SACRAMENTO COUNTY, Calif. — There are two state bond measures and several municipal bond measures people in Sacramento will be voting on in the November general election.
Utilized to raise funds quickly, the state allocates billions of dollars in its budget to cover bond payments.
However, when in voting booths, voters can sometimes be confused about what a 'yes' vote means for bond funding.
ABC10 spoke with Brian Uhler, deputy legislative analyst with the Legislative Analyst's Office to answer the questions people have about bonds. Responses have been edited for clarity and brevity.
What is a bond?
"A bond is the main way the state borrows money to pay for major projects with a long useful life, things like bridges, dams or school buildings, those sorts of things.
To raise the money, the state sells bonds to investors, they receive a large upfront payment that they use to pay for those projects and then they repay the investors over many years, usually over multiple decades with interest.
It's a mechanism that's not all that dissimilar from someone getting a mortgage to buy a house, and repaying that over many years."
How are bonds paid back?
"So, in the case of these kinds of bond measures that go on the ballot, the funds are paid from the state [from] what's called the General Fund. It's kind of like the state's main checking account. It's the same account that we pay for most public services, and so we make annual payments out of that account. You know, again, kind of a principal and payment akin to a mortgage payment essentially.
There [are] three primary tax sources that go into the general fund. Our three largest taxes are the personal income tax, the corporation tax and the sales tax. Those are the three main sources that are going to fund the money that pays for the debt service payments on these bonds."
When do bonds get paid back?
"It can depend a little bit on the context, but most of the time the bonds are usually repaid over 30 years is the most common."
What’s the difference between a state bond and a municipal bond?
"For a state bond measure, it's repaid from state tax funds generally. Local bond measures, again, it's a similar kind of basic mechanism and they're borrowing over a long period of time to pay for these large projects; a key difference with the local bond measures is the repayment mechanism. For local bond measures, it's almost always repaid from a property tax increase.
In that case, voters are essentially voting to approve both the borrowing and the associated property tax increase that's needed to make those bond payments over the years."
Can you explain the details about the tax increases? How long do they last?
"The property tax increases are there over the lifespan of the bond. Basically, the property tax rate increase is set to match the amount that is needed to make those annual payments to the bond investors who are receiving those payments."
Why is bond funding used for infrastructure projects?
"I think one thing is that a lot of these projects - they are big and expensive - and they are such that it can be hard to have enough funds on hand to pay for them all upfront.
If we tried to just pay for everything in cash, it could lead to delaying a lot of useful projects that could be providing benefits to the people of California.
You're hoping if you sell a 30-year bond, you're making these payments for 30 years, hopefully, it builds you a new school building that residents are going to be able to use for at least that 30-year period or more.
There is a state bond measure focused on education infrastructure on the ballot. In Sacramento County, there are also municipal bond measures focused on school infrastructure. Can you explain why that is the case?
"They are going to fund similar things. The state plays a role, in some sense, [in] supplementing some of those local funds.
There may be some school districts that either local bonds may not be quite enough to fund the projects that they need or the state also can play some role in balancing out differing levels of capacity for supporting bond borrowing at the local level.
Different school districts may not have enough local property tax base to borrow the same amounts, so the state can play a role in helping balance some of that out to ensure some consistency in the quality of these projects across school districts across the state."
Is there any limits on the amount of bond funding?
"There isn't like a hard and fast rule on the state, ‘if you reach this much, it's too much borrowing.’
There's a few different ways of looking at it. I think one is that we've talked about that the state has to repay these bonds out of [the] same account that it's paying for all the other kinds of public services that it funds.
One limitation or constraint to consider is just when you sell more bonds, that's more money that has to come each year out of that account that pays for the rest of the budget, it means less available for all those other projects.
Right now, at least the state is spending about $6 billion a year, out of that General Fund account, which is somewhere around $200 billion just to give context.
Another way of thinking about it is the sort of investors who are looking to buy these bonds, they look to rating agencies and other folks who can give them some sense of whether or not the state is taking on an appropriate amount or too much debt. Those rating agencies have various different ways of looking at what is the state's borrowing capacity.
Based on a lot of those right now, the state’s about average or maybe a little bit above average in terms of how much borrowing we have compared to other states. And, you know, probably these two measures on the ballot wouldn't change that too much."
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