By Jon Coupal – August 2, 2024
Voters confronting candidates and ballot measures this November should know that excessive government debt, at the national, state, and local level, should be getting a lot more attention than it does now.
This column has previously reviewed the state and local bonds appearing on the November ballot as well as a measure designed to make passing future bonds far easier.
To recap, there are two statewide bond proposals of $10 billion each. Proposition 2 is a $10 billion statewide school bond supported by developers in the naïve hope that it will reduce the pressure for even higher “impact fees” imposed by government entities as a condition for residential construction. Proposition 4 is a $10 billion “climate bond,” a mishmash of projects that have absolutely nothing to do with the climate.
Second, while there are numerous local bond proposals throughout California, they pale in comparison to the massive $20 billion regional “housing” bond proposed for the nine Bay Area counties. Unlike the two statewide bonds, the Bay Area Housing Financing Agency (BAHFA) bond will be repaid exclusively by property owners in just 9 of California’s 58 counties. Chew on that for a minute.
But here’s the kicker, while not a bond proposal itself, Proposition 5 is an even greater threat to California property owners because it lowers the vote threshold for local bonds from two-thirds to 55%. The two-thirds vote requirement for local general obligation bonds has been in the California Constitution since 1879 as a protection for property owners against excessive debt being approved by those who don’t own property.
Even worse, Proposition 5 is retroactive so the lower vote threshold applies to the massive $20 billion BAHFA bond appearing on the November ballot. Voters who mistakenly believe that the two-thirds vote for local bonds will apply to local bond measures this election are in for a rude awakening if Proposition 5 passes. Going forward to all future elections, Proposition 5 will indisputably open the floodgates to higher property taxes.
As evidenced by this year’s bond proposals, state and local government officials can’t kick the debt addiction. Even the recent near rejection of Proposition 1 last March hasn’t slowed down the relentless effort to rack up the state’s credit card.
California’s political leadership needs to rethink this pursuit of more debt. First, according to Statista, a global data and business intelligence platform, California had about 541.24 billion U.S. dollars of debt outstanding in 2021, the most out of any state. But that figure is at the low end. According to the Hoover Institute, California’s state and local government debt is roughly $1.6 trillion, which includes a proper accounting of the state’s unfunded liabilities. To put this in perspective, this works out to about $125,000 of debt per California household and exceeds the annual GDP of all but 13 countries worldwide.
The wide variance in estimating total debt amounts is due to differing methods of how debt is defined. As the Cato Institute recently noted, total debt should include, at a minimum, general obligation bonds, unfunded pension obligations, and other post-employment benefits (OPEB). “All three types of liability impose risks and costs on future taxpayers.”
In seeing how many states control the amount of debt they incur, Cato notes that there are a variety of legal mechanisms to limit bond debt, including limits on debt outstanding, debt servicing costs, and debt issuance. However, the Cato report also notes that many of these restrictions apply only to bond debt, not the more hazardous exposure from unfunded pension and OPEB obligations.
This is evident in California where litigation by the Howard Jarvis Taxpayers Foundation to enforce voter approval of pension obligation bonds in California has been met with widespread hostility from members of the judiciary who, not coincidentally, benefit from a public employment retirement plan.
As a side note, the Cato report relied on data from Truth In Accounting (https://www.truthinaccounting.org/), a respected financial think tank whose mission statement is “to educate and empower citizens with understandable, reliable, and transparent government financial information.” For citizens brave enough to check out this website, be forewarned. It presents the most troubling forecast imaginable. For example, its running total of the national debt increases more than $10 million every second. If that doesn’t scare you, it will assuredly scare your children and grandchildren.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.
