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Updated April 4, 2006
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Updated April 4, 2006 |
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The cost of interest for bonds increases the price of a new school by forty percent. The school system's response is that government needs bonds just as homeowners need mortgages. This is invalid. For a homeowner, the cost of a new house is many times larger than the homeowner's income. For government, however, the annual cost of building construction and renovation is only about ten percent of annual revenues. If Fairfax County Public Schools cannot find in its $2-billion yearly budget $200 million for buildings, how then is it able to increase staff four times faster than enrollment? A homeowner's annual mortgage cost is only about one-tenth of the amount borrowed. However, due to excessive bond sales, Fairfax County each year spends about as much repaying old bonds as it gets from selling new bonds. Fairfax County is $2 billion in debt. How can the County justify owing $2 billion when the amount it borrows each year is the same as the amount it repays for bonds already sold? Comment received November 10, 2005: Probably an academic point today, but I would agree that pay as you go, of course, avoids borrowing costs. It requires, however, that taxes be increased to pay the cost today. In terms of these bonds, that means a one time tax increase of $200+ million in 2005. I didn't understand FCTA to be arguing for that approach, i.e.. a $200 million tax increase. From a policy standpoint, hard also to understand why FCTA argues for imposing, via a tax increase in 2005, the cost of 30-year facilities on this year's tax payers, versus spreading that cost over the 30 year using population, which bonds would do.FCTA Response: Not a tax increase; spending reductions: elementary school guidance counselors as well as middle and high-school guidance counselors, social workers, psychologists, office workers, administrators, computers (which have not improved achievement but have driven up administrative costs); seven-period day, which probably lowered academic achievement by diluting students' time over seven subjects instead of six; elementary school Physical Education teachers (students need recess two-three times a day; not gym twice a week; Professional/Technical Studies which is an expensive fad that tries to give job training to college-bound students but has not resulted in higher achievement or significantly greater employability; reading resource teachers ... Enormous savings would be achieved through phonics-based reading which would result in far fewer children being (unnecessarily) stigmatized as learning disabled. You would also have fewer discipline problems if all students could read. The proliferation of magnet programs has made the neighborhood school a relic. If we had quality schools, magnet programs would not be necessary. If you quote this, please quote in context, i.e, state the reasons given for the reductions. Despite increasing real spending nearly ten-times faster than enrollment, the average senior's SAT score is only at the 65th percentile. Sixty-eight percent of Fairfax County Public Schools graduates attend four year colleges. However, 35 percent of college freshmen don't graduate (within six years). When you add graduates going to community colleges, it is likely that under 60 percent of Fairfax County Public Schools graduates will earn Bachelors degrees. Given that 57 percent of Fairfax County adults are college graduates, it appears children of college graduates will become college graduates. Virginia's real spending on public schools has also been increasing ten times faster than enrollment. Yet the National Assessment of Education Progress reports that 65 percent of Virginia students score below grade level. There has been no progress in closing the high school minority student achievement gap, despite all the lip service and extra money. The solution is a traditional curriculum, which public schools have resisted for half a century. Of the $1.4B 2004 Virginia tax hike, $1B went to public schools, even though public school real spending had been increasing ten times faster than enrollment. The Virginia Education Association has a great scam going: lobby for spending increases at the local level and then go to the state and say that state spending is not keeping up with local spending. Mark Warner's remedy for higher local taxes is higher state taxes. Regarding the second point, do you really want to increase the cost of a building just to spread its cost over twenty years (most bonds are twenty-year bonds)? Why not save money and pay up front? Wouldn't we be better off without a $2B debt? Then if there were a crisis, we would have reserve debt capacity for borrowing. As it is, our debt capacity is nearly exhausted. Follow-up comment (see below) received October 20, 2005: I find the argument is still very simplistic and the author lacks an understanding of government finances. Also the analogy is appropriate. If this person wanted to pay for all the investment projects up-front it would be many times available revenue (government income). Thus he is either advocating not to build schools, roads, or libraries (my guess) or a very substantial increase in taxes to pay for these when they are built. I can understand this