It is expensive to construct buildings, no matter the type. Public financing through bond sales adds significantly to that cost. Government agencies that want to issue bonds to fund construction usually hire a string of consultants to help them get through the rigors of the bond process, and all those consultants get a piece of the action.
Over the years it became apparent that when large sums of money were involved, the invitation to fraud was irresistible. To make it very difficult to just go out and steal the money or improperly secure it for personal gain, a whole host of rules and requirements were imposed to safeguard the public.
Because of these rules, it is harder to misappropriate the tax dollars, but a ton of those same dollars go to help protect the public from abuse. Although it is very expensive to float long-term bonds, it is lucrative to those who market them, and people who buy them want to make a profit, too.
In the late 1990s and into the 21st century, San Diego County found a way to finance some of its major construction projects while beating the expense associated with selling bonds.
Instead of spending all of its tax-generated income during the good years, the supervisors squirreled away a significant portion of that stream of unexpectedly high tax revenue. Then, instead of borrowing money, the county was able to use these saved dollars to pay for some of its recent construction projects.
Very few public agencies are willing to take care not to spend every penny when the going is good. The California Legislature and the state’s associated regulatory bodies routinely take unexpected income and pour it into new “necessary” programs, creating a legacy for themselves and endearing themselves to groups who enjoy new services and programs.
It is a good way to get re-elected. It is also a good way to wind up in the hole, as has the state and most public bodies, when the economy has a serious hiccup. Those new services and programs need continued funding, but the supply of tax revenue declines.
Jon Walz and Glen Sparrow, members of the San Diego County Taxpayers Association, have served on bond oversight committees and have questioned some of the decisions boards of education and others make to pay for some parts of what their bond proposals authorize.
Walz is a principal with Solana Advisors. He frequently asks why groups that use bonds for major construction projects also use the bonds to pay for short-term assets that don’t match with long-term liabilities. There must be cheaper short-term money, he has argued.
Sparrow, a professor emeritus of San Diego State University, has asked similar questions. It doesn’t make sense, he says, to use 20- or 30-year financing, typical for construction bonds, to cover the costs furniture, paint, carpet and other items that will be replaced in a shorter period.
Dale Scott of Dale Scott & Company offered an answer when he presented an alternative-funding concept to the Taxpayers Association. Scott told the group that shorter lending instruments can be part of an overall bond program. The cost savings he outlined are considerable.
In his capacity as an adviser, Scott offered that concept to the Cajon Valley School District earlier this year. The school board accepted the recommendation and has just completed a loan from a local bank that will cover the cost of the laptops and other electronic devices the district asked its citizens to approve as part of a general construction bond program.
Scott Buxcom, assistant superintendent of Business Services for the district, said the process was simple and much less expensive. In other words, it works.
As far as Dale Scott knows, Cajon Valley is the only district to use this dramatically less expensive method to fund purchases with a relatively short shelf life. When he was asked why, he demurred. It is clear that bond consultants stand to earn a lot more money handling long-term bond placement rather than shorter-term instruments, which must shade their thinking.
Dale Scott’s idea has merit. Cajon Valley has demonstrated it can be done. Hopefully, other districts will follow that example and save financing costs with a resulting greater value to tax payers in their districts.
Hawkins is retired after 35 years as a construction industry association manager. He was broadcast reporter and news anchor in Denver. As a Navy officer, he saw action in Vietnam in the River Assault Squadrons and is the recipient of a Silver Star and Purple Heart.