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2002-11-04 Bonds waste billions

Citizens urged to vote "no" on bond referenda

Arthur G. Purves, president of the Fairfax County Taxpayers Alliance, today urged Virginians to vote against the two Virginia bond referenda, $119 million for parks and $900 million for colleges.  He also urged Fairfax County residents to vote against the county’s two referenda, $60 million for public safety and $20 million for parks.  Mr. Purves charged, "Due to excessive bond sales, both Virginia and Fairfax County are wasting a billion dollars on interest.  Frequent bond sales are the bond underwriter’s paradise and the taxpayer’s nightmare."

Last year Fairfax County raised $200 million from bonds.  However, the county then paid $200 million for debt service on the bonds.  Of the $200 million paid, $73 million was for interest. The county paid $73 million in interest -- just to borrow enough money to pay the debt service.  Since each penny of the real estate tax rate raises $11 million in tax revenue, the $73 million interest payment accounts for six cents of Fairfax County’s $1.21 real estate tax rate.

This has been going on for over twenty years.  See graphs at . Each year, Fairfax County’s annual bond sales raise only about enough money to pay the debt service.  The interest cost of these bonds is over $1 billion.

All of this goes unmentioned in Fairfax County’s flyer, "Citizen Information on 2002 Bond Referendum", which was mailed countywide at taxpayers’ expense.

The revenue raised from bond sales should be ten times larger than the debt service.  For this to happen, all old bonds must be paid off before selling new bonds.  However Virginia and Fairfax County sell bonds every year.  Until 1996, Virginia exercised some restraint in bond sales.  Now Virginia is finding itself in the same situation as Fairfax County.  The interest cost on Virginia’s tax-supported bonds is well over a billion dollars.

Capital construction and maintenance are annual expenses and should be paid for from Virginia’s and Fairfax County’s mushrooming operating budgets.  Last summer a report on state spending by the Virginia Joint Legislative Audit Review Committee, Review of State Spending: June 2002 Update, reported (p.11) that between 1981 and 2000, enrollment in Virginia public colleges increased by 25 percent while inflation-adjusted spending for public colleges increased 114 percent.

This year, Virginia’s budget is $9 billion more than needed to keep up with population and inflation growth since 1979.  Fairfax County’s budget is $1 billion more than needed to keep up with population and inflation growth over the past 27 years.  Using these extra revenues instead of bonds would have saved billions of dollars of interest.

On November 5, voters will be asked to vote on both Virginia and Fairfax County bond referenda.

Vote "NO" on both.

Selling bonds is how government borrows money. Bonds are to government what a mortgage is to an individual. To pay off a mortgage, the individual makes periodic mortgage payments, which incrementally pay back the money borrowed (capital) plus interest.

For government bonds, the mortgage payment is called "debt service."

The purpose of borrowing is to obtain an amount of money that is many times, generally ten times, larger than the annual debt service payment. This is called "leverage." The greater the amount borrowed compared to the annual debt service, the greater the leverage.

Interest is the price of leverage. Leverage should be about ten, i.e., bond revenues should be about ten times the annual debt service. High leverage, however, is obtained by not selling more bonds until current bonds are paid off.

As the accompanying charts show, both Fairfax County and the state sell bonds annually. The result is almost no leverage. Fairfax County's highest leverage in the last 24 years was "2", in 1989 and 1983. In only two years, 1981 and 1984, did the county have the discipline to not sell any bonds.

Fairfax County Bond Sales and Debt Service

The state of Virginia has obtained higher leverage than Fairfax County over the last ten years. However, the state's highest leverage was only "3", in 1993.

Virginia Bond Sales and Debt Service

Excessive bond sales have exhausted Fairfax County's debt capacity, have nearly exhausted the state's debt capacity, and eroded their leverage.

This means that taxpayers are paying higher taxes for hundreds of millions of dollars of interest for bonds that have little or no leverage.

The only way the county and state can increase their debt capaicty and sell more bonds would be by lowering their credit rating. This would mean higher interest rates.

The county's cost of bond interest this year is $73 million, which accounts for 6 cents of the $1.21 real estate tax rate. The total cost of interest for all outstanding county bonds is $1.3 billion.

For government, construction and capital maintenance are annual expenses and should therefore be paid for from their mushrooming operating budgets. Using bonds for annual expenses is wasting billions of dollars in interest.

Fairfax County Taxpayers Alliance