Massive Bond Threatens State's Financial Future
Now it’s about real money…
[by Jon Coupal] 11/29/05

That ominous shadow that is now darkening the Golden State is being cast from a massive "infrastructure" bond trial balloon.

Although an exact amount has not been announced, the Capitol is abuzz with numbers that would make Bill Gates blush. Insiders from both the Schwarzenegger administration and the Democrat controlled legislature have suggested that a "megabond" of $50 billion, or even $100 billion, is possible. Backers of this monstrous debt issuance claim that the proceeds would be used to rebuild California's infrastructure of roads, levies, dams and other critical "brick and mortar" needs which no one disputes have been horribly neglected for decades.

But policy makers, particularly the adults in the Schwarzenegger administration, should reconsider. Any plan to load Californian taxpayers with the biggest state issuance of debt in American history is a bad idea. California's existing debt load is already too high.

Last year voters agreed to a $15 billion debt consolidation bond, Proposition 58, to cover the incontinent spending of the discredited Gray Davis. Add the $25 billion in state school bonds passed in the last three years -- this is separate from the nearly $40 billion in local school bonds approved since the year 2000 -- to other debt accumulated over the years and one is reminded of Everett Dirkson's wry observation, "A billion here, a billion there, and pretty soon you're talking about real money."

With the passage of Proposition 58, the state's debt ratio, the percentage of general fund revenues dedicated to bond repayment, jumped from five to seven percent. Most fiscal experts agree that a maximum of six percent is prudent, although some recommend a limit of only five percent.

Like a late-night infomercial, we can also say, "But wait, that's not all." Not counted amongst all this debt is the unfunded liability for state and local pension and health care costs. A wake up call is on the horizon, however, as new federal rules will soon kick in which would require an accurate accounting of these costs. Prepare to be shocked. These costs are likely to eclipse even the megabond proposal.

Nonetheless, a bond of $50 billion would put the state's debt ratio into the stratosphere. Due to fear in the financial markets that the state may not be able to pay its current bills, California's credit rating is already the lowest in the country. No wonder Wall Street has greeted the new bond proposal with skepticism

Still, some in the business community have expressed cautious optimism, and others are outright giddy. Already, building and transportation interests are lining up to lobby for their projects. After all, the bonds could be sold if California showed the capacity to guarantee repayment. This would, of course, mean increasing state revenue.

Gov. Schwarzenegger has declared his intention to increase state revenue by growing the economy, not by raising taxes which could undercut business growth, limit jobs, and ultimately, increase the burden on ordinary taxpayers. By rejecting intense pressure from the Legislature to raise taxes, the governor has proven he understands that California is competing with other states and countries across the world.

However, our governor is pulled in many directions. There are those among his advisors who would have Schwarzenegger cast himself in the mold of Pat "the builder" Brown, an admittedly attractive proposition to a forward looking man. They may be working hard to convince him major improvements in the state infrastructure are worth major investment, and as we learned from Bill Clinton, "investment" has become a pseudonym for taxes.

Thus the real test may be for the fiscal conservatives in the Legislature. It will be incumbent upon them, and their leadership, to provide the needed "gut check" to other officials given that California is still -- despite increased revenues -- in a perpetual state of deficit spending. As we move forward, taxpayer advocates will expect adherence to four basic principles.

First, no tax increases. Revenues into all levels of government -- cities, counties, special districts -- are at an all time high even taking population and inflation into account. Tax increases are not necessary.

Second, while some sort of budget reform is still needed, California can find its way out of the desert without any Constitutional amendments. Elected leaders possess the tools now to direct the vast amount of tax revenue generated into needed programs and, of course, infrastructure.

Third, if debt financing is proposed, it should be in the form of individual projects or spending categories only. No logrolling road construction with open space acquisition. Never should we hold essential projects hostage to billions of dollars of pork.

Fourth, priorities must be made clear. We must prioritize each and every dollar of spending, providing revenue for what is most vital today as opposed to what is simply the most politically expedient. Flood control is not purchasing more open space in the Santa Monica Mountains adjacent to Barbara Streisand's mansion. A high speed rail system would make a lot of construction companies rich, but has anyone really done an honest study as to the cost per passenger mile? If the Democrats could waive CEQA to build SBC Park and the SFO Airport extension, why can't it be waived for 500 miles of levee repair? These are legitimate questions to which taxpayers deserve honest answers.

Before moving forward with a gargantuan, all inclusive infrastructure bond, a backward look is important. It should be noted that, during Pat Brown's administration, six percent of the general fund was dedicated to infrastructure improvement. Today? Virtually nothing.

How can this be? In spite, of the constant "poor mouthing" by the tax-and-spend lobby, the state is even wealthier today. A just- released study by the Center for Government Analysis shows that total state government revenues, adjusted for inflation and population growth, grew well over 25 percent from FY 1977-78 (the year before Proposition 13 was approved (a time when big government advocates say times were good) and FY 2002-03.

So there it is; the state has more money than ever and should be able to afford to finance infrastructure improvements with ongoing revenue. By using existing revenues, the state would retain the ability to annually respond to changing economic conditions by expanding or contracting spending on these capital improvement projects, depending on available revenue. Bonds, on the other hand, are an unforgiving obligation, usually for 30 years.

Think for a moment of the huge multibillion dollar surpluses Gray Davis enjoyed in his fist three years in office. If, instead of using the extra $28 billion to expand programs that mandate a permanent spending increase, the money had been put into one-time expenditures like building schools, the taxpayers would have been spared the expense of repaying $25 billion -- nearly $50 billion with interest -- in state school bonds over the next 30 years.

While those favoring massive building may justify new bonds as an investment in our future, we should not ignore the impact on present and future taxpayers. Debt must be repaid with real money -- real money that will be repaid not only by ourselves, but by our children and, in some cases, our grandchildren. CRO

copyright 2005 Howard Jarvis Taxpayers association

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