Friday, April 25, 2014 by Steve Israel
This article, and a subsequent article, shares my thoughts and perspective regarding the upcoming $661 million AISD bond election. My comments are based on 25 years of education and experience working in the financial markets, having seen both private and public entities make sound and disastrous financial decisions.
The first article addresses spending on education, how bonds work and financial mismanagement of the AISD Trustees and school board (“Trustees”). The second article addresses some of benefits the Yes crowd is claiming the proposed spending will yield.
If someone votes yes for the subject bond issue and associated tax increase they are voting for, in my estimation, 1) the AISD taking on a considerable debt obligation without the guaranty or promise of an improved product, more highly educated students evidenced by academic test scores that rival those of students through-out the world, 2) increased debt and higher taxes in perpetuity and 3) to reward the Trustees for a level of financial mismanagement.
Over the last 30 years during every Presidential election a theme by the candidates has been a vow to fix education. As such, over the last 30 years an ever increasing amount of money has been spent on education. However, the test scores of students in the United States is below that of nearly all developed countries and now even some under-developed countries. I think a 30 cycle of ever increasing spending and 30 years of declining test scores pretty much tells the story. The promotional material of the Yes crowd spends considerable time outlining all the wonderful improvements that will be made with the bond debt. However, the material is silent on a promise or guaranty of improved academic test results. The reason, it won’t happen, history has proven this. Should not improved results be the gold standard for any spending? If not, what is the value received for the AISD incurring $661 million of additional debt?
Bond issues are simply a vehicle for government entities, via debt, to raise taxes and increase operating budgets in perpetuity. In order for a bond issue to be repaid there either has to be funds from a current operating budget earmarked for the repayment or a tax increase. As such, a tax increase equal to approximately $100 for every $100,000 in home value is proposed. Assuming a $150,000 home value, the result will be an additional $180 in property taxes annually for Arlington home owners. That doesn’t sound like much but, once a tax increase is implemented it is never later eliminated. So once the bonds are repaid, which rarely happens, I’ll address that later, the extra taxes imposed to pay for the bonds then goes into the operating budget. But, much of the proposed spending are recurring costs. Then what? Another bond issue? Another tax increase? So what was $180 annually goes to $360 or more. There is currently approximately $200 of taxes associated with previous bond issues imbedded in the AISD property tax rate. Adding the subject $180 of taxes will bring the annual total to approximately $400. Over the next couple of decades, unless the Trustees change their approach, I would expect bond debt to increase, so Arlington residents could likely be paying an additional $600 annually in property taxes via bond issues.
Bonds are interest only instruments. Although there are stated repayment amounts, they do not actually require any periodic principal payments. The only requirement is full repayment at maturity. As such, any periodic payments would be at the discretion of the Trustees. I can tell you with certainty that bonds rarely get repaid in any amount prior to maturity. If the bonds are highly rated, investors buy the bonds for the interest income and don’t want them repaid until maturity. So the additional taxes, other than to pay interest, is added to an entities operating budget and spent on other items. Upon maturity the bonds are refinanced with a new bond issue and a plea is made for a tax increase to pay for the new bonds; which do not get repaid and so on and so on. If not properly managed, the financial stability, in this case of the AISD, can be in an ever decreasing state of decay. If the current AISD bond election passes, debt will have increased from zero to $1.1 billion over the last decade, so this upward trend certainly exist. As such, bonds are a vehicle to raise taxes and increase an operating budget, on the backs of residents, in perpetuity, over time.
For example; I need new cars, my house remodeled and a new computer for my son. I don’t have the money to buy them so I’m going to get a loan for the purchases. I’m going to ask my friends to commit to giving me $100 for every $100,000 of their home value for the next five years to repay the loan. I would also like to have someone mow my yard each week, my wife would like to have a maid and my sons needs some baseball lessons; all discretionary items, but things I would like to have but do not have the money for. So I’m going to use the money from my friends for the discretionary items instead of repaying the loan. But, in five years I’ll need two new cars, my house painted, new carpet installed and two new computers. Since I did not repay the first loan, but spent my friends money on discretionary items, I’m going to need another loan to pay for new cars, etc. I’m also going to need my friends to give me another $100 for every $100,000 of their home value for five more years to repay the new loan. But, I don’t think I’ll repay that loan either because I’ve got my eye on some other things I would like to have but don’t have the money for. What do you think the likelihood of this happening is? Zero. If so, why do we as taxpayers agree to let government entities do this to us? It’s the exact same thing.
The Trustees are guilty of the above example. They have not implemented a sufficient schedule to construct/replace the subject items within the AISD’s annual operating budget so they are asking to pile on more debt. For example; five years ago the Trustee proposed a $180 million bond issue and associated tax increase to update technology, which the voters approved. Now they again want funds to update technology. You would think the Trustees would have learned a lesson and implemented a replacement plan so they would not have to continually ask for bond financing and tax increases for technology upgrades. Further, these bonds remain outstanding and did not get repaid within the useful life of the technology. So there is $180 million in bond debt owed by the AISD for something that is largely obsolete. I would like to know what the increased tax revenue was used for and why the bonds did not get repaid? So the Trustees have certainly exhibited financial mismanagement over the last decade. The Trustees claim the subject bonds will be repaid and the tax rate deceased over time. However they made this promise in the above discussed bond issue and it did not happen. In fact, this has not happen with any previous bond issue. I believe this lays to rest the promise that this will happen with the subject bond issue.
In conclusion, you can see that spending on education does not correlate to improve results, the bonds will increase debt and lead to higher taxes in perpetuity and the Trustees have done an insufficient job of managing the AISD’s finances.