The Desensitization of Debt -- An Accountant's Analysis of Propositions 51 & 53

by John Moorlach
Tuesday, August 30, 2016

In the 2016 June Primary, 81 percent of local tax and bond measures were passed by the California electorate. That, of course, would seem to make a pretty significant statement about the mood of these voters have in regards to incurring future debt and establishing additional local taxes. This November, they will have two chances to reassert fiscal prudence and make a significant statement about long-term debt.

Voters are in charge of approving certain state financing matters, as they are the ultimate oversight on issuances that will leave future generations responsible for repayment. One need only look at Puerto Rico and their recent default on $779 million of bonded debt to see the perils of issuing too many future obligations. They kept racking up the credit cards with over $70 billion in total debt, but currently cannot make even the simple maintenance payment. California voters should consider Puerto Rico’s challenges before allowing a similar scenario here at home.

The first measure, Proposition 51, would approve a $9 billion general obligation bond for school construction. The second, Proposition 53, asks voters to convert certain revenue bonds into a special category that would also require voter approval ​on all state lease revenue bond issuances of $2 billion or more. It is estimated that, if approved, Proposition 51 will add up to $500 million annually to the state budget, which has given even Governor Brown serious reservations.

In 1988, California voters approved Proposition 98, an education funding measure, which requires at least 40 percent of tax revenues to be devoted to K-12 schools and community colleges.  But Proposition 51 will not be paid out of Proposition 98 funds, putting further stress on the state’s general fund.

Nearly 90 percent of school district budgets are for personnel costs, including wages, benefits and pension contributions. Public teacher unions do not leave much room in district budgets for other critical expenses, like supplies, repairs and maintenance, and building improvements or replacements.

No matter the justification, with a general obligation bond, Californians will pay the costs through either higher taxes, diminished or cut services, or both. Yes, schools are a good area for investment, but if districts are unwilling to set funds aside, why should taxpayers be obligated to take on another new​statewide ​debt? California residents shouldn’t be punished for poor budgeting practices.  

Proposition 53 has the potential to give taxpayers additional oversight on revenue bonds. It’s origination story is fascinating, as concerned fiscal advocate, Dean Cortopassi, was frustrated enough about California’s debt and unfunded pension liability load, that he decided to sponsor a ballot measure that targeted long-term debt based on government’s current revenue streams.

Currently, revenue bonds do not need voter approval because they are repaid through some non-tax revenue stream​ by the governing bodies of the municipal agencies.  Why should the electorate be bothered to deal with specific revenue bonds, when you have elected representatives to handle these issues​? What should really concern the California electorate is the amount of debt this state, and its municipalities, have encumbered upon the taxpayers, much of it without their knowledge or consent.

To stem the tide, if passed, Proposition 53 would require voter approval of significantly large revenue bond deals, those of $2 billion or more. This should be simple enough. But, proponents of major government programs are having heart burn over this proposal. Could it be that this will slow down projects that elected leaders could normally approve and fund in a more expedited fashion? Or, is it that voters don’t really understand bond-related matters?

It may be none of the above. The real reason for the strong rebuff is that it will threaten two significant projects that are already in the works, the Delta tunnel and high speed rail. They will require revenue bonds to finance their construction. But, many doubt that the revenues projected from a bullet train will come close to forecasted projections and debt payments will end up being borne by the taxpayers.

A high passage rate of current bond measures may indicate that most voters do not make the connection that general obligation bonds puts them on the hook to pay the related principal and interest out of their taxes for up to 30 years.  Too much debt could be the downfall of the State of California. One only needs to watch Puerto Rico. Debt management is a serious voter responsibility.

With voters approving four out of five local tax and bond ballot measures, one has to ponder. Are voters unaware that the debt is paid out of their taxes? Are they bullish on the future and unafraid to pay higher taxes? Or are they just fiscally uninformed of the consequences of their votes? Regardless, they will have a chance to speak on two critical financial issues this November.

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