It’s election season. So of course, I’m at the bar El Rio in San Francisco doing what everyone loves to do over a beer -- chat about municipal bonds. I’m asking people: Do you know what a bond is?
“No...But do you want me to guess?” says Julie Crossman.
Almost everyone is stumped. I know that I’m unclear about what exactly they are. But look at your ballot this November, or any election season, and you’ll see the word ‘bond’ all over it.
This time around Oakland is voting onMeasure KK, a bond to fix up streets and community buildings. San Franciscans are voting on Proposition A, a bond to repair and rehabilitate school facilities. They’ll both cost hundreds of millions of dollars. And voters all over the Bay are voting onMeasure RR, a $3.5 billion dollar bond to patch up BART. This seems like a good time to ask some basic questions. Like what is a municipal bond? And what happens if one passes?
Bonds deal with how state and local governments spend and pay for things that can cost millions, sometimes billions of dollars. Remember howVallejo andStockton went bankrupt? That’s partially because of having to pay for bonds.
Like a loan, but different
It looks like I’m probably not going to figure out what a bond is at the bar, so I tracked down a bond nerd to help me out: Marc Joffe, a researcher at the California Policy Center, where he focuses on municipal finances.
Joffe’s worked with UC Berkeley’s Haas Institute and with Moody’s--the people that rate how risky bonds are. My first question for him: what the heck is a bond?
“A bond is a way for paying for something over a long period of time,” he explains. “So if we're going to build a school, we're going to get the benefit of that school for many many years. It doesn't seem reasonable in a way to pay all at once. Maybe the school will last for 30 years? Over the same 30 year period we're paying for the bond.”
Ok, not as complicated as I thought. A bond is similar to a loan. Except for with a loan you usually walk into a single big institution - like a bank - and borrow the money from them. Bonds, on the other hand, are broken up into lots of little pieces of debt and people come buy those pieces from you. And they buy them at a bond sale. Do you want part of San Francisco’s debt? Do you want a very safe investment that doesn’t make you a lot of money on interest but that you don’t have to pay income tax on? Then a bond is for you.
Revenue bonds and general obligation bonds
Once a city sells these bonds and borrows this huge chunk of money, how are they going to pay it back? Well, there are two ways. Firstly, there are the less common revenue bonds. They pay for themselves.
“So for example we want to build a bridge and the bridge is going to generate toll revenue, that toll revenue will go to finance the bonds,” Marc Joffe explains.
The Golden Gate Bridge itself wasfunded with a revenue bond that was passed by voters.
But mostly you’re probably going to see what are called ‘General Obligation Bonds’ on the ballot. These bonds will be paid for by taxpayers, usually with property taxes. They fund big projects like fixing up school buildings, water systems, or roads.
At El Rio, Leticia Huerta was close, but missed the mark. “A bond measure,” she stops and thinks. “Allocating money for schools is done through bond measures? I don't know!”
I explain to Leticia that you would pay to build a new school or fix the roof of an old one with a General Obligation Bond, but you’re not going to use one to pay for day-to-day things like teacher’s salaries. And getting into the details of exactly how much a property owner will end up paying in property taxes is complicated.
The story of a hospital bond
Take Proposition A on the November 2008 ballot in San Francisco. It was a bond to help update the San Francisco General Hospital. If it had failed: no fixing up the hospital, no extra taxes. But it passed. That means if you own a building in San Francisco you will pay, on average, over the next couple decades, about$170-a-year if your house is assessed at $500,000. And in return you get a freshly renovated hospital. But that $170 is just an average. The actual costs will be different every year.
“When you receive property tax bill,” explains Marc Joffe, “you'll see a line item for the bonds.”
By 2014, the city had already sold all the bonds and done all the construction. Now all the public has to do is use their new hospital as they slowly pay off the debt from now until 2035.
And if you’re a renter don’t worry, you’ll still end up paying for that hospital too. In San Francisco landlords can pass50% of these property tax increases on to tenants. But on the bright side, all those new condos being built up and down Market street on empty lots? Brand new properties mean brand new property taxes. More money to pay for bonds. And slightly less money that everyone else has to pay.
Into the weeds
I ask Joffe is he thinks that the public understands bonds. He says “no” then laughs.
The financial details are on your city’s website and in your voter guide. But not all of us are municipal bond experts like Marc Joffe.
“For people without financial background, maybe didn’t take economics in school, that's going to be more difficult,” he admits. “You have to ask the questions: do I think that $150 more on my property tax is worth what it's going to pay for. And how sure am I that the government that is asking for these bonds is going to spend the money efficiently, effectively, and in the way that they say they're going to spend it?”
One person I talked with at El Rio pretty much got it.
“They find the richest people,” explains Alison Fragomeni. “They get a loan from their personal like stash of money cus they're rich right? And then they use that money to like do whatever they want to do. Then they have to pay the rich people back with interest or whatever and then they get taxpayers to do that.”
Good job Alison! You win the bond competition. Your prize: understanding municipal finance.
Want to hear what it’s like to be in the room when San Francisco sells its bonds? Check out our piece “When SF needs money, it holds an auction” by Raja Shah.
