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WHAT MEASURE C COSTS PROPERTY OWNERS! |
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Welcome to the Silicon Valley Property Taxpayers’ Association - What Measure C Costs Property Owners portion of our Web Site. According to the Foothill-De Anza Community College District [“the district”], Measure C will “only” cost property owners $24/year for each $100,000 of assessed valuation or “less than $10 monthly for a home of average [$500,000] assessed value.” But this assertion is nothing more than an estimate, and more importantly, it isn’t even the district’s estimate! Instead, it’s based upon a number of allegedly “conservative assumptions” made by the district’s proposed bond underwriter [Morgan Stanley]; and as you will soon see, they are very likely wrong! First you need to remember Morgan Stanley has provided this estimate on a contingency fee basis. In other words, there’s no cost to the district unless Measure C passes]. Why do this work with no guaranty of payment? Because Morgan Stanley wants to become the district’s bond underwriter. Remember what the district’s political consultant [Larry Tramutola] warns: “if someone is offering something free, question its validity [because] rest assured, the firm offering the free service is going to make money somewhere down the line!” Stated differently, the district’s estimate is “suspect” because it comes from a source with an inherent “conflict of interest.” As aforesaid, the district asserts the “average” non-exempt district parcel has an assessed valuation of $500,000 [$10 monthly divided by $24/year]. But according to the County Assessor, the “average” non-exempt district parcel has an assessed valuation of closer to $634,000 [nearly 27% more than the district’s “low ball” assertion]! How can you confirm this fact? According to the district the following cities are included within its geographical boundaries: “Cupertino, Los Altos, Los Altos Hills, Mountain View, Palo Alto, Sunnyvale and portions of San Jose, Santa Clara and Saratoga.” Given the overwhelming majority of properties in the cities of Santa Clara and Saratoga are encompassed within the geographical boundaries of the West Valley-Mission Community College District [“the WVMCCD”]; and the overwhelming majority of properties in San Jose are encompassed within either the San Jose Evergreen Community College District or the WVMCCD; for all intents and purposes you may limit your examination to just the cities of Cupertino, Los Altos, Los Altos Hills, Mountain View, Palo Alto and Sunnyvale. According to the County Assessor, the assessed valuation for all 96,675 parcels, developed or not, and whether acquired just within the last year or 60 or more years, totals nearly $61½ Billion! Simple division confirms our “average” figures [if you want to see in greater detail how we’ve made our calculations, you’re invited to click here].
Of course the district’s “average” assessed valuation means little to you. What we believe is of greater relevance is your actual assessed valuation! If you’ve purchased your home in the last 6 years; or you live in Cupertino, Los Altos, Los Altos Hills or Palo Alto; it’s very unlikely it has an assessed valuation of only $500,000 [we suggest you take a look at the assessed valuation on your most recent tax bill (if you don’t have a copy, go to the “Assessment Roll Information and Inquiry Retrieval” portion of the Santa Clara County Assessor’s web site and after accepting the disclaimer, type in your address or Assessor’s Parcel Number - “APN”)]. If your assessed valuation is higher than $500,000, then please understand so will be the new taxes you pay because of Measure C!
For there to be sufficient revenue to repay $491 Million of Measure C bonds 10 or more years from now, the district’s bond underwriter assumes property valuations must increase by a minimum of 4% annually for their 40 year [see below] life! Given many experts predict the real estate bubble of the last 5 years is about to burst [in fact the San Jose Mercury Newspaper reports some professionals already assert it has burst (and others assert the burst will turn into a crash)], we hope you see the “conservative assumption” of foreseeable never-ending increases in assessed valuations is very likely wrong!
For there to be sufficient revenue to repay $491 Million of Measure C bonds, the district’s bond underwriter assumes they must be issued in “stages” over the next 10 years [2006, 2009, 2011 and 2015 according to the district]. In other words, the district must wait 10 years for assessed valuations to increase by 40% and “catch up” to the costs of servicing $491 Million of bonded indebtedness. Furthermore staging accomplishes another purpose; it extends the term of taxpayers’ repayment to 35-40 years. This is an important fact since state law allows up to 40 years for bonds or any series thereof to run [Education Code, §15100(a)(D)]! For there to be sufficient revenue to repay $491 Million of Measure C bonds, the district’s bond underwriter assumes they bear no more than a 5.5% annual rate of return [e.g., interest] to investors. One does not need to be a rocket scientist to realize that this “assumption” is likely wrong! Assessed valuations have exploded over the last 5 years specifically because long term interest rates have plunged to historical lows. But the days of low cost borrowing are over. It is the Federal Reserve Board that creates monetary policy. That policy directly affects the interest rates all borrowers [including the district] must pay. A simplistic means of monitoring Federal Reserve Board policy is through its discount rate [“the…overnight…interest rate charged to commercial banks and other depository institutions…in generally sound financial condition…on loans they receive from their regional Federal Reserve Bank’s lending facility”]. In June of 2004 the discount rate stood at 0.75%. 