Bonds: No Free Lunch

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