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CONTENTS
[...] Concentration of Wealth
[X] Campaign Contributions
[X] Bond-Financing Has Its Place
[X] Interest-Free Financing Is Usually Best
[X] 2005 State-Wide Bond Program - Voter Issue #1
On some things, most people can agree. If we are to have a just society, our economic system should reward those who show initiative, obtain skills, and work conscientiously. And, those who invest their savings deserve a return on
their investments. In addition, many also agree that our economic system should balance just rewards for effort with considerations of fairness. For the past 50 years, America has followed a trend toward concentration of wealth into fewer hands.
Concentration of Wealth
In 1998, the 50% of the population with the lowest income receives 14% of the nation's personal income (including rent income). While the highest 10% receives 42% of the nation's personal income. The top 10%
receive much of their income from interest on loaned money, not wages. [Capital Ideas, Jan/Feb 1999, Page 4, National Taxpayers Union.]
Our nation's total personal income is made up of wage-income and interest-income. At any level of total personal income, the interest-income/wage-income ratio shifts toward interest-income as interest rates rise. Bond-financing (or debt-financing) of public construction projects and services compete with the private sector for available capital. That is, government borrowing helps to elevate interest rates. By minimizing debt-financing of government programs, interest rates will be lower and, in turn, wage earners will receiver a larger share of the nation's total personal-income.
Current-day government
borrowing involves a significant amount of money as shown below in ball-park numbers that were taken from news reports and government sources.
* Federal Government
. . . Debt -- $7 trillion
. . . Debt per person -- $22,000
. . . Annual
interest -- $350 billion
. . . . (The U.S. military budget is about $400 billion.)
* State of Ohio
. . . Debt -- $18 billion
. . . Debt per person -- $1,600
. . . Annual interest -- $400 million
* * 2005 State-wide bond program
- Voter issue #1
. . . Debt -- $2.0 billion
. . . Forecasted interest cost -- $1.2 billion
. . . Total cost -- $3.2 billion
. . . . [X] Further details below.
* Franklin County
. . . Debt -- $170 million
. . . Debt per person -- $160
. . . Annual interest -- $9 million
* City of Columbus
. . . Debt -- $1.7 billion
. . . Debt per person -- $2,400
. . . Annual interest -- $90 million
* Columbus City Schools
. . . Debt
-- $400 million
. . . Debt per person -- $800
. . . Annual interest -- $20 million
* Columbus Metropolitan Library
. . . Debt -- Zero
. . . Debt per person -- N.A.
. . . Annual interest -- Zero
* Ohio State University
. . . Debt -- 815 million
. . . Debt per person -- N.A.
. . . Annual interest -- 23 million
The alternative to government debt-financing is collecting the necessary tax revenue before starting a project. This non-borrowing mode of financing with public funds has several names including "interest-free financing" and "pay-as-you-go financing".
Campaign Contributions
Campaign contributors, who typically make much of their income from lending
capital, are one source of political pressure for debt financing of government programs. It is easy to see why. Think of yourself as wealthy enough to rent a politician. Then ask yourself which of the following two candidates looks best, Candidate A or
Candidate B?
Thus, interest payments on public debts can be a form of financial pay-back to the campaign supporters of elected officials who promise to use debt financing. Interest income is tax-free at most levels of government. As a result, the personal-income tax base become smaller when one category of income is not taxes.
Bond-Financing Has Its Place
Not all long-term bond-financing of government facilities is an unwise use
of tax money. If, for example, a library district has its main library destroyed by a hurricane, the community clearly needs a new library. Assuming voters are willing to pass a tax levy to pay for a new library, the library board would have two
options:
Most voters would agree that their community needs a new library soon, not 15 years from now.
Interest-Free Financing Is Usually Best
Fortunately, crisis building programs are the exception. Most city councils, school boards, library boards, etc. are able to forecast capital improvements needs years
in advance. For example, a library board that projects the need for a building up-grade in about 10 years has the option of asking for a construction levy 10 years in advance, and thereby using interest-free financing.
In summary, interest-free (or zero-interest) financing of public facilities or public services offer the advantages of:
2005 State-Wide Bond Program - Voter Issue #1
The total bond issue is $2 billion.
The forecasted interest cost is $1.2 billion.
The total cost may thus be $3.2 billion.
State-wide Issue #1 is a $2 billion bond issue that includes money for:
A. $1,350 million to fund local infrastructure loans that help build roads, bridges, and water projects. Borrowing starts in 2008, runs for 10 years, and uses 20-year bonds.
Debt service cost peaks in 2018 at $115.3 million per year.
B. $ 500 million to fund Governor Taft's Third Frontier grants. Borrowing starts in 2006, runs for 7 years, and uses 10-year bonds. Debt service cost peaks in 2013 at $68.7 million per
year.
C. $ 150 million for "shovel-ready" development sites. Borrowing starts in 2006, runs for 7 years, and uses 10-year bonds. Debt service cost peaks in 2013 at $20.6 million per year.
Note: Annual debt service costs will vary over
time. The average will be around to $150 million per year. Information obtained from the Ohio Office of Budget and Management - 614--644-8787.
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This page last updated: July 14, 2006