argument for recurrent costs but not capital expenditures. Have the author read about the golden rule of government spending. Basically it says that you need to be able to cover recurrent costs (including interest payments) from recurrent revenue. Investment spending (for roads, schools, etc), is designed to provide a government with a rate of return to cover future interest payments associated with these projects. It is not quite this simple as one also needs a debt rule but this is a good first approximation. If I remember correctly Fairfax has a rule about interest payments not being greater than xx percent of revenue. If this is their debt rule, I would say it is well designed One other issue I did not want to bring up, is that if they finance by borrowing, the rate of interest is artificially kept low because of the tax deductibility of municipal bounds. On the other hand if they pay for it with tax money (our money), the cost to us is the opportunity interest rate which is much higher.FCTA Response: For Fairfax County, capital expenditures are, in fact, "recurrent": The County spends about $200M per year on capital projects. Therefore the golden rule, to pay for recurrent costs from recurrent revenues, is an argument against selling bonds. Regarding the debt rule, the County limits debt service (annual interest and principal payments for bonds already sold) to ten percent of the County budget. The "opportunity cost" due to the low interest rate on tax-free municipal bonds is cancelled out by the taxes we would pay on higher-interest taxable investments. Comment received October 17, 2005: > I find that this is one of the worst arguments I have ever read. The > person who drafted this has no idea what is meant by the cost of > borrowing or what is the purpose of interest or why people borrow. The > alternative would be raising taxes many-fold in the year when government > programs are undertaken. > > If you made the same argument about buying a house you would find that > the cost of buying a house could more than double? Does this mean we > should not borrow?. What makes this argument even more ridiculous is > that the longer the terms of borrowing the more it would supposedly > increase the cost > > Lets take a loan for 100,000 with an interest of 7%. > If the loan is for 30 years the total interest paid is 140,000 which is > greater than the loan > If the loan is for 20 years the total interest paid is 86,000 which is > also a large number > Guess what? If we repaid the loan in one year the interest is only a > little over 7000. > By the argument in this email we should repay in 1 year > > However rather than paying a little less than 8000 a year to service the > 30 year loan, the government would have to come up with 108000 in one year. > > I have not checked lately, but Fairfax County has an excellent bond > rating and it wood not have achieved it, if they had undertaken poor > debt management. >FCTA Response: As stated above, comparing the County to the homeowner is invalid. The homeowner has to borrow because the cost of a house is many times greater than his annual annual income. Moreover he has to repay over 20-30 years to get his mortgage payment down to a fraction of his income. However the County does not have to borrow since building costs (new construction and renovation) are only about ten percent of the County budget. Former Virginia governor and senator Harry F. Byrd, Sr., understood this and insisted on government pay-as-you go financing instead of borrowing. You can have an excellent bond rating even when you borrow unnecessarily. The bond underwriters won't penalize you for selling more bonds than you need; they want the business.
Republican legislators raise taxes higher than what was proposed by the Democrat governor.
Governor Warner told the Washington Post that general fund spending was flat for the last three years. What he neglected to mention was the large increase in general fund spending that occurred during the dot-com bubble.
Rebuttals to FCTA criticisms of the State of the Commonwealth address.
FCTA president asks Republicans and Democrats to reject costly debt financing, blank checks for the Virginia Education Association, and the use of taxes to destroy and replace families with big government.
Fairfax County Taxpayer Alliance 2002 Sales Tax Referendum Campaign Finances
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Fairfax County Taxpayers Alliance
© 1999-2006 The Fairfax County Taxpayers Alliance, Inc.E-mail us at webmaster@fcta.org
Apr 03 - During the 1999 campaign for Board of Supervisors, Providence District Supervisor Gerry Connolly denied any plans to raise taxes after the election. He called such plans "pure fiction" and "a fairy tale." ("Tax hike rumor spreads like wildfire", Times Community Newspapers, Oct. 14, 1999.) In the four years since that denial, real estate taxes for the typical Fairfax County household have increased over $1000, due to a sixty-percent increase in assessments. Rather than lower the real estate tax rate to offset the higher assessments, the supervisors allowed taxes to go up while making only token reductions in the tax rate. To offset rising assessments, the supervisors lowered the tax rate from its current value of $1.21 to $1.16. However, the supervisors had to lower the rate to 76 cents to completely offset the sixty-percent increase in residential assessments.
