Capital appreciation bonds, or CABs, are exotic public financing tools that allow local governments to borrow money now and delay principal and interest payments for decades. Once the repayment schedule starts, future taxpayers can be liable for as much as 10 times the initial amount borrowed over a 40 year period. By contrast, retiring traditional bonds usually costs taxpayers 2 to 3 times the amount borrowed.
Generally speaking, CABs provide an “out” for local officials who are too hesitant to go to voters to ask for a tax increase and too timid to root out waste, fraud, and abuse in the budget. And so increasingly, locals have turned to CABs which allow them to handle any cash flow positions they may have while passing the buck to future generations.
Obviously, this is neither good public policy nor fair to a generation of taxpayers not even born yet. That’s why it is heartening to see lawmakers tackle this issue head-on with House Bill 3416 and Senate Bill 449, two simple and straightforward bills to bar all local governments in Texas from issuing this type of debt.
It is too easy for local officials to borrow-and-spend now while passing on massive debt to future generations that they will never have to answer to. Fiscal irresponsibility of this sort deserves to go the way of the dodo, and that’s why we’re glad to support HB 3416 and SB 449.
To view the Foundation’s past writing on CABs, see here and here.