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California senator proposes including interest costs in new bond measures

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(The Center Square) – California State Sen. Kelly Seyarto, R-Murrieta, introduced a bill to require state and local bonds to include likely interest costs. This information is currently often combined with the annual payment estimate that combines both principal and interest, which Seyarto says obfuscates how much money is being spent on a measure’s objectives and how much the measure actually will cost.

“When asking voters if we can borrow money on their behalf, they should be armed with sufficient information to make an educated decision,” said Seyarto in a statement. “That includes being transparent and upfront about the cost of borrowing and what those voters will be paying back, even if it is over an extended period of time. Nobody would enter into a loan agreement without knowing the terms and interest, and the same information should be made clearly available for voters.”

In the California March primary voters’ guide, for example, governor-backed Proposition 1 is described issue authority for a $6.4 billion bond for expanding mental health and substance abuse treatment facilities and building supportive housing for the homeless, including $1 billion for veterans. However, the guide only mentions that the bond would cost $300 million per year over 30 years, and does not mention that interest will cost an estimated $2.9 billion, or that the total cost is expected to be $9.3 billion.

Government and pension finance expert and former State Sen. John Moorlach says Seyarto’s legislation could be helpful for voters, but that the government’s estimates for interest rates on bonds do not seem to be accurate.

“Due to varying interest rates, it can be difficult to come up with a precise number, so you could give a range. Usually we have more movement coming out of the federal reserve like we’re seeing now, when we saw rates rise from 1% to 5% within a few months,” Moorlach said. “It’s a dynamic which no one can predict, but I guess the author of the resolution should say it’s a range that’s reflective of current rates, and I think that’s a helpful idea.”

Moorlach also noted that with typical interest rates, the cost of interest on a bond over 30 years can cost more than the original bond principal, especially because bond issuances go through a competitive bidding process in which buyers determine what yield they are willing to secure to provide a loan to the state.

Proposition 1’s $2.9 billion interest cost is based on a 1.51% interest rate, which is less than half of what the state’s latest general obligation bond issuance was for — the November 2023 issuance of $682 million of general-obligation state bonds was split between two groups at 3.28% and 3.29% respectively.

Assuming a rate of 3.285%, or the average of the two rates from the November issuance, Proposition 1 would cost $6.31 billion in interest, or $12.7 billion over 30 years.

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