No: Bonds are addictive, and Phoenix must stop handing out IOUs
Noah Clarke Goldwater Institute
Mar. 6, 2006 12:00 AM
Spiffy blue-and-orange signs posted around Phoenix call on citizens to vote "yes" in the March 14 bond election. Supporters are quick to list the wonderful things the bond will buy: a downtown campus for ASU, police stations, libraries and senior centers. As an added bonus, they claim, the bonds won't raise taxes.
Unfortunately, there are a number of problems with this bond package, and they have nothing to do with being for or against ASU, police stations, libraries and senior centers. Instead, they have to do with how the city wants to pay for them.
A bond is nothing more than an IOU. For example, when a friend lends you 20 bucks, you have to go to work and earn 20 bucks to pay him back. When Phoenix bonds, it borrows 20 bucks from bondholders, but to pay bondholders back, the city reaches into taxpayers' pockets for the 20 bucks, plus 6 to 12 percent interest.
As a result, bonding always costs more than advertised.
Phoenix wants to borrow $878.5 million.
But according to city estimates, residents will have to pay an additional $1 billion in interest alone, putting the real cost of the package at $1.8 billion.
Bond advocates justify the added cost by saying it is like taking out a mortgage to buy your home. Not quite.
When homeowners upgrade to a bigger, more expensive home, they incorporate the new expense into their budgets and cut down on current spending in other areas - fewer trips to the movies, not so many restaurant lunches. Their ability to meet payments depends on how hard they are willing to work to generate income and how carefully they budget.
If they miscalculate and miss mortgage payments, the lender will repossess their home.
When the city takes on debt, it adds spending without cutting back anywhere. Government issues debt to avoid prioritizing spending. This bond package includes $8 million for a shooting range, even while city officials say they don't have enough money to adequately fund core public services like fire and police.
Unlike the home mortgage, if Phoenix has trouble paying its bills, bondholders don't repossess City Hall; City Hall comes to you and demands more taxes.
Government loves debt because it doesn't have to ask citizens for an immediate tax increase. This is debt financing's great allure: Voters do not realize how much spending is increasing because tax rates, at least in the short run, remain the same.
This may leave you wondering how Phoenix officials plan to pay back the new bonds without raising taxes, as they claim. The answer is simple: increased property valuations.
This year valuations in Phoenix jumped upwards of 50 percent in some areas. So, while your tax rate may not go up, your tax bill always does. Higher valuations give the city a bigger pot of money to play with. That annually increasing pot is what the city is counting on to pay for the bond.
Phoenix is addicted to bonds because they hide spending increases and the money needed to pay for them. Rarely discussed is that the city still owes $1.12 billion in past general obligation bond issues, some dating as far back as 1984. These won't be paid off until at least 2029. Nevertheless, plans are already being made for the next bond election in five years.
Although libraries and senior centers are great, bonding to pay for them is not. Bonds are just a hidden tax that grows over time and encourages the city to increase spending, extending its largesse to more and more special-interest groups.
It is time Phoenix stop handing out IOUs and learn to live within its means.
The writer is an economist with the Goldwater Institute, a free-market think tank in Phoenix (www.goldwaterinstitute.org).