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.


Adam Summers is a senior policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He has written extensively on privatization, government reform, law and economics, and various other political and economic topics.

Summers' articles have been published by the Los Angeles Times, San Diego Union-Tribune, Orange County Register, Los Angeles Daily News, Baltimore Sun, and numerous others.

Summers earned an M.A. in Economics from George Mason University and Bachelor of Arts degrees in Economics and Political Science from the University of California, Los Angeles.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

Follow Anthony Randazzo on Twitter @anthonyrandazzo