Posted on 07/01/2002 9:10:43 AM PDT by John Jorsett
SACRAMENTO -- California's top officials are leading what critics call an unprecedented expansion and reshaping of the role bonds play in government finance, urging taxpayers to plunge tens of billions of dollars deeper in long-term debt for an array of needs.
In one of two major new strategies that are alarming critics, state and local officials are urging voters to pass bonds in historic proportions for infrastructure work, tapping the state's remaining capacity for borrowing as the last easy source of cash.
Three statewide bonds totaling more than $18.5 billion will be on the November ballot, along with numerous locally generated bond proposals. And more state bonds are planned, not only for the Nov. 5 election, but also for future ballots.
Though the state is already carrying about $25 billion in long-term debt, its top fiscal officials claim California could safely bear up to $80 billion by 2010.
Critics, however, fear the state is moving toward use of bond money to pay current costs in an erosion of the state's pay-as-you-go philosophy.
Attacking what they view as a dangerous course, one leading taxpayer advocate is warning that Cali-
fornia is entering the "Twilight Zone" financially, and the Republican candidate for state controller has called for a blanket moratorium on long-term borrowing.
In the other new strategy setting off critics' alarm bells, the Democratic governor and treasurer -- facing a huge budget deficit -- also have begun a refinancing scheme for already approved state bonds that is pushing imminent payoffs years into the future, according to records obtained by the Oakland Tribune under the state's Public Records Act.
In the fiscal reshuffling, more than $1 billion in bond payments that would have come due this year and next instead will be paid from 2003 to 2030, treasurer's office documents show. The bonds were approved by voters from 1988 to 1998 for schools, libraries, clean water, prisons, housing, mass transit and earthquake safety.
The treasurer's office acknowledged that the deficit-easing move this spring marked the first time the state has pushed bond payments into the future. Records show the state's other nine bond refinancings -- from 1993 through 2001 -- took advantage of lower interest rates without delaying payments.
Gov. Gray Davis and Treasurer Phil Angelides say the latest refinancing makes good economic sense.
They say it postpones costly bond payments, thereby helping to ease the staggering $23.6 billion budget deficit looming in fiscal year 2002-03, which begins today. Refinancing also saves millions of dollars over the long-term because of the current low interest rates, they say.
"This is a prudent, reasonable strategy that will help California get through the lean times and achieve savings in the near and long term," Angelides said. "The savings achieved through the bond sale will help reduce the need for budget cuts in vital services such as education, health care and public safety."
Similarly, Angelides and Davis say, bonds proposed for upcoming ballots to finance varying needs could be sold at the current low interest rates, with the state's debt load remaining within acceptable limits.
Independent analysts, in general, agree.
But Republicans and taxpayer groups fear the state is hopelessly mortgaging the future of its children, in part to fund current needs.
They say the $1 billion-plus saved as a result of the bond refinancings, for instance, will be mixed into the general pot of monies being used to close the $23.6 billion gap in the state's operating budget in the fiscal year starting July 1.
At the same time, critics fear, the postponement of bond payoffs means taxpayers will be burdened decades in the future with payments linked to school improvements, for instance, that will have worn out long before.
State Sen. Tom McClintock, a fiscally conservative Northridge Republican running for state controller in November, is so concerned he's calling for an immediate moratorium on long-term borrowing.
"Debt service is rapidly consuming an increasing portion of this and future budgets," says McClintock. "When you've just lost your job, you don't take out a home improvement loan."
McClintock has taken to traveling with what he calls the California Debt Clock.
"We're adding over $1 million in new debt per hour, and that's all money that will be tacked onto your future taxes unless we restore sound fiscal management to this state," McClintock says.
"The debt clock helps us communicate to fellow Californians that we need to eliminate the waste and out-of-control spending that's driving up our debt and fueling the call for more taxes," he says.
The interest in approval of new bonds, and in refinancing of existing bonds, picked up earlier this year amid a deepening state budget deficit, historically low interest rates on Wall Street, and pressing needs to expand and refurbish the aging infrastructure in a growing state.
The Democrat-dominated Legislature, at the request of Davis, approved a landmark measure that will put before voters a $25.3 billion school construction bond. The first $13 billion will appear on the Nov. 5 ballot.
"This will be the largest bond issue ever to go on California's ballot," says Davis. "And believe me, we need it. This will improve schools, modernize schools, build new schools and put California's hard-working men and women back to work."
It is but one of several proposed statewide, taxpayer-backed bond measures to address a variety of needs. Sen. Don Perata, an Oakland Democrat, is proposing a $1 billion bond measure for the November statewide ballot, for instance, that would fund various infrastructure and security improvements throughout the state.
"With the current economic outlook, we can't afford not to invest in our future," Perata says.
Likewise, local governments and a wide spectrum of special interests are eyeing similar measures at the local level.
