Getting Local Governments Where They Need to Go Without Taking Taxpayers for a Ride: "CABs," Why They Are Used, and What Can Be Done to Prevent Their Misuse

The United States has tremendous infrastructure needs, and if those needs are to be met, local governments are likely to play a significant role in fulfilling them. Local governments spend hundreds of billions of dollars annually building infrastructure, and much of this is financed with debt in the form of bonds payable from real property taxes. Ideally, the cost of a capital project would be spread evenly over its life so all taxpayers who benefit from the project contribute to its cost. However, local political leaders have incentives to defer payment, requiring future taxpayers to pay more than their fair share. This article discusses an extreme example of this-the use of long-term compound interest bonds, on which neither principal nor interest is paid until at or near maturity. The article describes the problems with the extensive use of this form of financing and explores the reasons California and Texas school districts issue hundreds of millions of dollars of these bonds annually, then considers alternative means of addressing those problems, including recent California and Texas legislation. It is critical that problems with the framework within which local governments issue debt, such as those that lead to the misuse of long-term compound interest bonds, be addressed.