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WHAT MEASURE G REALLY COSTS PROPERTY OWNERS! |
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Welcome to the Silicon Valley Property Taxpayers’ Association - What Measure G Costs Property Owners portion of our Web Site. Since bonds represent ordinary I.O.U.s, a good way to visualize the total costs associated with their repayment is to think of them as if they were any other type of indebtedness. So for repayment purposes, let’s assume Measure G’s bonds were rolled into and evidenced by an ordinary mortgage. If you’re a property owner with an outstanding mortgage, you understand that the total amount you repay during the full term of your mortgage totals considerably more than just the principle amount originally borrowed. Although there are many variables which come into play, let’s assume you borrowed $1 Million. Let’s assume the term of your mortgage were 40 years, and the interest rate on your loan were a fixed 5.5%. Finally, let’s assume your mortgage were fully amortized so each month you repaid not only all accruing interest, but a portion of principle. The total of all your payments, principal and interest, would be nearly $2.476 Million. Now multiply the loan amount by 90 [for Measure G’s $90,000,000] and your total cost would be nearly $223 Million! Given that for the reasons stated it is unlikely Campbell Union High School District [“the district”] will be able to issue $90 Million of bonds, in stages, over 6 or more years, and at an average yield to investors of 5.5%, we feel confident in estimating that when everything is said and done, the bonds of Measure G will end up costing taxpayers $260 Million, or even more! According to the district’s proponents, Measure G “only” costs [and intentionally it doesn’t state WHO it costs] “less than $3/month.” But this assertion is nothing more than an estimate; it isn’t even the district’s estimate; and more importantly, it is very likely a wrong estimate! The first thing you need to know about a public agency’s bond cost assertions is that the district’s bond underwriter is the one who has provided the estimate, and the estimate has been provided on a contingency fee basis. In other words, there’s no cost to the district unless Measure G passes. If you’re in the business of bond underwriting, why would you ever do this kind of work with no guaranty of payment? Because you want to become the district’s bond underwriter [remember what political consultant (Larry Tramutola) has warned: “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.” By inference, the district asserts the “average” non-exempt district parcel has an assessed valuation of $242,420 [we say by inference because “less than $3 monthly” multiplied by 12 months equals $36/year. Dividing $36 by Superintendent Farber’s Tax Rate Statement rate of $14.85 per each $100,000 of assessed valuation, results in an average assessed valuation of $242,420]. But according to the County Assessor, the “average” non-exempt district parcel has an assessed valuation of closer to $428,730; nearly 77% more than the district’s “low ball” assertion! How can you independently confirm this fact, and why should you care? Independent Confirmation: According to the district, the overwhelming majority of properties located within its geographical boundaries are located within the City of Campbell [although some properties are located within the cities of Saratoga, Los Gatos and San Jose]. Given the average assessed valuation for properties in San Jose may be slightly less than Campbell’s; and considerably more for properties in Los Gatos and Saratoga; for all intents and purposes, you may limit your examination to just the city of Campbell. According to the County Assessor, the assessed valuation for all 10,895 Campbell parcels, developed or not, and whether acquired just within the last year or 60 or more years ago, totals nearly $4.77372 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]. Why You Should Care: If the new taxes to be levied to repay these bonds are based upon a parcel’s assessed valuation; and the average assessed valuation is twice as much as the district represents; then the new taxes the average homeowner will be assessed as a result of Measure G will be twice as much as the district asserts!
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 Los Gatos or Saratoga; it’s nearly impossible it has an assessed valuation of only $242,420 [we suggest you take a look at your home’s actual assessed valuation as reflected upon your most recent tax bill (if you don’t have a copy of the bill, 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 $242,420, please understand so will be the new taxes you must pay because of Measure G!
For there to be sufficient revenue to repay $90 Million of Measure G bonds [some of which will be issued 6 or more years from now], the district’s bond underwriter has likely assumed property valuations will increase by a set minimum [such as 4% annually] for their 40 year [see below] series term! 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 assert it has already burst (and others assert the burst will soon turn into a crash)], we hope you can see that the so called “conservative assumption” of foreseeable, never-ending increases in assessed valuations is very likely wrong!
