The public is being lied to every election day – right in front of their faces. The public is being led to believe bond debt financing is not the same as taxation. So untrue. Bonds are the most expensive form of taxation. Taxes are taxes and Bonds are taxes with interest, fees and commissions. If you prefer, we can use the word “burden” to describe taxes and bonds. Someone is being burdened in either case.
We live in a country where dictionaries are becoming the most underutilized publication known to humanity. We keep making words mean what we want them to mean not what they actually mean. We make decisions to build things but don’t want to pay taxes to finance the building. Yet very creative private-sector finance gurus are constantly inventing “no-money-down” financing schemes that are laden with interest, fees and commissions benefitting no one other than their firms and the investors, (which in some cases are firms loosely affiliated with the same sales people). Just to be clear, many of these schemes were developed for private-sector use because the private-sector is comfortable with increase risk for increased reward. However the incredible risk-assumption concept is not the public-sector model. I do not fault the investors. They put up their hard earned cash and are entitled to a return on their investment. I just question why the solutions presented today almost always exclusively benefit the investors over the taxpayers. I believe the slick bond financing salespeople understand they make no commissions or fees on tax increases but make BANK on bond financing schemes. This must be why today, every good idea is a bond financed idea right out the chute.
Introducing the concept of creative bond financing for every new project.
I have looked at the last decade of elections with ballot propositions and discovered a troubling reality. While requests for tax increases tend fail over 80% of the time, requests for bonds pass over 80% of the time. Bond are almost always sold as easy money, hassle free and a chance to get exactly what you want right away, while letting your kids pay it back over time. The public is told that bonds are not taxes. The lie the public is being told is that bond financing is not the same as a tax. The public is told that bond payments will not affect or come out of the general fund that pays for libraries, public safety, streets and roads. Yet the truth is bond financing is much more expensive than a tax increase. The truth is bond debt is secured by the general fund and if revenues come in short, the general fund is impacted, services are slashed, and/or taxes/fees must be raised. Where do those statements appear in the ballot language? I promise you the risk statements are never large font sizes in the bond summary language or in the first paragraph of the ballot.
My dad taught me to pay for anything I wanted with cash. If I did not have enough cash on hand to pay for it, I did not need it. I used lay-away or cash to buy what I needed and lived debt-free. I realized his philosophy kept me out of debt until I was 20 years old and wanted to buy a new car. I worked out a deal with a finance company and borrowed $20,000 for a $17,000 car. Ah, the magic of interest. Heck, I even paid interest on the sales tax. Brilliant. Now I knew debt and interest.
I also couldn’t use my dad’s good wisdom on my first home. In that instance, by the time I was scheduled to pay off my new 30 year mortgage, I would have given the bank the original value of my purchase plus $250,000 in interest. Between paying a portion of the principal and interest each month, I had a home and someone else made a mint. This is what happens when you buy something that you do not have the cash for.
I am not naive enough to believe large public-spending projects are always cash-financed and may have to be financed over periods longer than a month or 29 years. I just do not believe the public ever knows there are other options to incurring massive interest, fee and commission related debt in their quest to build that important project.
Now the public is discovering that when you finance something you want and you do not have the cash to pay for it, you’re going to pay a mint while you are enriching everyone except yourself. Here is what I mean. Say your community really wants to invest in building a school. Everyone wants it. Today the measure goes on the ballot, gets approved, and a bond oversight committee makes sure no one steals or misappropriates the bond money and the school gets built. Today we would call this transaction a success. Yet what was missed was the answer to this question? Why did we pay 3-4 times more for this school than we should have? Why did we single-handedly enrich institutional investors located outside our neighborhood by paying millions in interest, fees and commissions?
I can’t change the past but let me give you another way to approach voters for publicly-financed projects:
In the future there should be three votes for any publicly funded project.
The First vote should be:
a.) Does the public believe this project -valued at $x million before finance costs- is important and necessary and should go forward?
If the answer is yes, there would be two more questions:
b.) Does the public agree to finance this project -valued at $million – through a temporary no-interest tax increase of $% – that will sunset once the initial project value had been satisfied?
c.) Does the public agree to finance this project – valued at $million – through a bond finance program that will add $x in interest/finance debt to the initial project value for a period of X years until fully paid?
The advantage of this concept is it pulls the covers off of the mystery of bond financing as an easier way to finance and build because you will be disclosing the ultimate “all-in” cost up-front for the first time. As I have said, the public first must agree that they want the project to go forward. Then the public intelligently approves the detail of the financing vehicle. The public now sees the value of one option over the other. One method raises the specific amount needed for the public to get exactly what they want for exactly what it costs and then sunsets. The other method adds millions in commissions, fees and interest on top of the value of the project cost and therefore adds debt.
If it feels better, we call call that extra debt-burden an additional TAX on top of the project cost. Bond debt is the most expensive form of a tax burden.
Very few of us have enough loose change in our sofa to pay for a new $20 million school but I assure you we do not have enough money to pay $50,000,000 for a $20,000,000 school, which is what these projects cost the public when they are debt-financed versus tax-financed.
There is a school district in San Diego County that asked the public to approve a bond finance plan to borrow $105,000,000 at a cost of $1 billion over 40 years. They even invented a way to avoid making any payments for the first 20 years. What!! Of course the public was never told the project would require over $800 million in interest and fees. All they were told was this: “This bond will raise $130 million to refurbish 25 schools/build another and will not increase your taxes”. The bond passed a few years ago and now the word is out and the public is now fully aware of the details. News organization are shining that great disinfectant – light of day – on the debt-finance plan. Needless to say, someone is going to get fired. Personally, I hope it is the creative bond finance sales person that invented these negative amortization vehicles and foisted them onto the public-sector. I don’t want to let the public off-the-hook for agreeing to a deal that only the tooth-fairy might offer. Their punishment reveals itself in their bill from year 20 to ear 40. However, I assure you there will not be another bond measure passed in that city for the next decade!
Also, the next time someone presents you with the opportunity to create a 40 year bond or debt instrument, please spray them with water because they must be in heat! 40 years of interest cost is seriously crazy and terrible fiscal management under any circumstance because that length of debt will almost always exceed the useful life of the assets the debt covers. For example, many vehicle loan terms rarely exceed the warranty term of the vehicle because you will be putting maintenance money in after the warranty runs out. No one wants to be paying to fix a car while they are still paying off the original loan. Home loans have 15, 20 and 30 year terms -never 40 or 50 years. Large public bond debt financed over 40 years is fiscally imprudent in every case.
Now, I realize people hate paying higher taxes and the bar is very high for the passage of tax increases. But you can’t tell me just because the public can be fooled into approving bond financing – which will cost them 3 times more for the same thing than it would with a straight-up tax – is a better deal for the public? The public deserves to be presented the “smartest” way to fund their priorities – not just the easiest.
My problem is this: the public is almost never given the option to make the intelligent funding choice because they are almost never given the full details or full range of choice. This is wrong, unfair, and dishonest.
Bond are taxes, my friend. It’s time to get smart and do what is best for the public by being much more honest and open. The model audit rule should insist on “the whole truth and nothing but the truth” as the operative method of public communication in the future. Let the public see the all-in cost of their options before they vote to incur $ millions in new debt.