Double danger in bonds for sports arenas

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.

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