for decades is good for cash flow, but it comes at a price, a big price when the bill comes due.

An op-ed piece in the New York Times this week described how the 1998 Tobacco Master Settlement Agreement led some states to make serious financial blunders involving CABs.

While the tobacco settlement provided 46 states a stream of millions of dollars a year in perpetuity, that annual cash flow was not enough for some states. Nine states decided to sell the rights to all future payments for upfront money. To do that, they agreed to deals put together by Wall Street banks, which issued bonds with no annual interest payments for up to 50 years.

Getting a bigger pile of upfront cash looked good to the politicians signing off on the deal. But they look like terrible deals for taxpayers. To make matters worse, when the debt comes due, the politicians resposible will be retired or dead. There will be no accountability.

The Times article said that the nine states issued $22 billion in bonds, but received just $573 million in upfront cash. The steep discount reflected the high risk of the bonds not being repaid. The article noted that with 50 years of compound interest and no payments, the final repayment tab would be $67 billion.

To illustrate, the op-ed author wrote, “Imagine borrowing $200,000 to buy a house today and your children having to pay back $234 million in 40 or 50 years. That’s the scale of this problem.”

An extreme example of the true cost of capital appreciation bonds was found in Michigan’s deal, where the final repayment total will be 1,800 times the amount borrowed.

As with the risky swaption deals that went bad, taxpayers will be left footing the bill for CABs. Seeing the dangers of these no-interest deals, California passed legislation limiting the number of years of no interest payments in a CAB.

A grand jury report looking into capital appreciation bonds in California cited one example that motivated the legislative limits on CABs. In that case, the West Contra Costa school district issued $2.5 million in CAB bonds in 2010. The repayment plan requires no annual interest payments, but explodes in 2034 with a repayment cost of $33.8 million.

The Sacramento Bee newspaper described another example of the shortsightedness of capital appreciation bonds, noting that the Folsom Cordova school district used a CAB deal to “finance a building that cost $514,000 to build and will now cost $9.1 million to repay.”

As with swaptions, elected officials doing CAB deals made a dumb decision for a short-term gain. They either didn’t understand the risks or didn’t care, assuming they would be gone when the huge repayment came due decades later. The only people making out with CAB deals, and swaptions, were the investment bankers. And the price for elected officials’ mistakes is paid by taxpayers in both cases.