In Oakland, for example, the city is developing a $190 million bond measure for the November ballot that would fund improvements to Lake Merritt and the channel, open space along the estuary, a sports center in East Oakland and an arts center in North Oakland.
The local measures need a two-thirds vote to pass, though local school construction bonds can be approved on a 55 percent margin. Since passage of a November 2000 statewide measure allowing the lower threshold for local education bonds, school officials say they have generally enjoyed a higher success rate.
Supporters of statewide bonds also are taking comfort in how voters have treated their proposals in recent elections. Of the 14 bond measurers on the last six ballots since 1996, voters have approved a dozen of them. Statewide bonds require only a majority vote for passage.
But critics say the one-two punch of local and statewide bonds will sharply jolt taxpayers.
"Taxpayers will be nailed at home in terms of property taxes for local school bond measures and then nailed in terms of general state taxes for any additional bonds that might be issued," says Lew Uhler, the Sacramento-based president of the National Tax-Limitation Committee. "It's going to be a nightmare."
The state's scramble to adopt and sell new bonds is playing out against the backdrop of the state's quest to sell $11 billion in bonds to reimburse state government for the costs of buying its way out of the power crisis last year.
Though the power bonds will be repaid by rate payers rather than taxpayers, they still figure in the minds of financial analysts assessing the state.
Wall Street, however, again demonstrated its confidence in California -- the fifth-largest economy in the world -- by embracing the state's need for billions of dollars in short-term loans in early June. A timetable for that bond sale remains indefinite, pending resolution of some legal concerns about the repayment arrangements.
Angelides has urged the state to issue about $25 billion in new bonds over the next four years to take advantage of low interest rates not seen for 30 years.
The state's current ratio of annual bond payments to general-fund total is lower than that of many large states, says Angelides.
California's bond debt totals about $25 billion. There are, in addition, nearly $14 billion in bonds already authorized by voters but not yet issued.
The current $3 billion in annual bond payments amounts to less than 4 percent of California's general fund, which is comfortably below the 6 percent experts consider reasonable. Under the treasurer's plan, annual bond payments would rise to about 5 percent.
And Angelides says that if the state were to commit a full 6 percent of the general fund to debt service by 2010, California could let its bond total climb to about $80 billion.
But critics say that if all the bond proposals under consideration actually wind up on ballots and are approved, the total annual bond payments would exceed prudent levels.
"How do we shoulder this load?" says Uhler. "We're placing ourselves in real jeopardy. This bodes ill for California."
The state's new strategy of existing bond refinancings that push payments into the future adds a troubling twist to the problem, according to critics.
"Things have become so bizarre and so into the 'Twilight Zone' here in California in terms of fiscal practices that little is surprising to me now," Uhler says.
After initially ignoring Angelides' bond-refinancing plan, Davis embraced the strategy earlier this year when the governor abandoned a proposal to postpone payments to the state employees' retirement fund.
"We wanted to put together what we think is just a smarter package," says Tim Gage, Davis' finance director.
The plan actually costs the state more in interest over the long run but, when adjusted for the declining value of the dollar in the future, saves California about $21 million by 2030, according to treasurer's office records.
It also levels future bond payments, ironing out fluctuations in debt service, and embraces a variable interest rate that officials say doesn't pose the same financial risk as those offered in home mortgages.
More importantly to officials coping with the huge deficit, it postpones more than $1 billion in looming bond payments, without exceeding time limits in the bond-authorizing ballot measures for retiring the debt.
With the first phase of the so-called Strategic Debt Management Plan completed, Angelides expects to carry out a second phase in fiscal year 2003-04 that would delay another $964 million in payments.
One of the plan's critics, however, is seeking the opportunity to block that second phase -- Redwood City accountant Greg Conlon, the Republican nominee to replace Angelides in November.
"It's a sad situation. They're covering up deficits that otherwise would be there," Conlon says. "We don't want to mortgage our future."
"Until we can establish that we're not jeopardizing our credit rating by issuing new debt," he says, "we need to cut up our credit cards."
The ratio I had to meet in private industry was a two year payback.
EBUCK
In Kali they are a socialist scheme of getting by prop 13 and the so called debt limits which are not there after Davis et al. "Taxpayers will be nailed at home in terms of property taxes for local school bond measures and then nailed in terms of general state taxes for any additional bonds that might be issued," says Lew Uhler, the Sacramento-based president of the National Tax-Limitation Committee. "It's going to be a nightmare."
Then there is this little goodie: McClintock has taken to traveling with what he calls the California Debt Clock.
"We're adding over $1 million in new debt per hour, and that's all money that will be tacked onto your future taxes unless we restore sound fiscal management to this state," McClintock says.
"The debt clock helps us communicate to fellow Californians that we need to eliminate the waste and out-of-control spending that's driving up our debt and fueling the call for more taxes," he says.
