MOORLACH UPDATE — Propositions 51 and 53 — September 3, 2016

Allow me to wish you a relaxing Labor Day Weekend, which is considered the official start of the November election campaign season.

As the 2015-2016 Session has concluded, it is now time for me to be working on my legislative package for the 2017-2018 Session, working on my re-election campaign, and enjoying the District.

With that, November 8 will be here before we know it and I was asked to comment on two of the seventeen ballot measures. This basic overview is provided in the Hoover Institution’s Eureka below.

The two propositions addressed deal with the issuance of municipal tax-exempt state bonds. I purchased (almost entirely taxable) debt instruments from 1995 to 2006 for the County of Orange. In fact, I had the privilege of managing a $7 billion portfolio while serving as Orange County’s Treasurer, a very rare opportunity for money managers.

I had a talented investment staff which provided robust market research. We used this research in determining how to manage the portfolio and establish the weighted average maturity that should be utilized. We religiously followed the Federal Open Market Committee’s regular meetings and I became quite a student of Fed Chairman Alan Greenspan. In fact, we accurately predicted his interest rate moves some 95 percent of the time during my twelve years in this role.

However, even with this experience, I do not make it a habit of publicly giving investment advice. But, I will give you a simple suggestion. Go to Google News and type in the word "deflation." Then go to "Search Tools" and select "Sorted by relevance" and click on "Sorted by date." You will be amazed with the number of articles that touch on this topic.

If we are heading into a deflationary era, similar to what the nation of Japan has endured in the recent past, then taking on more debt will make paying it off more difficult. In an inflationary period, one can pay off debts with cheaper dollars. The opposite is true in a deflationary period. In fact, in a deflationary period, it would make sense to wait and purchase things with cash when they have become cheaper. And that’s all I’ll say about that.

Issue 1604 California’s Crowded, November Initiative Slate Part I

The Desensitization of Debt – An Accountant’s Analysis of Propositions 51 & 53

by John Moorlach

In the 2016 June Primary, 81 percent of local tax and bond measures were passed by the California electorate. That, of course, would seem to make a pretty significant statement about the mood of these voters have in regards to incurring future debt and establishing additional local taxes. This November, they will have two chances to reassert fiscal prudence and make a significant statement about long-term debt.

Voters are in charge of approving certain state financing matters, as they are the ultimate oversight on issuances that will leave future generations responsible for repayment. One need only look at Puerto Rico and their recent default on $779 million of bonded debt to see the perils of issuing too many future obligations. They kept racking up the credit cards with over $70 billion in total debt, but currently cannot make even the simple maintenance payment. California voters should consider Puerto Rico’s challenges before allowing a similar scenario here at home.

The first measure, Proposition 51, would approve a $9 billion general obligation bond for school construction. The second, Proposition 53, asks voters to convert certain revenue bonds into a special category that would also require voter approval ​on all state lease revenue bond issuances of $2 billion or more. It is estimated that, if approved, Proposition 51 will add up to $500 million annually to the state budget, which has given even Governor Brown serious reservations.

In 1988, California voters approved Proposition 98, an education funding measure, which requires at least 40 percent of tax revenues to be devoted to K-12 schools and community colleges. But Proposition 51 will not be paid out of Proposition 98 funds, putting further stress on the state’s general fund.

Nearly 90 percent of school district budgets are for personnel costs, including wages, benefits and pension contributions. Public teacher unions do not leave much room in district budgets for other critical expenses, like supplies, repairs and maintenance, and building improvements or replacements.

No matter the justification, with a general obligation bond, Californians will pay the costs through either higher taxes, diminished or cut services, or both. Yes, schools are a good area for investment, but if districts are unwilling to set funds aside, why should taxpayers be obligated to take on another new​ statewide ​debt? California residents shouldn’t be punished for poor budgeting practices.

Proposition 53 has the potential to give taxpayers additional oversight on revenue bonds. It’s origination story is fascinating, as concerned fiscal advocate, Dean Cortopassi, was frustrated enough about California’s debt and unfunded pension liability load, that he decided to sponsor a ballot measure that targeted long-term debt based on government’s current revenue streams.

Currently, revenue bonds do not need voter approval because they are repaid through some non-tax revenue stream​ by the governing bodies of the municipal agencies. Why should the electorate be bothered to deal with specific revenue bonds, when you have elected representatives to handle these issues​? What should really concern the California electorate is the amount of debt this state, and its municipalities, have encumbered upon the taxpayers, much of it without their knowledge or consent.

To stem the tide, if passed, Proposition 53 would require voter approval of significantly large revenue bond deals, those of $2 billion or more. This should be simple enough. But, proponents of major government programs are having heart burn over this proposal. Could it be that this will slow down projects that elected leaders could normally approve and fund in a more expedited fashion? Or, is it that voters don’t really understand bond-related matters?

It may be none of the above. The real reason for the strong rebuff is that it will threaten two significant projects that are already in the works, the Delta tunnel and high speed rail. They will require revenue bonds to finance their construction. But, many doubt that the revenues projected from a bullet train will come close to forecasted projections and debt payments will end up being borne by the taxpayers.

A high passage rate of current bond measures may indicate that most voters do not make the connection that general obligation bonds puts them on the hook to pay the related principal and interest out of their taxes for up to 30 years. Too much debt could be the downfall of the State of California. One only needs to watch Puerto Rico. Debt management is a serious voter responsibility.

With voters approving four out of five local tax and bond ballot measures, one has to ponder. Are voters unaware that the debt is paid out of their taxes? Are they bullish on the future and unafraid to pay higher taxes? Or are they just fiscally uninformed of the consequences of their votes? Regardless, they will have a chance to speak on two critical financial issues this November.


Proposition 51 would authorize the State of California to sell up to $9 billion in general obligation bonds for K-12 school and community college facilities. $3 billion of the bond proceeds would fund new construction; another $3 billion would go toward K-12 facility modernization; $1 billion would be set aside for charter and vocational school facilities; and the remaining $2 billion would be earmarked for community college facilities. The Legislative Analyst’s Office estimates the true total cost of Proposition 51 to be $17.6 billion, costing the state about $500 million per year on average – or about 0.05% of the current General Fund budget.


If approved, Proposition 53 mandates voter approval of state revenue bonds costing more than $2 billion. Current law requires general obligation bonds – bonds repaid out of the general fund – to be approved by voters. Proponents argue elected officials have a blank check with the use of revenue bonds. Opponents note that revenue bonds are repaid by dedicated funding connected to the project the bond proceeds finance, limiting taxpayers’ exposure. As of Fiscal Year 2015, revenue bonds accounted for 28% of the State of California’s outstanding debt.

Copyright © 2016 by the Board of Trustees of the Leland Stanford Junior University

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