Understanding the Cost of Bonds

What Will it Really Cost?  A Fair Question.

When taxpayers are asked to vote on a $70 million school bond they deserve accurate facts and honest disclosures about costs from their school board.  I’m aware of the local discussion about the cost to taxpayers regarding the August 27 Lakeland School Bond.  I was the sponsor of HB 626, the legislation that requires new disclosures on the ballot for bonds and would like to share with Lakeland voters why the laws are important and why they were written the way they were.

First, I live in southeast Idaho and offer no opinion on the merits of voting for or against your bond. That is for the local patrons to decide. Rather, I am writing to clear up a great amount of misinformation about the tax consequences of your ballot question.  Several Idaho voters contacted me about their frustrations with unclear taxing information bond elections.  We worked over several sessions and passed this much-needed disclosure bill becoming law in July 2018.

Boards and taxing authorities, in efforts to get support for bond elections, use three consistent methods for making the costs look small or even free.  1. Claim the bond will be paid for by growth in the tax base.  2. Claim the bond’s costs will replace existing bond payments, therefore no increase in taxes.  3. Backloading bond payments so the real costs come later.

Constituents and others told me for years, firms selling school bonds in Idaho would sometimes help taxing authorities create “growth” projections to make an expensive bond seem low cost or no cost.  One classic example happened in 2017 when a school board asks a bond firm to create a model showing they could pass a huge bond with a new huge tax, and do it without changing their levy rate.  When the bond company’s first model didn’t show it as such, the school board asked the bond company to use different assumptions to come up with a favorable figure the board wanted to give taxpayers.  To some, this seemed like a “smoke and mirrors” approach to taxation.

A similar scenario, related to the first example, was when bond selling companies or others used growth projections in their future financial projections without explaining that almost all the growth was increased growth valuations in current property values.  Specifically, taxpayers were told that “growth” would pay for a proposal without revealing the growth referred to was almost always growth in the tax bill of current property owners.   In some cases the annual collection of taxes from new construction is less than 5%, meaning that 95% of new taxes came from the increased valuation of current homes, and not from new taxpayers.  Homeowners would almost entirely see “growth” as their own “out of pocket” taxes going up.  To be sure, “growth” often means the growth in your property tax bill.

Always keep in mind, when talking about the future in regards to a new bond,  a homeowner might see his cost per $100,000 go down over the future years, but because his home goes up in value he could very well see his total “out of pocket” taxes go up over the years.

Another issue I was told about was how taxing districts would sometimes make up a sales pitch to their patrons where they would combine all their bonds and levies and the associated annual payments for them.  Next they would concoct a taxing plan that would include a huge new bond proposal with what is known is “backloading.”  Essentially, very little would be paid upfront for the new proposal and most of it would be paid in the final few years.  Further, most backloaded plans would reflect not only the tax people were paying for the new proposal, but also take the amounts taxpayers were paying to current bonds, saying current taxes won’t increase.  To be clear, as current bonds were paid off, instead of taxpayers seeing a reduction in their taxes, the same tax amount would be collected and redirected toward the new proposal.  Boards were essentially hiding the fact that taxes would be much lower in later years were it not for the bond being approved now.

Many feel that packaging new tax proposals in this way is dishonest because, years ago, when the already existing bond was proposed to taxpayers it was for a set number of years, say 15 or 20, and taxpayers thought when the bond was finally paid for their rates would go back down.  Think of buying a car, and when you get it paid off, your payment goes away. But the way some bond proposals were being designed, the tax collections for current bonds wouldn’t really go away.  Instead, the ongoing taxes people were paying would simply continue and be redirected toward new bonds. Hence, passing the first bond often was simply creating a tax that would just go on and on and on, often with a never-ending stream of future bonds requests, while giving the false impression that when bonds are retired the associated tax would go away.  Also, there is the false impression that a big tax proposal would only cost a little bit more, or nothing more than what was already being paid.  In fact, some voters actually were told big spending proposals would not really result in any new taxes. It was a shell game, disguising significant new taxes as “little or no increase.”

To give voters a clear snapshot of what a proposed bond or levy would cost, without the smoke and mirrors, sketchy growth projections, double talk, blending of different debts, or other assumptions, several Idahoans worked with me and other legislators to pass new state disclosure laws.  The first one was HB 626 in 2018, sponsored by both Republicans and Democrats.  The second was HB 103 that passed unanimously both in the House and Senate in 2019.  Every elected official voted for HB 103.  Both bills put simple language right on the ballot in straightforward language what a taxing proposal, be it a bond or a levy, would cost a taxpayer in terms they could understand, under current market conditions, by itself, without assumptions, double talk, blending of debt, etc.

Some have likened the new disclosures to when you finance a new car purchase. In that scenario you get a form with the interest rate, the amount financed, and what your payment will be, regardless of your future income growth, current debt, etc.  In fact, a standard consumer disclosure was the template for this legislation.

We found that previous ballots contained all the major elements of a consumer disclosure except what the payment would be to the person paying the costs—leaving voters to guess at what their true cost would be.  So HB 626 added the last and missing component by putting the clear cost estimate on the ballot for the bond.  This disclosure is an average cost over the life of the bond. Regardless of how the bond is structured or whatever the claims of tax base growth, the “average cost of the bond per year” cannot be monkeyed with or disguised to build support for an election.

Thanks to these new laws, if you look at any future bond or levy ballot you will see ballot language that shows what the average annual cost of a proposal will be, per $100,000.00 of taxable property owned, under current market conditions and values. Again, these bills took away financial funny business such as guessing what future market growth might be (which actually turned out to be negative in most counties in Idaho in 2008-2010) and the smoke and mirrors, debt blending, front or backloading, or double talk.

During consideration of these bills in the legislature, discussions were had in committee about the wording.  Topics such as changing market valuations in the future, backloading, and other things were discussed. It was determined that growth projections were only speculation, would vary according to who you talked to, and did not fit into this simple disclosure.  Taxing districts were free, and remain free, to show their growth projections and other taxation models as they wish, but taxpayers have the right to know what a proposal will cost them on average under current conditions, and the new laws do that.

Always be skeptical when someone claims “growth will pay for it” because it’s often the growth is in your own “out of pocket” taxes.  No bond is free. When a bond or levy passes, this is certain:  Taxpayers will either see their taxes go up or will be denied a tax decrease that was coming their way. The disclosure law ensures taxpayers have at least a basic understanding of the average impact they will feel over the life of the bond.

In closing let me repeat, my explanation here of these two new Idaho disclosure laws is meant to clear up some misunderstandings and misstatements that have been said about the ballot disclosure law.  Deciding to pass or defeat the upcoming bond or other future bond proposals, well, that is for the voters to decide.  To be clear, I offer no opinion on the merits of the current ballot proposal but merely explaining some of the history, reasons, and methodology used in these new ballot disclosures. Voters are now armed with the simple truth.

This article was also submitted by the author to The Coeur d’Alene Press.