Wonder why the media hasn't had a word on that? /sarcasm
In advising various public agencies, I regularly advise some of them on the theoretical benefits and problems with borrowing money for some capital projects. If one is a manager of a City owned electric utility and one is building a new substation that has a 20 to 50 year life, there are some good reasons to issue 20 year bonds to pay for the project.
One reason is that if the project were paid from current revenues by current rate payers their rates would be higher now than they would need to be. Some of them might die and no live to see the full benefits of the project over the next 20 to 30 years. For most public agencies borrowing costs are pretty reasonable (unlike credit cards). Funding public capital projects is in some respects a "cross-generational" subsidy. If folks want to do this kind of thing it is fine and actually results in lower societal costs in the long run, but it is a subsidy to the future.
At least it is not a reverse generational subsidy like the way Social Security is lining up to be.
I ususally advise my clients on the downside of borrowing too much for capital projects. One of the biggest, is that you never know about the future of the local economy and what you can afford in the future. Another has to do with what other kinds of infrastructure will be needed that you may not be able to affort because you are maxed out on bonds.
Your comments were electric, but somewhat charged, representing currently popular opinion (sorry, it was just too tempting).
Seldom are civic capital projects discounted for risk of technical supercedure or other changes in market conditions. That is because the funds are guaranteed at gunpoint. The voters could be accepting that risk consciously, but it is seldom the case. Usually what happens with 30-year GOs or Revenue bonds is that the beneficiaries are the bond holders who lend against the resulting subsidized economic opportunity: the banks.
My dad was a municipal financing consultant in California for forty years. You don't have to tell me about the California bond market or the corruption therewith. :-)
Seriously, you are right that bonds will get repaid and that now-a-days seldom is the issuance of debt seriously questioned. It should be, but many lenders have become lack. Your comments were right on.
My only criticism of his article is this: He did not mention Article 16, Section 1 of the California Constitution which contains specific limitations on borrowing.
SECTION 1. The Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of three hundred thousand dollars ($300,000), except in case of war to repel invasion or suppress insurrection, unless the same shall be authorized by law for some single object or work to be distinctly specified therein which law shall provide ways and means, exclusive of loans, for the payment of the interest of such debt or liability as it falls due, and also to pay and discharge the principal of such debt or liability within 50 years of the time of the contracting thereof, and shall be irrepealable until the principal and interest thereon shall be paid and discharged, and such law may make provision for a sinking fund to pay the principal of such debt or liability to commence at a time after the incurring of such debt or liability of not more than a period of one-fourth of the time of maturity of such debt or liability; but no such law shall take effect unless it has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election; and all moneys raised by authority of such law shall be applied only to the specific object therein stated or to the payment of the debt thereby created...
Californians don't need a moratorium on debt, they just need to elect legislators who will follow the constitution.
Completely off the radar screen. Amazing. The "RAWS", too. Certainly some shoe must drop very soon, since the fiscal year ended yesterday, and the California Constitution says things come to a stop until a budget is passed.
The Legislature shall pass the budget bill by midnight on June 15 of each year. Until the budget bill has been enacted, the Legislature shall not send to the Governor for consideration any bill appropriating funds for expenditure during the fiscal year for which the budget bill is to be enacted, except emergency bills recommended by the Governor or appropriations for the salaries and expenses of the Legislature.
What power bonds? What power RAW's? Has Davis realized that this dog don't hunt? I think so.
"Enronesque" (Davis' Deceptive Budget! My emphasis!)
This is exactly why the Repellicans MUST stand firm! It's inexcusable to burden business and industry when they finally get their heads above water while CA government keeps growing that taxing burden on society!
This editorial should have been written by the Simon Campaign, but Noooooooo! It was writen by a government loving editor who just took over from the previous government loving, business blighting editor!!!
You Simon guys better make the most of this. I've got my signs and bumper stickers ready, but I'm gonna throw 'em away if you don't start making hay! The years half gone... Giddy UP, will ya? Let's ROLL!!!
Our reps should be making hay with this while the sun shines to produce globular warming gasses out of that swamp in Sacratomato!
P.S. Somebody better be given Assembly Leader Dave Cox some strong support about now with BIG PUBLICITY and lots of credit!!! He's being a HERO!!!
I think it's high time for an SUV traffic jamming PROTEST in the Crapitol!!!
I sure hope Davis signs it to guarantee his rejection by the voters! Of course the lock-step Demonicrat Slaves will not let SUV envy stop them from re-electing the creepy emergency powered Governot!!!
I realized then that, in the fiscal chain - from top to bottom - I was the only one that knew how to balance a checkbook.
Pathetic.
Just what I was thinking. CA's implosion will make the S & L debacle seem like child's play. Unfortunately, every "Joe and Jane 6-pack" in fly-over country will have to pony up to bail out CA. I resent that mightily.
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