Financing Community Facilities: A Case Study of the Parks and Recreational General Obligation Bond Measure of San Jose, California

Article excerpt

1. Introduction

The burden of financing a community's infrastructure and services like roads, parks, libraries, police stations, and fire stations primarily falls upon the local governments. The financing of these infrastructure and services, which are often critical for the survival and development of the community itself, is typically achieved through such broad-based revenue sources like property taxes and sales taxes, or through fees such as library fees, park fees, and development impact fees. However, wide spread public opposition to property tax increases exemplified by the limitations put on property tax rates in California, and the stiff inter-jurisdictional competition for sales tax revenues has led many jurisdictions to seek additional sources of revenue to finance these infrastructure and services. Bonds are one such revenue source.

Bonds issued by a municipal government are called municipal bonds. The municipal bonds are primarily of two major types--the revenue bonds and the general obligation (GO) bonds. The revenue bonds can be issued to finance revenue generating infrastructure or services like a toll road, water supply system, and sewer system. The GO bonds are typically issued to finance infrastructure and services that either do not generate any revenue, or generate very little revenue compared to the expenditure involved. Examples include police and fire protection services, parks and libraries.

General Obligation (GO) bond is one of the principal financing mechanisms through which the local and state governments fund capital improvements in the United States. It accounts for approximately 30% of all state and local government bond issuances (U.S. Census Bureau, 1998). GO bond's tax-exempt status and low risk, due to the fact that they are backed by the full faith and credit of the issuer, makes them very appealing to investors.

The use of public funds to retire the GO bonds makes it the responsibility of the issuing entity to ensure that first, the financing and transaction costs associated with the bond issuance are minimized; and second, the borrowed funds are used in the most efficient manner possible. The existing literature has primarily focused on the first responsibility while neglecting the second.

On November 7, 2000 the voters of the City of San Jose, California authorized the issuance of $228 million Neighborhood Parks and Recreation GO Bonds (Parks bonds in short). $132.715 million worth of Parks bonds were issued by the year 2005. They were issued as part of the Series 2001, 2002, and 2004 GO bonds. The City is using the bond proceeds to actively undertake several improvement projects, and intends to complete all the projects in a 10-year period (2001-2010).

This paper, using case study method, aims to fill this significant research gap by evaluating the usage of funds obtained from the issuance of the City of San Jose Neighborhood Parks bonds. The specific research question this study aims to answer is: What politics-, management-, and planning-related lessons can be learned from the difficulties faced by the City of San Jose as it developed capital facilities through Parks bonds proceeds?

The research involved review of the city council memos, documents prepared by the City Parks, Recreation and Neighborhood Services (PRNS) Department, Finance Department, and the City Manager's Office, and the interviews with the City staff. The study finds that a jurisdiction has to consider several politics-, management- and planning-related factors before issuing a GO bond. These include: be conservative in what you promise the residents; be prepared for changes in economic environment by identifying supplementary funding sources should the primary source not yield adequate funds; make sure that the jurisdiction is organizationally capable of handling the increased workload; and prepare detailed project plans prior to the bond issuance. …