August 8, 2010
Do we -- you and I -- make good financial decisions? We all want to think so, but there's troubling evidence to the contrary. In recent years, we've seen:
- Families buy $400,000 or $500,000 houses with little or no money down and an adjustable rate mortgage and no fears -- because, hey, the real estate market will just keep going up and we can refinance to cover the balloon payment.
- Elected officials approve pension changes that give retiring public workers higher amounts at younger ages, even though it is common knowledge that people are living longer. They subscribed to the belief -- patently silly in retrospect -- that these benefits "won't cost anything" because rising stock prices and other lucrative investments will cover everything.
- In the face of a state budget crisis, voters approve a $9 billion bond to help build a bullet train that may or may not get out of the station but that will put the state further in debt.
- Citizens, when surveyed on how to cut $25 million from the Modesto City Schools budget, zero in on business cards, bottled water and cell phones -- items that add up to a paltry amount, providing no real help.
What's the common denominator? Rather than political affiliation or corruption, it's more often a shortage of financial common sense -- or a failure to recognize that we can't have all we want for as little as we're willing to pay or to give up.
The term "financial literacy" has come into vogue in the past decade, usually in the context of teaching people to manage their finances. Organizations such as the Institute for Financial Literacy have emerged to help people learn how to manage their money, their debt, their credit, their insurance, and their investment and retirement planning. This is all positive.
When elected officials address the subject, they're usually talking about the need to provide -- or mandate -- financial literacy in the schools or financial literacy by those taking out a home loan. In other words, financial literacy for others.
But here's a possibility: Maybe this shortage of financial competence we demonstrate as consumers extends into local elected boards and councils -- and into the polling booth. We don't ask candidates to demonstrate that they really understand budget choices and trade-offs. We let them get away with simplistic slogans -- no new taxes, no more layoffs -- and we don't press them on just how they're going to provide basic public services.
On Aug. 1, The Bee carried a special report on school infrastructure financing, which appeared under the headline "District snookered?"
Reporter J.N. Sbranti outlined the Empire Union School District's Mello-Roos tax arrangement and bond refinancing, which ultimately will cost district residents a whole lot more than they or the school board members ever anticipated. One former trustee even apologized, saying board members didn't ask enough questions about how much had been collected.
Neither did The Bee. In reviewing our news coverage in July 2001, just before the last bond was approved, we reported that the Mello-Roos tax extension would cost $105 a year for homes purchased before 1987 and $315 a year for homes purchased later. Not mentioned was the escalator clause, which has raised those amounts to $147 and $441 and eventually will take them to $232 and $696, respectively, per household.
The Bee did not make a recommendation on Empire's Measure H in 2001, but on this page we generally have supported school bond measures, on the argument that "improving education remains one of the best investments any community can make." We still adhere to that principle, but with the benefit of hindsight, we recognize that we need to delve further into the long-term costs of bond proposals. Voters do, too.
That requires a lot of hard questioning that doesn't come naturally, especially to people not comfortable with math. Elected officials can fall into that category, so they rely on their staffs and on consultants, often without recognizing their inherent biases.
John Anderson of J.B. Anderson Land Use Planning has researched the tax burden on the Beard Land Improvement Co., which is in the Empire school district. He told Sbranti, "If you don't know how to ask the right questions, you can't expect the consultants to hold your hand."
And in one of the more-telling comments in last weekend's package, the former bond counsel for Empire said he didn't offer financial advice to the school district because, after all, everyone understands that if you stretch out the payments, you pay more interest. When we pause for a moment, of course we know that. But the duration of a debt typically is not the forefront of a bond measure. The questions are: What does it cost me now and what do we get out of it?
The special report on Empire and one on the Mello-Roos taxes in Modesto's Village I offer examples of huge financial decisions that didn't get enough public scrutiny. The result is that property owners in both areas appear to have unfair tax burdens.
How do we learn how to handle our money -- as individual consumers and as a citizenry? As individual consumers, we can read more, take classes and use Web sites such as the one offered by the Institute for Financial Literacy. Each Sunday in the Work & Money section, The Bee has a personal finance column. We also need to consider whether a source has a financial stake in the information he or she is providing.
As citizens, we can ask more questions of candidates and do more to study local and state ballot measures. We need to be more skeptical. And we need to ask the questions that weren't asked in the examples provided at the top of this piece: Will things continue as they are today? What are the short-term and long-term costs of this choice?