For there to be sufficient revenue to repay $90 Million of Measure G bonds based upon the tax rate represented, the district’s bond underwriter has likely assumed bonds will be issued in “stages” over the next 6 or more years. In other words, the district must wait a minimum of 6 years for assessed valuations to increase by 25% or more so they can “catch up” to the costs of servicing $90 Million of bonded indebtedness. Additionally, staging accomplishes another purpose; it ends up extending the term of taxpayers’ repayment commitment by an additional 5-10 years. This is an important fact to understand since state law allows school districts to issue bonds in “series” which results in new taxes for up to a maximum of 40 years [Education Code, §15100(a)(D)]! This is why we can accurately assert that although some of the district’s individual bonds may be issued for a 30 year term, homeowners will be repaying the entire series of bonds for the next forty years! For there to be sufficient revenue to repay $90 Million of Measure G bonds based upon the tax rate represented, the district’s bond underwriter has likely assumed they will bear no more than a 5.5% annual yield [e.g., interest] to investors. One does not need to be a rocket scientist to realize that this “assumption” is very likely wrong! Assessed valuations have exploded during 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 for you to monitor Federal Reserve Board policy is through its published 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%. 17 consecutive upward adjustments later it now 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 the end of 2006, the discount rate will likely stand at 6.25%, or even higher! Of course the interest rates borrowers pay in the marketplace end up being 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 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%. Why should you 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 G 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 millions to tie up for the next 25-40 years in an I.O.U., would you ever invest in an unsecured piece of paper returning but 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 5.76% on terms as little as ten months! Many banks already offer FDIC insured compounded returns approaching 5.5% annually for no more than a six-month commitment. Thus the likely rate of interest the district will actually have to pay on the bonds of Measure G cannot be viewed in a vacuum. Since for logistical reasons alone the district cannot issue any bonds any earlier than January of 2007, assuming arguendo Measure G were to pass, the simple fact of the matter is the district 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 2011-2012? And how do you think these rates compare to the district’s so called “conservative assumptions?”
Now that you have a better understanding of the real world costs of bonds [rather than the district’s so called “conservative assumptions”], you can now pay very close attention to Superintendent Farber’s Tax Rate Statement [which is mandated by law (Elections Code, §9401), and included in your voters’ pamphlet]. There Superintendent Farber admits the district’s estimate of the costs of Measure G are based upon projections and estimates only, which she cautions 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 depends 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 local assessment and equalization process, and other factors at the time of sale. Therefore actual tax rates, and the years in which such rates become applicable, may vary from those presently estimated. See; we told you so!
Also pay close attention to the Resolution Ordering this Election [hopefully also included in your voters’ pamphlet (although oftentimes not)]. That resolution likely states that the budget for each proposed project is an estimate, and it may be affected by factors beyond the District’s control. Thus 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 not completed. In such case bond money will be spent on only the most essential of the projects listed. Translation: we told you so! Finally, also pay close attention to County Counsel’s Impartial Analysis of Measure G [also by law included in your voters’ pamphlet]: According to County Counsel, “the actual interest rates at which the bonds will be sold depend on the bond market at the time of the sales.” Translation: we told you so! So what does all of this legalese mean to you? 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 G in stages over the next six or more years; the cost to property owners will be $260 Million, or even more; and, higher than $36/year for every $100,000 of assessed valuation as the district has represented! Furthermore when taxpayers wake up to this reality 6 or more years from now, the district’s response will likely be: no one ever guaranteed the cost of Measure G would be limited to less than $3 monthly, and there will be nothing you can do! Is this the kind of arrogance you expect from an agency of the state? Thus if you agree: the likely cost of Measure G will be higher than the district has estimated; the district knows it will be higher; and the cost is not warranted; we urge you to VOTE NO! Should you have questions or comments, please address them to Silicon Valley Property Taxpayers’ Association at: |
