State Rapidly Adds to Use of Bond Debt to Finance Projects

State government is buying more on credit these days. And the bill, to be paid by future generations of Californians, is growing.

Principal and interest payments next year on California’s $8.3 billion in general obligation bonds are estimated at $616 million--up 93.6% in five years.

Payments on the state bonds--which in effect are long-term loans used to finance such things as construction of prisons and school buildings--constitute one of the fastest-growing parts of the state budget under Gov. George Deukmejian.

Since Deukmejian took office in 1983, debt payments have been growing substantially faster than the tax revenues the state receives to pay for them.

Not Alarmed

So far, most state officials are not alarmed.

In fact, they predict California will continue borrowing at a rate of more than $1 billion a year.

Always popular with government officials as a way of raising money, bonds also are being viewed as a way of getting around the state spending limit imposed by voters in 1979. Spending to pay off voter-approved bonds is not subject to the limit. Thus, with the state near, or possibly even over, the spending limit, pressure is stronger than ever to use bonds to finance state projects.

Those who support the issuance of bonds argue that California historically has maintained an unusually low debt load, contrasted with other states, as it pursued a “pay-as-you-go” policy on such things as construction and renovation of school buildings.

So, even with the heavy borrowing of recent years, this argument goes, the state still is not over-mortgaged. And bond proponents say the cost of today’s prisons, school buildings, roads and highways make long-term borrowing necessary to spread out costs over a long period.

‘Under the Allowable Limits’

“We are well below any kind of danger points,” said Manuel M. Mateo, chief trust officer for the state treasurer’s office. “General obligation bonds represent only 1 1/2% to 2% of state spending. That is well under the allowable limits.”

Still, there are drawbacks to using bonds to raise money.

Similar to home mortgages, the bonds are paid off over a 20- or 30-year period, backed by the state’s promise to raise taxes, if necessary, to pay for them. Interest payments over that time can double or triple the cost of the original bond offering, depending on what rate of interest the state pays to borrow the money.

Another sometimes-cited pitfall is that future generations of Californians will have to pay for political decisions being made today.

And the trend in bond financing means that rising interest costs are eating up more and more of the state’s spending money.

Bonds at various times have also been called an inefficient way of raising money. The government, to keep interest rates low, makes the income that investors receive from interest on the bonds exempt from state or local taxes. The Franchise Tax Board estimates that it loses $50 million a year in tax revenues because of deductions allowed for state and local bonds.

But so far the prevailing view inside and outside the Capitol seems to point to continued use of bond financing.

With bonds, everyone seems to win. Lawmakers can avoid tax increases by spreading out payments for capital projects over a period of years. Wealthy investors who purchase the bonds at attractive tax-exempt rates get favorable tax benefits. Wall Street investment firms make money handling the bond financing. And local city, county and school district officials are pleased because the bonds finance new facilities for their communities.

Unanimity of agreement is such that Deukmejian and state school Supt. Bill Honig, now bitter political enemies, signed the arguments in favor of last year’s $800-million bond measure to finance public school construction and remodeling of existing elementary and high schools.

Similar alliances were forged in the Senate and Assembly. The $800-million school bond measure passed in the Assembly, 70 to 1, and it got a 29-0 vote in the Senate, winning support from both Republicans and Democrats. A $500-million prison construction bond issue was approved in the Assembly, 68 to 1, and in the Senate, 32 to 0. Both bond issues were also approved by the voters.

No Sign of Abating

The popularity of bonds shows no sign of abating this year.

Lawmakers already have introduced bond measures totaling $13 billion.

Among the bills are proposals to construct medical facilities ($750 million), child-care centers ($100 million), school construction ($800 million), water projects ($750 million), environmental cleanup ($150 million), and so on.

Most recently, Deukmejian kicked in with a proposal to issue $2.3 billion in bonds to finance highway and transportation projects in California.

Deukmejian’s proposal, if approved by the Legislature and then voters, would represent a departure from the historic way California has financed its highway system--on a pay-as-you-go basis through “user taxes” such as the state’s levy on each gallon of gasoline and truck weight fees.

Some lawmakers, like Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly Ways and Means Committee, support the use of bonds to finance school construction but criticize bond financing as a way to finance highway construction.

“I don’t find it wise to go to bonds and pay twice as much to get the services,” Vasconcellos said.

Deukmejian, on the other hand, said he cannot see the distinction between using bonds to finance school, jail and prison construction, sewer projects and other major capital projects, but drawing the line at highways.

“In any kind of public works project that’s going to be used and in existence for many years, it has long been felt that this is the proper way of financing it,” Deukmejian said.

