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The Tax Wolf in Bond Clothing

When people hear "bond" it's likely to conjur up postiive sentiments such as "James Bond" or "savings bond". Few people think "tax", but that's the decision confronting Californians like never before. Come November 6th, $14.4 Billion in bond measures will be on the ballot. (It's actually closer to $40 Billion as you'll see below.) Over the last decade statewide, straight tax initiatives haven't had a good passing rate, but 80% of school bonds have been approved since 2001 when laws changed, requiring only 55% approval instead of the 2/3rds super majority. School officials have spotted this easy money and are drowning citizens with a whopping 600% increase in the amount of bonds compared to the last election.

Bonds are loans government entities takes out with a promise to repay using future collected taxes. These loans typically have a payback period of 20-40 years. Repayment plans can vary much like house or auto loans. There can be introductory teaser rates, interest only or even periods of no payments like Poway, Santee and dozens of other school districts have entered into, which will see them paying back 10-20 times what they initially borrowed.

Why are school bonds so easily approved while traditional tax initiatives are voted down? Many citizens don't have the economic sophistication to understand bonds are a form of taxation. The ballot language for bond measures talks about "issuing" and "selling" bonds. Usually when products are sold there's a profit made which is a positive step for finances. Deeper in the ballot text it mentions a tax will be required, but that's surrounded by dense financial language that most gloss over. If the ballot language used more understandable borrow and loan terms, voters would better appreciate the implications of bonds.

Bonds are most often used for schools, which lends itself to a sympathetic emotional "it's for the kids" appeal. While big construction projects and essential repairs such as the ever present "leaky roofs" are often touted as the justification for bonds, enrollment at most public schools is flat or down, raising questions about whether massive school building is even necessary. Bond monies can be spent on everything except payroll and benefits. Furniture, iPads, personal computers or even routine maintenance such as paint, carpet, and light bulbs are now uses of bond funds. Districts are increasingly turning to bond money to pay for everything in the budget that isn't personnel costs, thereby freeing up money for ever growing salaries and benefits. Some have rightly criticized the strategy of borrowing money over 25 years to pay for lightbulbs and tablet computers which will only last a few years.

The true cost of bonds are routinely understated in ballot literature. For example, Proposition Z, the San Diego Unified School District bond measure is listed as a $2.8 Billion bond. Bonds are loans which means not just the principal must be paid back, but also interest. Rates vary but a conservative estimate will see double the amount borrowed in interest charges over the life of the bond. Thus, the $2.8 billion bond will require repayment of around $8 billion. Nowhere in the ballot description is this true cost mentioned which leads people to greatly under-estimate the cost of bond measures.

Bonds are the most insidious form of taxation because the entire amount is received up front with future citizenry required to repay the money years later. Bonds are the diametric opposite of living within your means. It's alluring to politician who gets to spend the largesse while they're in office and who will likely be long gone when the bulk of repayment come due. 106 different local bond initiatives will be on the upcoming CA ballot - each offering what may feel like a free ride to many - almost a gift for our children. The biggest gift for the children will be to vote "No" on loans which will saddle them with massive debt obligations in their earning years for paint, light bulbs and iPads long since worthless.

--MR

michael@michaelrobertson.com





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