A very important election looms Tuesday November 7 – just 16 days away. Politics sets the framework within which we live our lives, including our economic lives, and its impact on the economy and therefore stocks and bonds is substantial.
In this post, I want to address the so called “Rebuild California” campaign, which supports voting “Yes” on Propositions 1A – 1E.
First, it is crucial to distinguish between Prop 1A and the other 4. Prop 1A concerns the use of gas taxes already in play and therefore does not propose an increase in taxes or the issuance of bonds. 1B through 1E, however, each propose the issuance of new bonds with a total cost of $73.3 billion, including both principal and interest, over 30 years.
Second, nobody can deny the importance of the goals that Propositions 1A – 1E aim at. California’s infrastructure, especially its transportation system, is crucial to the smooth functioning of its economy. Consider that all the time we spend stuck in traffic results in a massive loss of productivity. All those cars stuck in bumper to bumper traffic during rush hour could be spent at the office or at home engaged in productive tasks.
On top of that there is the emotional cost, the frustration that comes from being stuck in traffic and knowing you are going to have to weather it day in, day out, as well as the cost in accidents and the injuries and lost lives that result from them.
Paul Hefner, spokesman for the Let’s Rebuild California campaign, is right and makes another important point when he says:
People understand these sorts of investments are crucial to the health of the state’s economy and that we need to make them. I think people also understand that the first thing that in every single budget year, the first thing that tends to get eliminated are those long term investments, and that’s why we need to make them in (the) form we’ve proposed.
The problem here is not the goal but the financing. According to the Governor’s Budget Summary 2006-07 California expects to collect about $91.5 billion in taxes this fiscal year (p. 14). These bonds are going to cost $73.3 billion over 30 years or $2.45 billion per year. Why can’t we find this $2.45 billion for such important public goods in the $91.5 billion in taxes we are already paying???
Because how do you think state governments pay for bonds? How do they pay for everything? TAXES!!!! Voting for these bonds is voting for increased taxes. Increased taxes squeeze businesses and consumers and suck life from the economy. Don’t we already pay enough taxes out here in California?
California already has about $45 billion in outstanding general fund debt, with another $30 billion of authorized bonds yet to be sold and financed – not including $15 billion in defecit bonds approved by voters in 2004, according to the Sacramento Bee. The state paid $5.1 billion in the last fiscal year to service its debts.
If you are an owner of State of CA municipal bonds, as many people are because the interest is free of state taxes, the issuance of more bonds hurts your investment. As California takes on more debt, increasing its financial strain the likelihood of its having difficulties in paying back existing debt increases. This leads to a lower credit rating and lower bond prices. If these bonds pass expect California’s existing bonds to take some kind of a hit.
Vote with Sacramento City College student Marina Penkoba who has heard of the bonds and is against North Korea getting one! Vote “NO” on Propositions 1B – 1E!!!