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Bonds Hit Our Budgets Just as Hard as Higher Taxes

by Chris Edwards

This article appeared in the Dallas Morning News on November 1, 2006.

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Voters in a number of states and hundreds of cities Tuesday will directly control government policy by giving a thumbs up or down to proposed bond issues.

The biggest bond proposals are in California, where Gov. Arnold Schwarzenegger has endorsed $43 billion worth of bonds on the state ballot this year. If approved, this new debt would fund highways, schools and other infrastructure. California used to finance most of its infrastructure with current revenue, but it now finances nearly all of it with debt.

In Dallas, voters will say yea or nay to $1.35 billion of bonds to enhance the city's aging infrastructure.

In Greensboro, N.C., voters will decide on $115 million of bonds to fund baseball stadium renovations, neighborhood redevelopment and an "international civil rights museum."

For politicians, the appeal of bonds is obvious: They provide funding for favored projects without the need to pass unpopular tax increases. Federal Reserve Board figures show that total state and local debt jumped from $1.2 trillion in 2000 to $1.9 trillion today.

Voters usually approve more than two-thirds of bonds at the ballot box, according to The Bond Buyer. That high approval rate is curious. Don't people know that more debt means higher taxes? The tax bill might not come due for a few years, but the burden of debt is real. Financing state spending with debt rather than current revenues has many disadvantages:

• First, consider that yesterday's decisions to issue debt are imposing a burden right now. State and local governments will pay about $100 billion in interest on outstanding debt this year. That's $100 billion that states can't use for infrastructure upgrades and taxpayers can't spend on their household expenses.
• Second, debt financing is more costly than current tax financing because of the interest expenses and related charges. The only real beneficiaries of debt are the middlemen – the tens of thousands of highly paid lawyers and analysts in the Wall Street municipal bond industry who do the underwriting, trading and related activities. These middlemen are costly, and mixing high finance with big government often results in corruption. Indeed, the municipal bond industry suffers from "pay to play" scandals where bond underwriters use bribes and campaign contributions to win bond business from government officials.
• A third disadvantage of debt is that it makes state and local finances less transparent. As Wall Street has concocted ever more complex debt deals for the states, it has become nearly impossible for citizens to decipher government budgets. To help residents, California recently published a "debt primer," but the primer is 606 pages long.
• The most important reason that voters should hesitate to approve bonds is that the country already faces huge government liabilities. At the state level, pension and health benefit plans for retired workers have funding shortfalls of about $2 trillion. At the federal level, there are massive unfunded obligations in Social Security and Medicare.

With all these looming liabilities, states should be cutting debt, not increasing it. After all, it is not as if states are short of tax revenues to fund needed infrastructure. According to the U.S. Bureau of Economic Analysis, state and local tax revenues rose 8.3 percent in 2004, 8.8 percent in 2005, and will rise roughly 7.6 percent in 2006.

One option for states is to vigorously pursue privatization. Projects such as sports stadiums, airports and highways can be owned and operated by private businesses and supported by user charges and advertising. In some states, such as Virginia, private highway projects are being pursued. In Europe, many airports have been privatized.

America's congested infrastructure is frustrating to all of us. But voting for more bonds and getting deeper into debt is not a good solution. Instead, states should reprioritize their budgets, devote rising revenues to critical projects, and pursue private financing where they can.

There is no free lunch with debt-financed spending, so on Election Day, remember that bonds come with just as high a price tag as new taxes do.