No Free Lunch

Bond measures often succeed at the polls, and it’s easy to see why. They require only a simple majority vote; generally – but not always – pay for infrastructure, such as schools and highways; and appear to be “free money” since voters aren’t asked to raise taxes in order to repay the bondholders. In reality, there’s no free lunch. Debt service (principal plus interest on bonds) becomes a new General Fund obligation paid out of the same limited revenues that also fund services that enhance the quality of life for all Californians – everything from K-12 and higher education to in-home care for low-income seniors and people with disabilities.

A recent report by State Treasurer Bill Lockyer shines a spotlight on this issue. The report shows that debt service on voter-approved bonds (including those that are projected to be approved and sold over the next two decades) will consume a rising share of the state budget. The report projects that the state’s “debt ratio” – debt service as a share of revenues – will increase from 6.71 percent in 2009-10 to 10.16 percent in 2014-15. The debt ratio is projected to remain above 10 percent through 2020-21 before gradually declining to 9.18 percent in 2027-28. These debt ratios reflect fairly conservative estimates of state economic growth, and thus could be lower if the state’s economy outperforms the Treasurer’s expectations. On the other hand, the state’s debt ratios could be higher than projected if economic growth turns out to be weaker than the Treasurer assumes.

To sum up: Within a few years, more than 10 cents out of every General Fund dollar could be used to pay debt service – the highest proportion in the state’s history – leaving fewer resources to pay for programs and services that sustained deep cuts this year and that face the prospect of more cuts in 2010.

The fact that debt service could increasingly crowd out spending for vital public services makes us apprehensive about the water deal recently reached between the Legislature and the Governor. The deal includes an $11.14 billion bond measure that would be entirely repaid out of the General Fund if the voters approve it in November 2010. Anticipating this outcome, the Treasurer’s report states that “further increasing the General Fund’s debt burden, especially in the next three difficult budgets, would require cutting even deeper into crucial services already reeling from billions of dollars in reductions.” Instead, the Treasurer makes a case for “user-funding for most water system improvements … both as a matter of equity and fiscal prudence.”

— Scott Graves

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