If you think the consumer credit crisis is bad, just take a look at the debt problem the State of California is facing. The budget deficit is estimated at around $15 billion, and, more than two months into the new fiscal year, legislators and the governor still have not figured out a way to address the imbalance (although massive tax increases seem to be a likely “solution”).
To put the $15 billion budget deficit in perspective, consider that the entire General Fund budget is just over $100 billion. For most of us, the thought of borrowing more when we already owed 15 percent of our total earnings for an entire year would be unconscionable, yet that is precisely what the Legislature is doing with all the bond measures on the ballot.
On the November ballot, there are four bond measures which, if passed, would add a total of over $16.8 billion in debt. The bond measures are:
- Proposition 1A – $9.95 billion to start building an 800-mile high-speed rail system.
- Proposition 3 – $980 million for capital improvement projects at children’s hospitals.
- Proposition 10 – $5 billion for various renewable energy, alternative fuel, energy efficiency, and air emissions reduction programs.
- Proposition 12 – $900 million for the veterans’ farm and home loan program.
The state’s budget woes have already led to proposals to raise taxes by some $8 billion.
How much higher will taxes have to be to pay off even more debt?
In just the past six years, the amount of general obligation bonds authorized has nearly tripled, from $42.1 billion in FY 2001-02 to $120.1 billion (well more than the state’s total General Fund budget) in FY 2007-08. According to the nonpartisan Legislative Analyst’s Office, as of June 1, 2008, California had about $53 billion of infrastructure-related General Fund bond debt outstanding, and an additional $68 billion in bonds had been authorized but not yet sold.
Bonds are an expensive way of financing things. In addition to the principal cost of the bonds, the state must pay interest, which typically doubles the cost. Even after adjusting for inflation, bond financing costs about 30 percent more than pay-as-you-go financing. In other words, total bond costs are about $1.30 for every $1 borrowed.
General Fund debt payments for infrastructure-related bonds totaled $4.4 billion in FY 2007-08, and are expected to rise to $9.2 billion in FY 2017-18, as currently authorized, but not yet sold, bonds are put on the market. The state’s debt-service ratio is already rather high. It has risen from less than 3 percent in FY 2002-03 to 4.4 percent today, and is expected to peak at 6.1 percent in FY 2011-12, eclipsing the most recent high of 5.4 percent during the early 1990s. (Note that these numbers relate only to infrastructure bonds and do not even count the 2004 $15 billion budget deficit bond.) These numbers will only worsen if the bond measures on the November ballot pass.
Long-term bonds should never be used to pay for day-to-day government operations because it is unfair to saddle future generations with debt for our expenses today. These expenditures should be included in annual budget appropriations bills. We have already made this mistake once by approving a $15 billion bond (Proposition 57) in March 2004 to pay off the budget deficit. This is like taking out a mortgage to pay off your credit card bill. Moreover, it obviously did not work. Less than five years after passing a $15 billion bond to pay down the budget deficit, here we are again with a $15 billion budget deficit and more tax and bond proposals.
If history serves as any guide, putting bond measures on the ballot only relieves the Legislature from having to make budget trade-off decisions that would normally occur during the annual appropriations process, leading to even more spending. Instead of relying upon taxpayers to bail them out, legislators should be forced to do the job they were elected to do and prioritize spending based on the revenue available.
Just two years ago, Californians approved $42.7 billion in bonds. Given the state’s current financial straits, the state simply cannot afford to take on up to $16.8 billion in additional debt.