Voting for Bonds: Why California Propositions 1A Through 1E and 84 Make Sense

Pete, consider these words from Jon Coupal of the Howard Jarvis Taxpayers Association:

There was a popular song a few years ago called, "Money for Nothing." While the tune was a satire on the vast amounts paid to successful rock stars, the title could just as easily apply to many voters' attitudes toward bonds.

As we approach the November election with over $41 billion in bonds on the statewide ballot, and additional billions being considered for local jurisdictions, now is a good time to brush up on the significance of bonds, their true costs, and how they are repaid by taxpayers.

The California Constitution gives the electorate the right to vote on state and local general obligation bonds. However, the rules for passage are different for each category.

State bonds, commonly used for infrastructure improvements like highways and to provide additional funding for school construction, require a simple majority vote of the statewide electorate for approval. These bonds do not trigger a tax increase, but are repaid from the state's general fund into which virtually everyone pays through sales and income taxes.

Although there is at least the appearance of fairness to a system that allows a majority vote to approve bonds that are repaid by everyone, these bonds are hardly a perfect means to finance long term capital improvements.

First, these bonds are more expensive than many voters imagine. Most are aware that bonds mean debt that must be repaid, but just like when we see that must-have item that we charge to a credit card, it is easy to overlook the impact of compounding interest. Since most government bonds are issued with a 30 year payback, a good estimate of the actual cost to taxpayers is to double the face amount of the bond. Additionally, when the state takes on a lot of debt, bond buyers demand higher interest rates to compensate themselves for the perceived additional risk. This makes the bonds even more expensive.

Second, since bond repayment has first call on the general fund, fewer dollars are available for the ongoing operation of state government. In other words, the amount of debt we must pay from the general fund means less money to finance other government programs or even for infrastructure on a "pay-as-you-go" basis where taxpayers get, by far, more bang for their buck.

The second category of bonds on which we vote is local general obligation bonds used for local infrastructure projects, libraries and schools. Although everyone can vote on these bonds, property owners are singled out as solely responsible for the repayment of principal and interest. Both commercial and residential property owners see a tax increase when these bonds are approved, but the hardest hit are the single-family homeowners who, unlike businesses that can pass additional costs on to customers, must pay the entire
amount.

Wisely, the drafters of the California Constitution of 1879 recognized the inherent unfairness of letting everyone vote on a tax that would be placed on a minority of the community. To level the playing field, they required a two-thirds vote for passage of these local general obligation bonds under the belief that if passed with a higher vote threshold, it would be a reflection of a strong community consensus, including the support of those who would be paying the principle and interest bills.

This system served the state well for over a century. Then, in 2000, Netflix CEO, Reed Hastings -- author of the Proposition 88 property tax increase on the November ballot -- and his merry band of billionaires bankrolled the misleading campaign that passed
Proposition 39, which lowered the vote for local school bonds to 55 percent. The measure has virtually guaranteed that all school bonds pass, regardless of merit, and has saddled property owners with tens of billions of dollars in bond debt.

So, for the upcoming election, a large percentage of Californians will confront bond proposals that require a majority vote, a 55 percent vote, and a two-thirds vote.

Although this may seem complex there is a simpler way to classify bonds. Those that are a necessary evil and those that are an unnecessary evil.

The "necessary evil" bonds are those that build something like a bridge or a sewage treatment plant that would be very difficult to fund immediately out of existing revenue. Although paying for the infrastructure improvement means going into debt, the debt may be justified in that it allows government to continue to provide vital services that would be curtailed if an immediate cash outlay were required.

"Unnecessary evil" bonds are those like some we have seen in recent years marketed as measures to help the environment. However, closer examination reveals that some of the backers of these bonds personally benefit because, if the bonds are approved by the voters, the public becomes obligated to buy property the proponents own at inflated prices.

Unfortunately, some bonds contain both flimflam and worthwhile projects, which make it even more difficult for voters to weigh their merits.

Ultimately, Californians voters should approach all bonds proposals with extreme caution and skepticism. The debt bonds create is an irreversible obligation that continues for decades and, yes, our kids will be paying for our folly if we make poor choices. For that reason, bonds should not be approved unless the need is proven beyond a reasonable doubt.

The heightened level of scrutiny that should, as a matter of policy, be applied to all proposals to commit the public treasury for years into the future leaves many voters in a quandary about this November’s ballot. Many have asked fiscally conservative organizations and advocates about how they should vote.

Here is our take. In large part, the extent of this monstrous bond load on the coming ballot not related to actual concerns for the welfare of the state but, rather, because of political expediency -- those favoring one bond agree to support the bond desires of others in return for their support. Needless to say, bond brokers and spending interests are thrilled.

Taxpayers might have been somewhat mollified if the bonds proposed by the governor and the Legislature had been accompanied by reforms such as an ongoing budget category requirement – pay as you go – for some infrastructure needs. Unfortunately our representatives could not agree on any reforms. Still, the infrastructure requirements of the state are such that it is difficult to put off transportation and levee repair -- matters having a direct bearing on public safety.

So, taxpayers find themselves in the position of a man in the desert who is asked to pay $20 for a glass of water. Does he need the water? Yes. Is he being overcharged? Yes, and so are we.

As for those bonds for education and housing, there is no pressing need that cannot be addressed in future election cycles. Taxpayers have been particularly generous to education, approving nearly $30 billion in state education bonds and more than $40 billion in local school bonds over the last five years. Let’s pay down some existing debt before we reconsider more education bonds and let’s address the housing crisis the best way possible – reduce government regulations and let market forces work their magic. More debt is not the answer.

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