California: State government diving deeper into debt. Need to "cut up our credit cards."

Oakland Tribune ^ | July 1, 2002 | Steve Geissinger

[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."

[John Jorsett]

FYI

[goldstategop]

Gray Davis will max out the state's credit cards before he leaves office. Count on it.

[John Jorsett]

Companion article from Oakland Tribune:

How refinancing schemes work
By Steve Geissinger
SACRAMENTO BUREAU

SACRAMENTO -- The state's controversial new state bond-debt restructuring strategy works something like the refinancing of a home mortgage, pushing bond payoffs years -- or even decades -- into the future.

Critics fear that with the state pushing bond payments ahead for the first time, taxpayers will now be paying off the bonds well past the useful life of some of the projects that were financed with the bond monies.

Bay Area school districts were among those which received initial allocations from the bond measure in 1999, according to documents obtained from the state Office of Public School Construction in the Department of General Services.

In Alameda County, money from the school bond went in 1999 to the Albany Unified School District for a middle school and New Haven Unified for a middle school and an elementary school.

In Contra Costa County, school bond money that year went to Antioch Unified for an elementary school.

Records obtained from the state treasurer's office under the California Public Records Act show that more

than $1 billion in bond payments that would have come due this year and next will now be paid from 2003 to 2030.

The recent refinancing postpones payments on various multimillion-dollar bond issuances under the authority of 25 ballot measures that voters approved:

In 1988, for construction of schools, universities, libraries, local jails and state prisons, as well as for clean-water projects and water conservation efforts.

In 1990, for construction of state prisons, schools and universities, as well as for seismic-safety retrofitting, mass transit, transportation improvements and affordable housing.

In 1992, for school and university construction.

In 1996, for earthquake safety, school and university construction and clean-water projects.

In 1998, for school construction and repairs aimed at reducing class sizes.

Under the refinancing, state officials say for example, $3.5 million in bonds issued under the 1998 voter-authorized school construction measure that would have been paid off in April of this year and another $3.5 million that would have been retired in April 2003 will both instead be paid off in February 2029.

Therefore, critics say that bonds monies used in 1999 or 2000 for construction or repairs -- that are supposed to have a useful life of at least 10 years under the original $9.2 billion bond measure -- will be paid off decades later.

But the concerns are dismissed by top officials in a deficit-ridden state government, who view the refinancings as a widely accepted fiscal tool to free up cash in the short term and take advantage of the current low interest rates.

[NormsRevenge]

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.

DUMP DAVI$ & the Den of Socialists

GO SIMON

[Ernest_at_the_Beach]

Thanks for posting this!

calgov2002:

calgov2002: for old calgov2002 articles. 

calgov2002: for new calgov2002 articles. 

Other Bump Lists at: Free Republic Bump List Register

[Dog Gone]

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.

Using long-term debt to pay current expenses is lunacy.

[goldstategop]

Oh I agree. But to a Rat its smart politics.

[Ernest_at_the_Beach]

This may be the best recent article on the politician's love of easy money to buy another year of elected bliss in sacramento!

I believe they are going to tap into the giant pile of money in the State Pension Funds!

[John Jorsett]

Using long-term debt to pay current expenses is lunacy.

Yep. I actually thought that it was prohibited by state law, but I must be mistaken. Either that or it's been gutted by the courts.

[John Jorsett]

I believe they are going to tap into the giant pile of money in the State Pension Funds!

The temptation must be enormous. If it happens, that will be an interesting battle. The public employees are generally quite protective of that money. It's our money they want to fling around.

[dalereed]

"Using long-term debt to pay current expenses is lunacy."

Lunacy for sure but when you consider how the average (stupid) citizen handles their personal finances they will probably all pass in November.

Personally, I have never borrowed a cent for personal consumption and haven't had a mortgage in years and object to having to pay taxes to finance the desires of the "have to have it now and cost doesn't matter" idiots that are allowed to vote.

[Reeses]

Gray Davis will max out the state's credit cards

Welcome to socialism's mature stage, the end game. The socialists will max out the state's $80 billion credit card and then self-destruct. The best thing we can do is try to direct the socialist spending into capital improvements, durable goods or things we would have to buy anyway, such as electricity, rather than any Democrat voter breeding programs.

[Mr. Jeeves]

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.

We are paying $30 billion a year now for education, $10 billion of which never leaves Sacramento and can't be fully accounted for. And these lizards want more?

It's time to smash the military-priesthood educational model. You could buy every child in California a notebook computer and a set of DVDs with the entire K-12 curriculum for far less than we are spending annually to keep these teachers union jokers in power (where they can generously fund Democrat campaigns.) "Schools" are nothing but breeding grounds for antisocial and criminal behavior and we could improve the futures of millions of California children if we bulldozed every one of them starting tomorrow.

[Ernest_at_the_Beach]

Democrat voter breeding programs

Good Term, I could see a bumper sticker come out of that!

Stamp out all Democrat voter breeding programs

[Robert357]

Thank you, it was a great article.

What I thought was signficant was that the concept of pushing repayment past the useful life of capital projects was raised, that paying current expenses out of borrowed funds was labled as wrong, and that loading up local government agencies with debt may create future problems.

If this keeps up, common sense may return to the discussion of government financing. Sorry, I got carried away, the politicians are still looking at the easy money, so common sense hasn't yet returned.

This should be an interesting season for the Bond Rating Agencies. I saw where Moody's downrated Dynergy and Illinova. I expect they will soon get around to DWR and the State of California. It is interesting how nothing is being said any more about "power bonds." Must mean that wall street has told the Gov. that there it is not going to happen.

[CIB-173RDABN]

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."

---

Over 50% of the state budget already goes to education. Now they want more.

I stopped supporting any bond issue years ago. If this bond issue passes, the money will be wasted just as all the other money given to the education mafia.

[Ernest_at_the_Beach]

Aren't they just playing the relabeling game?

[Carry_Okie]

Need to stop buying land.

[Dog Gone]

If these bond issues pass, the taxpayers are guaranteeing high taxes for years to come. No tax cut will be possible, no matter which party controls the legislature, because tax revenues will already be dedicated to repaying these bonds.