Bonded

Written by: 
Aubrey Freedman

Since outright taxation, even for statists, has its limitations, bond measures have become the preferred method for politicians and vested interests to increase government spending, especially here in California. Since California voters passed Prop 39 in 2000 lowering the threshold for passage from 2/3 to 55% for school bonds, the approval rate for such bonds has soared to 80%. A report from the Little Hoover Commission, a “good government” independent state oversight agency, in 2009 pointed out the increasing problem of more and more long-term debt being approved both statewide and locally. It revisited the issue last year as the problem seems to have worsened as few of their recommendations from 2009 were adopted. As the Commission noted last year, “California voters have been exceedingly supportive of bond measures. In the past decade, voters have approved more than $70 billion in statewide bond financing. They have been equally supportive of local bonds, with some $138 billion in local school facilities bonds enacted since voters reduced the threshold for approving these measures in 2000…But as Californians have put more and more on the tab, a day of reckoning will arrive. When the next recession hits and revenues fall, the payment on the debt remains.” As the Commission noted in both reports, bonds are a long-term commitment to repay debt, which goes to the front of the line when it comes to decisions made each year as to how governments spend taxpayer dollars. These general obligation bonds are guaranteed by the California Constitution and take priority over all government expenses beyond education, which has locked-in funding from Prop 98.

To put things in perspective, the voters approved $74 billion in debt from 44 bond measures from 1974-2004, but from 2006-2016, they approved approximately $71 billion more from 10 bond measures. The debt almost doubled in just one decade. California’s debt is higher than most large-population states. California’s ranks third highest of the 10 most populated states as measured by debt per capita, debt as a percentage of personal income, and debt as a percentage of GDP. When your state ranks just behind Illinois and New York, that’s a dubious honor indeed.

School bonds deserve special mention as a huge part of the problem as voters overwhelmingly approve anything that mentions “children.” The prohibition on using public funds for consultants for voter “research” that is subsequently used in election campaigns to pass the bonds is routinely skirted as there is a legal gray area between what is viewed as “information” and “partisan campaigning.” Education Code Section 7054 states, “No school district or community college district funds, services, supplies, or equipment shall be used for the purpose of urging the support or defeat of any ballot measure.” That’s clear enough. But California Attorney General Bill Lockyer ruled in 2005 that it is legal for public funds to be used for consultants to conduct surveys and establish focus groups to assess support or opposition to a bond measure, the public’s awareness of the district’s financial needs, and the overall feasibility of developing a bond measure that could pass. He ruled that all this information gathering is a fair and impartial presentation of relevant facts to aid the voters to reach an informed judgement and is not partisan. Bull—obviously the consultants can use all this taxpayer money to determine the best words and arguments to pass the bond, as they definitely weren’t hired by the school bureaucrats to be “impartial.” One consulting firm that worked on “surveys” before the election even noted, “A finding of measurable strong support portrays a bond measure as something already broadly supported by the community, thus convincing undecided individuals and organizations that the bond measure is worthy of support and discouraging individuals and organizations that might be inclined to oppose it.” In essence the taxpayers pay the consultants to pull the wool over their eyes. Since 18 years of history has now produced an 80% chance of school bonds passing at the 55% voter approval threshold, isn’t it rather obvious the “surveys” aren’t really needed anymore and should no longer be funded by taxpayers? Another way to get around the law is funding campaigns in support of the bonds by companies likely to earn money from the proceeds of the bond sales. Community college foundations often contribute to bond campaigns; the law allows them to spend up to 20% of their disbursements for influencing legislation. In 2004 there was a scandal in Placer County when the college president was accused of making about 40 presentations to groups of perspective donors (including architects and engineering firms) advising them to donate to the foundation, rather than the bond campaign committee, to hide their identities as contributors. Further evidence of the cronyism involved in passing school bonds is the “pay-to-play” hanky panky where leading financial firms donate huge sums of money to successful bond measures. California is noted for firms donating to the campaigns and then not-quite-so-incidentally being hired by the school districts to sell the bonds for a profit. Even a minor reform to remedy this abuse in 2009 by having the Municipal Securities Rulemaking Board (MSRB) prohibit brokers from doing business with government entities if those brokers contributed to bond measure campaigns failed when the MSRB declined to change the rule, citing constitutional First Amendment issues. Then there’s the unethical issue of municipal finance firms supplying pre-election services for “free,” getting awarded the contract after the school bond passes, and then inflating their legitimate fees the district pays in connection with the bond sale to cover their pre-election costs out of the proceeds raised from the bond sale. It’s quite a racket for the insiders. Lastly, there’s the infamous Coalition for Adequate School Housing (C.A.S.H.), an unholy alliance of school districts, county offices, architects, attorneys, consultants, construction managers, financial institutions, modular building manufacturers, contractors, developers, and others in the school facilities industry, that has sponsored or supported over $52 billion in statewide school bonds. This organization lives and breathes school bonds and will fight to the death any possible reform to school bond passage. Its website proudly and shamelessly notes that it successfully fought bills that sought to make school districts supply greater specificity of projects to be funded by bonds, match the term of their bonds with the economic life of the item being purchased, and (heaven forbid) require additional information about tax rate increases on the ballot measure label. Clearly, when it comes to school bonds, it’s a completely stacked game, and we’re amazed if any school bond doesn’t get passed by the voters.

Yet another disturbing piece of the bond measure puzzle is the illusion of transparency and legitimacy that bond oversight committees bring to the passing of bonds. These committees were established by an act of the state legislature in 2009—in no small part to encourage the voters to approve Prop 39. It worked. Today bond measures routinely sport an “oversight committee” guaranteed to ensure that all is kosher. The Little Hoover Commission was quite scathing in its evaluation of the effectiveness of these oversight committees. The whole point of the committees is to ensure the bonds are spent efficiently and as described in the text of the bond the voters approved. The Commission found the committees to be ineffective and, as some committee members testified, this was by design. One witness told the Commission, “The watchdog has no bite.” Other problems noted were bond oversight committee members were lacking in training and had conflicts of interest, and also the difficulty committee members have obtaining required documents from school districts. One oversight committee member in West Contra Costa County who almost resigned out of frustration described even more problems such as the oversight committee meeting only once a year, being charged with doing their work only after the fact when it’s too late, and oversight members being appointed by the same district that they’re auditing. She added, “We are powerless to effect changes.” Perhaps the most glaring shortcoming of these oversight committees is their emphasis on compliance by focusing only on whether they followed the language in the bond, rather than also taking a look at how effectively taxpayer money was spent. Isn’t that what real oversight is all about? A 2016 report from the Los Angeles County Grand Jury discovered that taxpayers were paying between 25% to 50% too much for poorly designed debt issuances, costing the taxpayers hundreds of millions of dollars of unnecessary expense. Shouldn’t the oversight committee have noticed that something was amiss?

No discussion of bonds would be complete without mentioning what is likely to become the biggest bond boondoggle in California history—the High-Speed Rail. It was approved by California voters in 2008 for $10 billion. The Little Hoover Commission was not impressed with the lack of accountability and mentioned several times in its report how little information has been made public about the expenditures. The accountability website that Governor Schwarzenegger ordered to be set up in 2006 after the voters approved a $43 billion package had little to say about the High-Speed Rail, and spending data was not readily available on the High-Speed Rail Authority website either. All we can say is $10 billion (to start off with) and where has the money gone?

A quick perusal of this fall’s state ballot measures shows almost $17 billion in new bonds being presented to the voters in 4 separate ballot measures. If history is any indication, California voters will sadly be burying themselves in even more insurmountable debt.

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