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Is A Borrowing Binge Endangering State’s Fiscal Health?

By Mark Baldassare, president and CEO, Public Policy Institute of California
This opinion article appeared in the San Jose Mercury News on June 14, 2007

The state's annual budget debate in Sacramento is in full swing. Sparring between the governor and Legislature this June features the governor's proposal to prepay about $1.7 billion in recovery bonds. Some legislative leaders argue that health and social services spending should be the priority instead, while others say the state should keep the borrowed money on hand in case the economy slows. And while the amount in question is a mere 2percent of the state's overall budget, it reflects a larger issue that has major repercussions for us all - how much debt is too much for the state's coffers?

Californians have passed $93 billion in state bonds since 1998, including the 2004 recovery bonds meant to fill the state's chronic gap between spending and revenues. State and local governments have taken advantage of historically low interest rates and piled on new debt. The Legislature has sent voters a steady stream of bond packages designed to build and renovate schools, repair and construct roads, build affordable housing, improve flood control systems, and preserve open space. Last fall alone, voters passed four state bond measures worth $43 billion.

Most observers agree that population growth is straining the state's infrastructure and that a lot more money will be needed - perhaps up to $500 billion - to prepare for the future. Earlier this year, the governor floated a plan for another $43 billion in state bonds over the next few years to build more schools, transportation systems, water storage, prisons and court buildings. Can we afford to continue borrowing at this torrid pace? In the Statewide Survey by the Public Policy Institute of California in May, Californians seemed unfazed by the growing indebtedness, and two in three voters supported the latest big bond proposal.

Moreover, the state uses borrowed money not just for future planning, but to solve immediate crises. Three years ago, $15 billion in general obligation bonds were the "recovery package" for a large budget deficit. This spring, faced with a court order to address prison overcrowding, the governor and Legislature agreed to a nearly $8 billion prison package that is mostly financed by lease revenue bonds - a borrowing tool that doesn't even require voter approval. Whatever the type of bond, the fiscal outcome is the same - payments are made from the state's existing general funds, rather than through new tax revenues, and bills for the principal and interest are stretched over two or three decades. Like the mortgages and credit card debts taken on by Californians, the costs of long-term borrowing take money out of the pot for other spending.

While some may argue that long-term bonds are a prudent fiscal option, this course of action has little to do with wise planning and everything to do with legislative gridlock and voter indifference. As Democrats have stubbornly argued for more spending, and Republicans have adamantly toed the party line of lower taxes, both sides have compromised on floating bonds that provide money without raising taxes.

Meanwhile, bond packages sent to voters have met a receptive audience, who admit to being woefully uninformed. The recent PPIC survey found that only 12 percent of voters could correctly name both the state's top spending category (K-12 schools) and top revenue source (personal income taxes), while just 6 percent said they knew a lot about how state bonds are paid for. But what they do know, they like - bonds seem to fulfill their wish for more state spending on their favorite programs without higher taxes.

Without a drastic change in the political climate, we can continue to expect state government to turn to bonds when money is needed. Are legislators willing to raise taxes to expand health coverage, improve student performance, meet the unfunded obligations to public employees' retirement and health plans, and respond to the next emergency whether it is an earthquake, flood, fire, or terror attack? Most likely, bonds will find their way into the fiscal solutions for the state's most pressing issues.

However Sacramento resolves this year's squabble over prepaying bonds, it is primarily the voters who will determine the amount of future state debt. As a sign that they may be having second thoughts, eight in 10 voters in the recent PPIC survey said they want an accounting of how bonds they've approved are being spent. Still, in order to make intelligent decisions about future borrowing, voters need to be better informed about how bonds are paid for and how payments affect other spending.

Meanwhile, the governor and Legislature should be looking for alternatives - such as user fees, public-private partnerships and conservation and efficiency - rather than always taking the politically expedient route of piling debt on future generations.


PPIC Statewide Survey: Californians and Their Government, May 2007

PPIC Statewide Survey: Special Survey on the California State Budget, May 2006

Just the Facts: California's State Budget