Last week, the Sacramento Bee reported that thecity of Sacramento has been “forced to use money from [the] general fund to pay off Golden 1 Center bonds.” Golden 1 Center is the arena in downtown Sacramento known mostly for being the home venue of the NBA franchise Sacramento Kings.
The predicament that the city finds itself in – which was easily foreseeable –highlights two major problems with the way local governments raise and spend billions of dollars. First, the bonds used to finance the construction of Golden 1 were never approved by voters. Second, government subsidies for sports facilities have a horrible track record in damaging the interests of taxpayers.
As to voter approval, a common reaction from readers of the Bee article was “how could they issue bonds without an election? That’s a good question.
Voter approval requirements for new debt date back to the earliest days of California’s history. In fact, the original California Constitution in 1849 required that local debt could only be incurred by a two-thirds vote of the local electorate. And what was true 170 years ago is even more so today: Because long term financial obligations are paid by future generations, we should not allow politicians – who desire to placate special interests which stand to gain from projects – to commit to massive debt without a direct check by those who are ultimately on the hook.
But political elites and special interests hate voter approval and, over the course of the last several decades, have created new esoteric debt instruments like “Certificates of Participation” and “revenue bonds” for the sole purpose of avoiding voter approval. While “revenue bonds” are not inherently bad, especially for smaller projects, they are far more susceptible to abuse than are general obligation (GO) bonds.
Generally, local bonds are either general obligation bonds or revenue bonds. General obligation, or GO, bonds are backed by the general revenue of the issuing municipality, while revenue bonds are supported by a specific revenue source, such as income from a toll road or sewer system.
For investors, GO bonds are considered less risky than revenue bonds because they are backed by the general fund of the issuing entity. Revenue bonds have no such guarantee except that there is an expectation that the legislative body will appropriate annually an amount to meet the obligation.
In Sacramento’s case, the Golden 1 construction bonds were intended to be repaid by parking revenues. But because parking revenues have fallen short, partly due to the pandemic, the city must fulfill the obligation by other sources. If they didn’t, “. . . there would be ramifications to the city’s credit rating and reputation,” according to the City of Sacramento’s Debt Manager, Brian Wong.
In addition to being deprived of the right to vote on long-term debt is the issue of whether government support for professional sports teams is beneficial to taxpayers. Despite sports boosters’ claims that such subsidies generate additional economic activity, that claim is belied by numerous economic studies.
Economists John C. Bradbury, Dennis Coates, and Brad Humphreys went through 130 studies over 30 years and concluded: “The large subsidies commonly devoted to constructing professional sports venues are not justified as worthwhile public investments.” Their report, released in August of 2022, is the most comprehensive review of the research on the subject and it confirms what taxpayer advocates have argued for years. Simply put, a city or county does not see net economic growth from subsidizing stadiums.
California’s growing trend toward increased debt absent voter approval and the pursuit of projects and programs that deviate from traditional government responsibilities are just two more symptoms of the state’s financial ineptitude.
For taxpayers who were told by city officials that stadium bonds would pay for themselves, it’s another reminder that, with government spending, there’s no free lunch.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.
