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|Bonds Are Bondage for Taxpayers
by Jon Coupal 8/13/08
With the state budget now six weeks late, the question remains unanswered: Will Sacramento gain control over the fiscal malfeasance that has resulted in spending dramatically outpacing the state's substantial revenues?
However, while the public's attention is drawn to the battle between those who favor more spending versus those who favor much, much more spending, it is easy to overlook the storm clouds of debt gathering on the horizon.
Unfortunately for the taxpayer, it is no longer sufficient for politicians to simply take what you have. Increasingly, they have also started proposing General Obligation bonds, so they can take money you haven't even made yet! Worse, they are taking money from our kids and grandkids who aren't born yet.
Coupal is an attorney and president of the Howard
Jarvis Taxpayers Association -- California's largest
taxpayer organization with offices in Los Angeles
and Sacramento. [go to website] [go
to Coupal index]
Traditionally, bonds are used to provide up-front money for capital infrastructure projects that should outlast the 30 year payoff of a bond. Common examples include new roads and water storage projects like reservoirs. In recent years however, bonds have been loaded up with funding for routine maintenance and other projects that meet neither of these objectives. A recent example is Proposition 84, the "Water Quality, Safety, and Supply" bond, approved in 2006. Nowhere in the $5.4 billion proposal was there any funding for new water storage projects that truly would have met California's increasing needs.
But that number only tells half the story. As I recently discussed in a previous column opposing the Proposition 1 High Speed rail bond on the November ballot, the interest on the water bond must be paid, too. The result is that a $5.4 billion bond that doesn't create any new water really is an $11 billion bond. The repayment cost for all the bonds appearing on just the November 2006 ballot is nearly $84 billion.
This obligation has first call on the state general fund, which means that before one dollar is spent on education, transportation or law enforcement, payments must be made to the owners of these bonds. The result is less money left to provide essential state services
Unfortunately, bonds have become an attractive financing option for both Democrats and Republicans. Democrats believe that the passing of bonds will allow them to fund new programs when they are unsuccessful at raising taxes to pay for them. Republicans, in the minority, often see bonds as a way to come to an agreement with Democrats, without increasing the tax burden on constituents.
So while bonds may be right for lawmakers, for taxpayers they are dead wrong. Whether in taxes or bonds, Californians are still ultimately stuck with the bill.
Currently, the debt ratio, the amount of the general fund that must be allocated to repay the state's bond debt, is at about five percent. But that is just the tip of the bond repayment iceberg. According to State Treasurer Bill Lockyer's website, only about five percent or $2 billion of the 2006 bonds have been sold, meaning most of the repayment obligation has yet to be realized. As these bonds are sold, the draw against the state general fund will be ratcheted up dramatically, and schools, law enforcement, transportation and other important state programs will suffer.
Just as egregious is the fact that these bonds were passed before the money from existing bonds had been sold. For instance, voters passed $10.3 billion of K-college school facilities bonds in 2006. Voters approved similar measures with the exact same ballot title in 2002 and 2004. A total of $5.4 billion worth of these bonds have yet to be sold four and six years later. Knowing the strain such bonds place on the General Fund, wouldn't it make sense for the Legislature to wait until those bonds voters have already approved are sold before pushing them to accept even more debt?
These fiscal obligations will haunt us for generations, and it will get worse if we are not prudent. Propositions 1, 3 and 10 on this November ballot, if approved, will add another $32 billion -- including interest -- to our already substantial debt burden. CRO
2008 Howard Jarvis Taxpayers association