The Bond Bomb

The rapidly approaching impact that state and local debt will have on government services and taxpayers is likely to be as subtle as a suicide bomber’s belt of C-4 explosive.

Highly regarded political pundit Dan Walters has compared our state’s debt situation to both Enron "which cooked its books to fool investors and lenders" and a "Third World country whose rulers run up a mountain of debt while squandering revenues."

The Legislature’s budget analyst Mac Taylor estimates that California has more than $200 billion in liabilities that will affect the state’s financial health. And this doesn’t even include the local debt of cities counties special districts and redevelopment agencies.

The $200 billion in state debt includes about $35 billion in budget related liabilities — read this as budget tricks used to paper over the deficit; about $69 billion in bond debt that must be repaid from the general fund; and more than $100 billion in unfunded liabilities for government employee pensions and health care.

While the unfunded liabilities are likely to become our most pressing problem right now state services are being cut to meet the obligations voters created when they passed tens of billions of dollars in bonds in the last decade. Payments must be made to bond holders before one penny is spent on education transportation corrections or any other service that Californians deem important.

Many cities and counties are equally vulnerable. At the local level bonds are repaid exclusively by property owners. Voter approval of bonds places a lien usually for 30 years against property to guarantee repayment. Don’t pay your property tax and you can lose your home in a process that can take as long as five years. Fail to pay the accompanying bond obligation and your home can be seized within a year.

News from the Los Angeles school district which in the last eleven years has pushed through five bond measures totaling $20 billion provides a cautionary tale for all voters considering a local bond measure.

The LAUSD has just announced that due to the recent decline in the value of property that serves as collateral for the district’s bonds taxes to cover bond payments will have to be increased. The current rate is $123 dollars per $100000 in assessed evaluation. The schools superintendent estimates this will go to $205. For a median valued home within the district the additional cost will be about $275 on top of the nearly $400 they are already paying.

Taxpayers’ complaints are falling on deaf ears at the LAUSD headquarters. The district is shielding itself behind the "Contract Clause" of the United State Constitution. While not all contracts between private parties are constitutionally protected those for public pensions and other forms of public debt are.

The lesson here is that all bonds should be regarded by voters with suspicion. It is important to keep in mind that those who promote bond passage are not looking after those of us who will have to pay the bill usually double the face value of the bonds once interest is calculated. Local officials are required to make no more than an estimate as to how much a bond measure will cost property owners. If they are mistaken or are disingenuous in their estimates the penalty will not be borne by those officials but by property owners who are compelled to pay off the bonds.

Some bonds may be justified in situations where the cost of a bridge a fire station a school or other major bricks and mortar project is much greater than could be funded directly from general fund revenues without making significant reductions in service. However when a public entity comes back repeatedly in a few short years for more bond money that should be a major clue that already approved bond funds are being mismanaged.

There is an old saying "Fool me once shame on you. Fool me twice shame on me." Sadly in the case of the LAUSD it looks like the voters were fooled numerous times. Now we know. Let’s not be fooled again.

Jon Coupal is president of the Howard Jarvis Taxpayers Association California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.