February 20, 2004

Commentary

Bonds Mean Bondage for Taxpayers

By Jon Coupal

To vote intelligently, voters need to know the difference between state and local bonds.

For years in California, bonds have been on two tracks. The state constitution of 1879 required that local general obligation bonds receive a two-thirds approval by voters. The two-thirds vote leveled the playing field because property owners — and only property owners — are responsible for the repayment of such bonds. In addition to an automatic property tax increase, passage of these local bonds also places a lien on property, usually for 30 years, to guarantee repayment. The two-thirds vote was intended to prevent those with no obligation to pay the increased taxes from overwhelming the property owners who would be stuck with the entire bill.

In 2000, a handful of Silicon Valley multi-millionaires and billionaires placed Proposition 39 on the ballot, which lowered the vote for local school bonds only, to 55 percent. With the success of this measure, a 55 percent vote is the new standard that those favoring additional spending and higher taxes are promoting in all areas that traditionally required a two-thirds vote. Proposition 56 on the March ballot would lower Proposition 13’s two-thirds vote mandate for higher state taxes to an easily attainable 55 percent of the Legislature. Other local bonds continue to require a two-thirds vote, for now.

State bonds are different. These appear on every Californian’s ballot and require only a simple majority for passage. They are not like local bonds, because they are repaid out of the state’s general fund. The two major sources of revenue for the general fund are sales and income taxes, which are more broad based than property taxes. Also, unlike local bonds, they do not automatically trigger a tax increase. Of course, these bonds are not free, because they have first call on the state general fund. This leaves less money available for other services.

Confusion over the approval threshold required for these two classes of bonds may have hurt taxpayers in 2000 when Proposition 39 was on the ballot. A post-election review shows that many who voted for a 55 percent requirement for local bonds thought they were making it harder, not easier, to approve new debt.

Prior to the passage of Proposition 39, Howard Jarvis Taxpayers Association (HJTA) generally deferred to local voters on local bonds. As long as the two-thirds vote was secure, local citizens were the best judges for new local bonds. However, the Jarvis organization campaigned vigorously against the change in the two-thirds vote. Now that Proposition 39 is law and local school bonds require the virtually automatic 55 percent, HJTA has recommended a no vote on all local bonds not requiring a two-thirds vote — a threshold that school officials still have the option of using.

On state bonds, before making a recommendation, taxpayers have tended to look at the condition of the economy, the state budget, and the debt ratio — the percentage of the state general fund that must be obligated to bond repayment. This is why Proposition 55, a $12.3 billion school bond on the March ballot is such a cause for concern.

While state officials are claiming they don’t have enough money to make ends meet, many of them are supporting another huge state school bond that will draw money away from essential services.

Just 16 months ago, voters approved Proposition 47 — a $13.05 billion state school bond. Perhaps they overlooked the additional burden this bond places on the state budget. Voters won’t be able to use the same excuse again, now that they are being asked to approve nearly the same amount again. At a time when the economy is uncertain, the state is unable to balance its books, and taxpayers are already obligated to pay off $73 billion in previously approved debt, it looks like the only ones that would benefit from the new bond will be the special interests involved in the school construction industry and bond brokers.

Another bond on the March ballot, Proposition 57, deserves careful scrutiny. At first glance, it looks like just another addition to public debt, in this case, to fund state operating expenses. However, it is in fact an attempt to consolidate debt that was surreptitiously undertaken by the Gray Davis administration and his allies in the Legislature. Last summer, Davis attempted to minimize the budget crisis in the minds of the public by working out a scheme to borrow money without going to the voters. Had the voters been consulted in advance, there is little doubt the voters would have said no, and who could blame them?

However, when voters go to the polls on March 2, the state will have been operating on these funds for almost 8 months. We will be voting on Proposition 57 because our new governor believes the public should have the final say. Also, the hope is that Proposition 57 would allow a “soft landing” out of the current budget crisis with neither massive cuts nor tax increases.

Additionally, Proposition 57 is “double joined” with Proposition 58 requiring a balanced budget in future years. This means that Proposition 57 must pass in order for the balanced budget requirement to be effective. While Proposition 58 is not the strong spending limit that taxpayers crave, Proposition 58 would prohibit the state’s use of debt to fund future budgets.

Proposition 57 is an opportunity to put the irresponsibility of the Gray Davis era behind us. Is it perfect? Perhaps not. But the new leadership in Sacramento has already cut the dreaded car tax and adhered to its promise of no new taxes hikes. Proposition 57 is a big piece of the map to lead us out of the budgetary wilderness.

Jon Coupal is an attorney and president of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization with offices in Los Angeles and Sacramento.

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