Policy Brief

Drowning in Debt: Bond Measures Threaten California’s Already Precarious Debt Situation

Policy Brief 73

Executive Summary

California has many infrastructure needs, but the four bond measures on the November ballot are unaffordable and unnecessary. If approved, the measures-Propositions 1A, 3, 10, and 12-would authorize a total of over $16.8 billion in general obligation bonds. After factoring in the cost of paying interest on the bonds, the total cost would be approximately $33.1 billion, resulting in debt service of over $1.1 billion a year.

The state’s borrowing is simply not sustainable without significant increases in taxes or reductions in service levels. California’s debt has nearly tripled in just the past six years, from $42.1 billion in fiscal year 2001-02 to $120.1 billion in FY 2007-08. The debt-service ratio-the portion of the state’s annual revenues that must be set aside for debt-service payments on infrastructure bonds- currently stands at 4.4 percent and is projected to rise to 6.1 percent in FY 2011-12 as more bonds that have already been authorized are sold. This will surpass even the high rate of 5.4 percent the state maintained during the early 1990s. As the Legislative Analyst’s Office notes, the investment community considers a debt-service ratio of more than 5 or 6 percent to be a red flag. No wonder the state holds the second-worst credit rating in the nation, ahead of only Louisiana. Should more bonds be passed in November, the state’s debt-service ratio will only get worse.

Roughly 50 years ago, nearly 60 percent of the budget for capital projects came from the General Fund and special funds. Today, nearly all state improvements are financed through borrowing. As the state, and the economy at large, struggles to manage its mountains of debt, it is time to re- evaluate California’s borrowing binge and ensure that high-priority projects and programs are paid for in the annual budget.

The legislature and the governor have proven time and time again that they have enough difficulty balancing the budget without the imposition of other significant costs such as those contained in the bond measures on the November 2008 ballot. If California is to return to a state of fiscal responsibility, it must put an end to its borrowing and spending binge. Californians must carefully consider the details of the bond measures discussed herein, and consider whether they, or their children, will be able to afford the ultimate bill.