Whether it’s a household, a corporation or a government, one bedrock management principle is maintaining a healthy separation of operational and capital spending.
The former’s day-to-day expenses should be covered by ongoing income, while the latter may be financed through debt, as long as the term of the borrowing doesn’t exceed the life of the capital improvement.
In household terms, one may borrow for a house, or a new roof on the house, but should pay for plumbing repairs without incurring debt.
Borrowing for current expenses is how families – and governments – get themselves in financial trouble. Repaying the additional debt becomes another operational expense, often compelling borrowers to acquire even more debt and digging their holes ever-deeper.
Next week’s ballot carries not only a $9 billion state bond issue for schools, but about 200 local bond measures totaling more than $30 billion, also mostly for schools.
While voters are told that the bonds would finance much-needed capital spending, many are really a sneaky way of borrowing to pay for current operations.
School districts and other local governments often neglect maintenance of their facilities to meet demands for other spending, particularly pressure from unions for increases in pay and fringe benefits. Then, after the deferred maintenance results in deterioration that can no longer be ignored, officials draw up bond issues to make repairs that could have been avoided with proper maintenance.
In theory, elected boards of these local agencies are supposed to protect taxpayers from such mismanagement and duplicity, but in reality they are often complicit because they are politically beholden to unions.
The wording of bond ballot measures and “informational” mailings to voters make lavish improvement promises, but often conceal their true purpose. And the money to persuade voters to pass them typically comes from construction companies that see the potential for new contracts.
The state’s largest local bond measure, a $3.5 billion proposal by the Bay Area Rapid Transit District, is a classic example of the syndrome – but it’s not going unnoticed because of dogged digging by East Bay Times columnist and editorial writer Daniel Borenstein that has connected the dots.
Even though it already faced large operating deficits, the BART board agreed to a fat contract with its unions that added more red ink, then decided to ask voters for the bond issue, supposedly to improve its aging system.
Borenstein pointed out, however, that BART wouldn’t say exactly how it intended to spend the money and understated the property taxes needed to cover the new debt. He also did the complex arithmetic to demonstrate that a substantial part of the borrowed money would cover operating funds that had been diverted from maintenance into salaries and pensions, leading to the system’s deterioration.
“BART needs upgrades because of past failure to plan for inevitable deterioration of equipment,” he wrote. “We can’t fix the past. We can make sure BART doesn’t misspend more tax money.”