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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?

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?

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?

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?

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?

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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Q&A with Erickson

• John Erickson

• What are bonds and what are they used for?

• Why do states use bonds?

• Have bonds been used to support educational goals before?

• Why not just add additional taxes?

What are the types of programs that might be considered for bonds?

• So, with interest, what do bonds cost?

• You hear about general obligation bonds and revenue bonds. What's the difference?

• Are there alternatives to using bonds?

• Why are there so many propositions on the March ballot?

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• Ballot Proposition Will Benefit County

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