Excess Revenue Predicted

Additional pressure to use bond financing came last week when the Commission on State Finance estimated that the state will finish the current fiscal year June 30 with nearly $1 billion more in revenues than it can legally spend under the spending cap.

One of the allowable expenditures is to use the money to pay voter-approved debt.

Another reason for the multitude of bond proposals is that they are still popular with voters.

Even though voters in the past have shown a fiscally conservative bent in approving tax and spending limit measures such as the tax-cutting Proposition 13 in 1978 and a government spending limitation initiative in 1979, they have voted for one bond proposal after another.

In November’s general election, voters approved $1.8 billion in bond measures, each by a strong margin. The bond proposals drew very little opposition.

Nancy J. Ordway, chief deputy director of the Deparment of Finance, said in an interview:

“The people of this state obviously feel comfortable because they voted very strongly to support those types of bond expenditures. The types of things the money is spent on are the types of things that people wanted the money spent on.”

That is a common view shared by other members of the Deukmejian Administration, state Treasurer Jesse M. Unruh and members of the Legislature.

Voters Seen as Confused

But Assemblyman Nolan Frizzelle (R-Huntington Beach), who wrote a ballot argument against one of last year’s bond measures, thinks voters may be at least a little confused, not seeing the bonds as debts that they themselves are agreeing to pay back with their own tax dollars.

Frizzelle argued that a $400-million bond issue for construction and improvements on college campuses was “a bad business deal” because the bonds will cost $1 billion to pay back. But the measure was approved by 60% of the voters.

“The public generally has voted for the bonds because they don’t think it’s costing them money,” Frizzelle said. “They believe the government pays back the bonds. They don’t make the connection that the government does pay back the bonds, but it uses their tax dollars to do it.”

Some of the confusion may be due to the different types of bonds that the state issues. Some of the bonds in fact do not cost taxpayers money. These are revenue bonds, such as some park bonds that use fees to pay off the cost of state park improvements, or self-liquidating bonds, like those used to provide low-cost mortgages for veterans that are paid off by those taking out the home loans.

General obligation bonds, on the other hand, are paid off with sales, income and corporate tax receipts--the same pot of money used to finance school, health, welfare, prison and other state programs. As such, the interest and principal payments on the bonds are in competition for the same dollars used to provide classroom instruction for public school students or to hire the guards that patrol state prisons.

And today, because of the spending limit placed in the California Constitution by voters in 1979, that competition is fierce.

But, rather than dulling the state’s appetite for bonds, the spending limit is having the opposite effect.

‘Going to Find a Way’

“Government finds its own way of financing things,” said Assemblyman Mike Roos (D-Los Angeles), the majority floor leader who heads a lower house bonds oversight subcommittee. “If there is fear of reaching the cap on spending and the pressures are such that there is a need to clean up a river, as in San Diego County, or to build more school facilities or develop more parks, the people are going to find a way, and the way lately has been through bonds.”

Evidence that there is a shifting emphasis toward bonds came when the governor recently recommended that $25 million in tideland oil revenue--money generated by the leasing of offshore oil fields--be used to solve a one-time public school budget deficit.

The governor also proposed and the voters ultimately approved the use of bond money to finance college construction projects, which formerly were paid for out of tidelands money.

Roos and others say they are concerned that the legislators may go overboard in putting bond proposals on the ballot.

Roos, whose subcommittee will review all the bond proposals, predicts that only 10% to 15% of the $13 billion in proposals circulating in the Legislature will be approved.

He pointed to the state’s AAA bond rating as proof that the state is following a prudent debt policy.

State Treasurer Unruh is both a strong advocate of using bonds to finance major capital projects and perhaps the single biggest voice for restraint. Unruh aide Mateo, speaking for the treasurer, who is ailing, said Unruh is concerned that lawmakers may view general obligation bonds as a way to avoid the spending limit. “The treasurer doesn’t want to use them as a way of solving the spending-limit problem,” Mateo said.

RISING STATE BOND PAYMENTS Interest and principal payments on general obligation bonds: In millions of dollars

1980-’81 $210.5 1981-’82 $218.7 1982-’83 $264.5 1983-’84 $318.7 1984-’85 $378.6 1985-’86 $452.3 1986-’87 $537.9 1987-’88 $616.9

General fund revenues: In millions of dollars

1980-’81 $19,020 1981-’82 $20,960 1982-’83 $21,233 1983-’84 $23,809 1984-’85 $26,536 1985-’86 $28,072 1986-’87 $30,765 1987-’88 $31,742

Source: Legislative Analyst’s budget reports.