Californians can be forgiven if they're starting to feel nickeled-and-dimed to death. The Nov. 4 ballot is studded with requests by cities, counties, schools, transportation districts and other local governments to borrow money for projects by selling bonds. And when government borrows, the taxpayers become the collateral.
Investors buy general-obligation municipal bonds in part because interest earned on them is tax-free. But they also like such bonds because they are so safe -- and they are safe in part because they are backed by tax revenues. That's the reason they can be issued only on approval by voters: a majority vote for state bonds, and a two-thirds vote for local bonds (55% for many school bonds). Local bonds, especially, appeal to investors because everyone knows where the money will come from to repay them, with interest -- the property tax bills of the residents of the city, county or special district.
For The Record
Los Angeles Times Tuesday, August 05, 2008 Home Edition Main News Part A Page 14 Editorial pages Desk 0 inches; 21 words Type of Material: Correction
Bond ratings: Sunday's editorial referred to one of the "big three" bond rating agencies as Fisk. The name is Fitch Ratings.
But the money residents pay to back up all those bonds is part of a financial chain that links institutions far beyond statehouses or local city halls. At the far end are Wall Street firms, which often see cities, counties, school districts and states, and ultimately their taxpayers, as cash cows. Populaces are essentially sold to investors based on their willingness and ability to tax themselves.
It can be a good deal all around. Residents get projects and services that enhance their quality of life, and that their governments otherwise would be unable to afford. But a growing number of the politicians who ask constituents to back those bonds are beginning to nip at the other end. Investment banks, they claim, and rating agencies and especially bond insurance companies have been gouging governments -- and taxpayers. It's what Connecticut Atty. Gen. Richard Blumenthal calls "a secret Wall Street tax on Main Street." These newly combative elected officials charge that abuses are now being uncovered because of the mortgage default crisis. They are rebelling. People who pay taxes should pay attention:
* Earlier this year, California Treasurer Bill Lockyer charged that the "big three" bond rating agencies have cost taxpayers millions of dollars in higher interest payments and unnecessary insurance premiums by intentionally giving lower ratings to municipal bonds -- which carry virtually no risk of default -- than they do to much riskier corporate bonds.