16 consecutive upward adjustments later it currently stands at 6%. Although no one can definitively forecast where interest rates will be at any given future point in time, according to the San Jose Mercury Newspaper, Federal Reserve Chairman Ben Bernanke has signaled that by August of 2006, the discount rate will likely stand at 6.25%, or even higher! Of course the interest rates borrowers pay in the marketplace are higher than the discount rate because financial institutions/investors are in the business of making money on the government’s money. Therefore they surcharge the discount rate [typically by 2%] to their best customers and call it the prime rate [“the underlying index for most credit cards, home equity loans and lines of credit, auto loans…personal…(and) many small business loans” including bonds]. The Wall Street Journal regularly surveys “the [prime rate for the] 30 largest banks [in the country] and when three-quarters of them…change, the Journal changes its [prime] rate.” Thus the WSJ prime rate has become “the most widely quoted measure of the prime rate,” and today it stands at 8% [2% over the discount rate]. Why care about any of the foregoing? Because according to the Federal Reserve Bank of San Francisco, long term interest rates, the discount rate and the prime rate all tend to move together. Because a “bond is [nothing more than] a debt security, similar to an I.O.U., when [one] purchase[s] a bond, [he/she is]...lending money to a government, municipality, corporation, federal agency or other entity known as the ‘issuer.’ In return for the loan, the issuer promises to pay...a specified rate of interest during the life of the bond and to repay the face value of the bond [the principal] when it ‘matures,’ or comes due.” Insofar as Measure C in particular is concerned, the district is the “issuer;” it proposes paying investors 5.5% annually; and, its promise to pay is guaranteed by nothing more than its good name. Now ask yourself: if you were an investor with money to tie up in a bond for the next 25-40 years, would ever invest in an unsecured piece of paper returning 5.5% annually if you could earn that same or a likely higher rate of return simply by making a deposit into a FDIC government insured bank account? Now fast forward. Some financial institutions are offering FDIC insured returns in excess of 5.16% on terms as little as five months! Many banks already offer FDIC insured compounded returns approaching 5.5% annually for no more than a one-year commitment. And we know of one [there’s a branch in Sunnyvale] that’s actually offering 5.5%! And for the rest of these banks that aren’t yet at 5.5%, because of ever increasing interest rates, they’re likely to “catch up” and exceed 5.5% in very short order! The likely estimated rate of interest the district will have to pay on the bonds of Measure C cannot be viewed in a vacuum. Since for logistical reasons alone the district cannot issue any bonds by August of 2006, assuming arguendo Measure C were to pass, the simple fact of the matter is it will very likely have to offer investors more than a 5.5% annual return! And if you’re of the opinion interest rates are on a long term upward trend, what kind of return do you really think the district is going to have to offer investors in 2009, 2011 and 2015, and, how do you think these rates compare to the district’s “conservative assumptions?”
Now that you have a better understanding of the real world cost of bonds [rather than the district’s bond underwriter’s “conservative assumptions”], you’re prepared to pay very close attention to the Chancellor’s Tax Rate Statement [which is mandated by law (Elections Code, §9401) and included in your voters’ pamphlet]. There she admits that the district’s estimate of the costs of Measure C bonds is “based upon projections and estimates only, which are not binding on the District.” Why are they not binding? Because “the actual timing of bond sales and the amount of bonds sold at any given time will depend upon the needs of the District...the state of the bond market...the actual interest rates on any bonds sold...the actual assessed valuations in future years...as determined in the assessment and equalization process...and other factors at the time of sale...Therefore [she cautions that] the actual tax rates, and the years in which such rates are applicable may vary from those presently estimated.” See; we told you so!
Also pay close attention to the Resolution Ordering this Election [hopefully included in your voters’ pamphlet]: “The budget for each project is an estimate and may be affected by factors beyond the District’s control. The final cost of each project will be determined as plans are finalized, construction bids are awarded and projects are completed. Based on the final costs of each project, certain of the projects described...may be delayed or may not be completed. In such case, bond money will be spent on only the most essential of the projects listed.” Finally, also pay close attention to County Counsel’s Impartial Analysis of Measure C [also included in your voters’ pamphlet]: “The actual interest rates at which the bonds will be sold depend on the bond market at the time of the sales.” So what do all of these disclosures mean to you? Simply stated, if assessed valuations don’t appreciate by a minimum of 4% annually over the next 40 years; the district is forced to offer higher interest rates [than 5.5% annually] to bond investors; or, it doesn’t issue the proposed bonds of Measure C in stages over the next ten years; the cost to property owners will be higher than $24/year for every $100,000 of assessed valuation! And when taxpayers wake up to the reality 10 years from now, the district’s response will likely be the same as its rebuttal arguments to Measure E: no one ever guaranteed the cost of Measure C would only be less than $10 monthly! Is this the kind of arrogance you expect from an agency of the state?
The simple answer is it can’t! As the district’s political consultant correctly observes, “the tax rate levied as a result of any single election must be less than...$25 per $100,000 of assessed property value.” When it becomes evident the district can’t service $491 Million of Measure C bonds with a new $25 per $100,000 of assessed property value tax, it will undoubtedly return for more! Is this the kind of program you’re willing to buy into? If you agree that the likely cost of Measure C is higher than the district has estimated; the district knows it is higher; and the cost is not warranted for the questionable rather than the most “critical and urgent” facility repair projects it proposes; we urge you to VOTE NO! Should you have questions or comments, please address them to Silicon Valley Property Taxpayers’ Association at: |
