Credit Card Bill for State Skyrockets

The bills from California’s record borrowing binge are coming due, and they are so staggeringly high that financial experts warn paying them back threatens to stall the state’s economic recovery.

Creditors are knocking on California’s door at the same time the state sorely needs money to undo years of neglect to freeways, schools and water systems.

The state’s overall credit card bill now stands at $51 billion, most of it for public works projects to be repaid over several years. A steep run-up, however, came earlier this year with mega-borrowing that voters approved in March to get the current state budget balanced.

But most of that bond money was used to get California through last year. Now lawmakers must deal with paying back that loan while wrestling with a coming multibillion-dollar deficit.

“It is alarming,” said Steven Spears, a former deputy treasurer and a partner at the SAER Group, a Sacramento consulting firm specializing in public finance. “There are enormous infrastructure needs that are really vital to California jobs and how people get to them. It’s going to be very difficult to make those investments when you reach this level of state debt.”

The numbers are sobering. In the budget year that ended in June, the state spent about $2.4 billion to pay down debt. In the budget year beginning this summer, the SAER Group projects California’s credit payments will climb to more than $5.5 billion per year.

That increase would be more than enough to pay the annual salaries of 50,000 teachers or to educate 357,000 students. It’s more money than the state puts into the entire University of California system each year. It’s more money than it costs to provide healthcare for 847,000 Californians.

And the amount the state must pay each year will continue to climb into 2010.

It is generally agreed on Wall Street that states should keep the share of their budget that goes to paying down debt to below 6%. California was at less than 3.4% last year. Next year, it will be at 6.4%. Assuming the state stops borrowing now and doesn’t authorize any more bonds for anything -- an unlikely scenario -- the number is projected to grow to 7.5% by 2009.

“That is a big number,” said Ted Gibson, who was chief economist for the Department of Finance under former Gov. Pete Wilson. “It is going to be an impediment. It cripples the state’s ability to borrow for the kinds of programs for which such debt was intended.”

And it comes at a time when economists generally agree that such programs will be crucial for growth. The areas where billions of dollars in investment are needed include:

* Ensuring California has a sufficient and safe water supply. A massive effort to that effect -- known as CalFed -- is underway, but the $8-billion project has been severely underfunded. That program only addresses the needs of part of the state. Water experts say other efforts to ensure that water quality doesn’t drop below minimum safety standards will cost billions more dollars in the coming years.

* Fixing a crumbling freeway system. In 2000, Californians spent about 530,000 hours sitting in traffic, according to a government report released this year. It cost taxpayers $4.7 billion in wasted time and fuel. And that was before the state’s budget problems grew out of control a year later. Since that time, the amount of traffic has grown steadily, yet spending on transportation has been cut repeatedly.

* Maintaining the higher education system. Economists are growing increasingly concerned that the capacity at public universities and colleges is not keeping pace with the state’s needs.

* Keeping California’s hospitals afloat. The Los Angeles area is in the midst of an emergency room crisis as a result of a crush of uninsured patients. Several have closed over the last year, and the pressure it has put on those that remain places the trauma care system in danger of collapse.

Already on the ballot for 2006 is a nearly $10-billion proposal for a high-speed rail network that would link Southern California with the Bay Area, as well as a measure that would authorize an additional $2 billion of borrowing to improve the state’s library system.

But the ability of the state to make any such investments will be hampered by the extraordinary amount of debt sitting on the books.

On top of the $51 billion in bonds yet to be repaid, the state has a backlog of $30 billion worth of borrowing that has been approved for things such as school construction, housing and environmental programs but has yet to be sold. The $3-billion measure that voters approved in November to promote stem cell research also is in that pool.

“The state is underwater,” said state Treasurer Phil Angelides. “We aren’t even bringing in enough money to pay our operational expenses, let alone all the debt service. All the deficit borrowing has put us in a precarious situation. It will make it very difficult to sell bonds for the things that will actually make the state stronger.”

Few states have ever taken on such proportionately high levels of debt in their budgets. In the cases of those that have, it almost always involved paying for infrastructure programs that helped drive their economy. That is where California is different. Here, taxpayers borrowed just so the state could keep spending on day-to-day programs without raising taxes.

“California is alone in having taken such actions to close a budget gap,” said Arturo Perez, a fiscal analyst with the National Conference of State Legislatures.

The state’s situation is made worse by all the additional loans it has drawn against itself -- akin to using one credit card to pay another. Billions of dollars that were supposed to be going to road projects, schools and local governments have instead been used to narrow the past deficit. Much of that money has to be paid back now.

Assemblyman Keith Richman (R-Northridge) described those accounting shifts to a group of business leaders at a recent economic conference at UCLA this way: “If you used them in your own business, you would probably be thrown in jail.”

“We are talking about billions of dollars in our general fund that are not going to education, not going to public safety, and are not going to transportation,” Richman said in an interview.

“Look at [Interstate] 5: The traffic doesn’t move. There are problems at the ports, with our water supply. You can go on and on.”

Now there is talk of borrowing to cover that.

All the borrowing the state has been doing, analysts say, has only empowered voters to believe the tough decisions -- such as spending cuts or new taxes -- don’t really need to be made. After all, voters themselves approved most of the bonds. And even as the bills are coming due, there is little indication that they have yet come to grips with the consequences.

Mark Baldassare, director of research at the Public Policy Institute of California, said at the UCLA event that he was concerned that Californians were not grasping the long-term implications of authorizing debt at such a dizzying pace.

“Voters are generally not engaged and not informed and increasingly are making all the public policy decisions in this state,” he said.

At the same time, voters are presented with more and more initiatives that ask them to authorize the state to go further into debt for one program or another.

Leon Panetta, former director of the federal Office of Management and Budget, said a reality check was long overdue.

“At some point, our kids are going to wonder what the hell we were all on,” he said. “The more you rely on borrowing, the more it is going to come back to haunt you.”

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Debt costs

Because the state has borrowed heavily, it must set aside more and more money for payments and interest, leaving less for other needs.

Fiscal year / annual debt costs (in billions)

‘01-02 / $2.7

‘02-03 / $2.8

‘03-04 / $2.1

‘04-05 / $2.4

‘05-06 / $3.0

‘06-07 / $5.5

‘07-08 / $6.2

‘08-09 / $6.6

‘09-10 / $6.8

2004-05 and later years are projections.

Source: SAER Group

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Times staff writer Nancy Vogel contributed to this report.