Bonds: No Free Lunch

October 14, 2011

Bond measures that appear on statewide ballots include a disclaimer that goes something like this: “This measure appropriates money from the General Fund to pay off bonds.” Translation: “This measure does not raise your taxes to repay the bondholders.” Instead, bond debt is repaid from the same limited pot of money that funds our schools, universities, safety-net programs, criminal justice system, and other key public structures. Because voters don’t have to weigh the value of what the bonds would buy against their willingness to pay for them, bonds may look a bit like free money to many California voters.

However, a recent report from State Treasurer Bill Lockyer makes clear that bonds are no free lunch. Debt service – principal and interest payments – on outstanding bonds will cost the state an estimated $6.9 billion in 2011-12, equal to 7.8 percent of General Fund revenues. That “debt-service ratio” is higher than in any year since 1990-91, when debt service equaled 2.5 percent of state revenues, according to data provided by the State Treasurer’s Office. This ratio has fluctuated over the past two decades depending on the volume of bond sales and the health of state revenues, but the trend in recent years has been upward. Since 2004, voters have authorized the sale of nearly $70 billion in general obligation bonds for everything from high-speed rail to stem cell research to flood prevention. Meanwhile, state revenues have plummeted in recent years due to the Great Recession.

This isn’t to say that none of these projects are worthy of public investment. In fact, many of them are critical, given the state’s growing population and aging infrastructure. According to the Treasurer, however, “the crucial question is: How do we go about making the investment?” The Treasurer urges policymakers to “devise a strategic infrastructure financing plan that reduces reliance on the State General Fund … includ[ing] alternatives such as user/beneficiary fees to finance State debt where appropriate, or new sources of revenue dedicated to payment of additional debt service.” While user fees wouldn’t work for financing public school bonds, for example, they would make sense for other types of bonds – such as the water bond that the Legislature placed on the November 2012 ballot. However, rather than embracing a “user pays” principle to finance new water-related infrastructure, this measure will ask voters to approve yet another massive general obligation bond – $11.1 billion – that would be repaid from the state’s ailing General Fund.

— Scott Graves

Ten New Year’s Resolutions for a Fiscally Responsible California

January 4, 2010

I’m a big believer in New Year’s resolutions. I have one list for home, one for work, and a separate list for my favorite hobby. In honor of the new decade, here’s another list: one aimed at setting the state on a fiscally responsible path for the year ahead.

  1. Don’t vote for any ballot measure that creates an unfunded obligation on the state budget or “locks in” more of the budget. Constitutional provisions that limit the use of certain tax revenues or impose spending requirements on the budget without providing the resources to fulfill those obligations exacerbate California’s fiscal problems. These provisions range from dedication of sales taxes collected on gasoline to transportation to the “Three Strikes” law establishing minimum sentencing requirements.
  2. Don’t vote for bonds that impose an obligation on the General Fund where there’s a good alternative. The Legislature missed a great opportunity when it placed a water bond on the ballot that will further burden the General Fund instead of asking water users to pay the cost of system improvements. State Treasurer Bill Lockyer recently reported that debt service costs will exceed 10 percent of General Fund spending in 2012-13. That’s more than the state spends on all of Higher Education or Corrections and Rehabilitation. Debt service costs have more than tripled as a share of the budget since the mid-1980s.
  3. If you vote for an unfunded bond or budget “lock in,” don’t complain about the state’s budget problems. This one should be self-explanatory. If you help create the problem, don’t be surprised when it is hard to find a solution.
  4. Don’t promise to cut taxes and balance the budget. I have the cover of an old New Yorker magazine on the wall of my office. It is a take-off of Dante’s Inferno. At the center ring of hell? Politicians that promise to cut taxes and balance the budget. It’s a good reminder that the impossible is, well, impossible.
  5. Use more facts, less rhetoric. Here at the CBP, we like to think of ourselves as being in the business of providing facts. That’s because, to paraphrase our friends at the Oregon Center for Public Policy, “facts matter.” Let’s all resolve to make 2010 the year that budget and policy debates are based on hard facts and solid, evidence-based research. And remember that the plural of anecdote is not data.
  6. Hold candidates for public office accountable for realistic solutions to California’s budget problems. If a candidate for governor proposes to layoff tens of thousands of state workers, make them tell you exactly which workers she or he thinks are expendable: college professors or prison guards? The upcoming gubernatorial campaign offers an opportunity for those who seek to lead California to initiate an honest conversation with voters about the difficult choices needed to balance the state’s budget and what Californians want and need from government to make our state one we can all be proud of.
  7. Have compassion for the less fortunate among us and those who continue to suffer from a weak economy. Double-digit unemployment rates and the prospects of a jobless recovery will increase demands on state and local safety nets. Recent budget cuts have asked families and service providers to do more with fewer resources in the face of rising demands. Budgets are about values and choices and we remain convinced that compassion is a value Californians share.
  8. Get involved. Lobby your legislators or the Governor. Better yet, do it as part of the PTA, your union or professional association, or a local community organization. Don’t have one? Start one. Any elected official worth her or his salt does listen and your opinions do matter. Remember that you are the expert for your community.
  9. Vote. My guess is that Budget Bites readers are high-propensity voters. Take the next step. Encourage your family, friends, co-workers, and clients to register and vote. This year, Californians will elect a new governor, vote for 80 assemblymembers, 20 state senators, Congressional representatives, and weigh in on countless ballot measures. My motto: if you don’t vote, you don’t get to complain if things don’t turn out how you’d hope.
  10. Contribute. Hopefully, to support the work of the California Budget Project, but also to the shelter, clinic, food bank, or school of your choice. Tough economic times make for tough fundraising times. Many nonprofits that receive state or local government funds have experienced deep cuts in funding while demand for their services soars. Even a small donation, if that’s all you can afford, tells staff and volunteers that you value the work that they do.

And with that, best wishes for a happy new year. We know that it will be tough. And it probably won’t be pretty.

On behalf of all of us here at the CBP, we look forward to working with you to build a better future for Californians.

— Jean Ross

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Drowning in Debt

December 14, 2009

Bond debt will consume a substantially larger share of the state’s limited revenues over the next few years, according to two longtime budget watchers who testified before the Assembly Budget Committee this afternoon. State Treasurer Bill Lockyer reported that California could spend more than $10 billion on debt service in 2012-13 – about 11 percent of projected General Fund revenues, crowding out funding available for programs and services. “Debt service is cannibalizing your program support,” Lockyer said.

Legislative Analyst Mac Taylor agreed that debt service is likely to rise significantly in coming years, and recommended that the Legislature create a Joint Committee on Infrastructure to help ensure better planning. Although Taylor argued there is no “right” level of debt service, he noted that more debt means a bigger “hit on the budget” – the state pays $70 million in debt service for every $1 billion in bonds sold. Assembly Budget Committee Chair Noreen Evans, concerned about that hit on the budget, called debt service “the Pac Man that is eating up” the state budget and pledged to keep this issue front and center during 2010.

— Scott Graves

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