State Bonds: What are they? How do they work? by Valerie Orleans
From Dateline (February 19,
2004)
Q:
What are bonds and what
are they used for?
A:
Bonds issued by states and municipalities
(often called “municipal” bonds) are generally
used by states to finance capital outlay projects or acquire
land. With capital outlay, this could include using monies
to finance construction or renovation of buildings or other
infrastructure. These are usually long-term expenditures.
Q:
Why do states use bonds?
A:
Bonds generally allow the state
to acquire assets or develop building programs that it could
not afford on a “pay as you go” basis. Perhaps
one analogy would be to look at your mortgage. When people
purchase a home, they usually don’t have all the money
needed to finance such an acquisition. So, they take out a
loan to secure a down payment. The understanding is that the
loan will be repaid over the years with interest. Basically
the state is doing the same thing but on a larger scale –
they’re taking out a loan to finance a project or series
of projects.
Q:
Have bonds been used to
support educational goals before?
A:
Yes, actually there is a long
history of using bonds to support education. In 1962, Prop
1a authorized bonds for the expansion of the UC, CSU and California
Community College systems. In Orange County, they funded the
construction of UCI, Cal State Fullerton and new community
college campuses.
Q:
Why not just add additional taxes?
A:
People and businesses tend to be averse
to additional taxes since California is already a high-tax
state, and taxes can have negative consequences. Moreover,
once you institute a tax, you’re frequently going to
continue to pay – even if the original reasons for the
tax no longer exist. For capital investments, bonds are superior
because the funds they make available are typically targeted
for specific expenditures that most agree need to be made.
And since the types of projects that bonds tend to fund have
long-term benefits, the costs are spread out over time. Generally
speaking, bonds should not be used to meet ongoing operating
costs.
Q:
What are the types of programs
that might be considered for bonds?
A:
Historically, some of the projects
that tend to be funded with bond money include education,
corrections, veterans’ facilities, housing, transportation,
state and local parks, natural resources and, in California,
expenses related to seismic retrofitting.
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