State Goes Heavy on Bond Issues and Some See It as Perilous Shift

After pursuing a cautious, conservative approach to borrowing, Gov. George Deukmejian and the Legislature changed course this year and decided to ask voters to approve $5.4 billion in bonds to finance school, highway, prison and other construction projects.

Add to that a $776-million parks bond issue that environmentalists put on the ballot, and it means that voters will make decisions on $6.2 billion in bonds, or about twice as much as they have ever been asked to vote on in any one year.

For many, this raises the question of whether the state may be headed down the road of relying too heavily on borrowed money to pay for needed programs.

“This is the Legislature’s version of deficit financing. It’s the same thing Congress has been doing for 39 years,” asserted Assemblyman Steve Peace (D-Chula Vista), a member of the Democratic “Gang of Five” that has been challenging the leadership of Assembly Speaker Willie Brown (D-San Francisco).

Budget Crisis

“What we have here are politicians who want to generate services for people without having to pay for them,” he said.

But Deukmejian is firmly in support of the bond measures, even with the state’s current budget crisis: a $2-billion drop-off in income tax revenues this year and next that prompted the governor to ask the Legislature for $800 million in tax increases and $450 million in budget cuts.

“We have to go ahead. There is no question about that,” Deukmejian told reporters shortly after the revenue shortfall was discovered. “We need to proceed with the improvement of our transportation network and build additional school facilities and prisons.”

Roughly half of this year’s proposed bonds, $3.2 billion worth, will go before voters in the June 7 primary election. They are Proposition 70, the $776-million parks bond issue; Proposition 74, which would allow the state to borrow $1 billion for highway and mass transit projects; Proposition 75, authorizing the borrowing of $800 million to construct and renovate school buildings; Proposition 76, to add another $510 million to the Cal-Vet veterans mortgage program, and Proposition 76, to make $150 million available for low-income housing and earthquake safety improvements for apartment houses.

Deukmejian is supporting four of the five bond measures on the June ballot, the exception being the parks bond measure.

Highway Measure

Critics of bond financing, particularly Deukmejian’s highway measure, say using long-term debt is the most expensive way of doing business.

Traditionally, the state has financed its highway and transit system on a pay-as-you-go basis, using gasoline taxes and highway user fees to generate the income needed to build and repair the transportation system.

But Deukmejian has flatly rejected an increase in the state’s 9-cent-a-gallon tax on gasoline. Now, for the first time since California started building roads, the governor is offering bonds as a financing alternative.

But other state officeholders insist that the state should not be taking on so much new debt.

Peace, perhaps the most vocal critic of the bond measures, said, “We can’t afford to pay for any of them. We’re in trouble in this state, and we have to get control of our finances.

“This is not the way to do it. If a given stretch of road costs $2 billion on a pay-as-you-go basis, it will cost $3.2 billion using bonds,” he said.

Parks Measure

Sen. Quentin L. Kopp (I-San Francisco), chairman of the Senate Transportation Committee, is supporting the school, veterans and earthquake bonds but opposes the transportation and parks measures.

“I’m fearful of the debt service that will result if all the bonds in June are adopted and all of the proposed bonds in November are adopted,” Kopp said.

Supporters of bonds claim that this method of financing provides more leverage and purchasing power for the state, allowing the purchase of big-ticket items, such as new schools and prisons, with a relatively small initial cash outlay. It is precisely the same philosophy consumers use when they buy a car with a small down payment, rather than paying for it outright with cash.

But Kopp replies, “How do you get more leverage for your money when you borrow $1 billion and you pay $790 million in interest costs over 20 years?”

Even before any of the new measures was put on the ballot, the governor budgeted $645 million to make interest and principal payments on general obligation bonds already approved by voters. The measures on the June ballot, if all pass, will cost taxpayers an additional $283 million a year for 20 years to repay.

Potential Interest

Add on the potential interest and principal payments for the $3 billion in bond measures Deukmejian and the Legislature have placed on the November ballot, and the annual bond payments will be in the $1.2-billion range, according to estimates by the legislative analyst’s office.

According to Kopp, interest and principal payments on bonds would jump from about 1.8% of the state general fund budget to just over 3%, the highest level in the state’s history. Most budget experts say the state’s payment level should never go beyond 5% of the general fund.

But virtually all of the state’s leading fiscal officers say California can support the level of bond payments envisioned in the current ballot measures. They believe that the state can finance the bonds without threatening the state budget or California’s AAA bond rating.

State Finance Director Jesse R. Huff, Deukmejian’s budget adviser, said even if all the ballot measures are approved, California still will be below the national average of bonded indebtedness for states.

‘Big Step’

Manuel M. Mateo, who oversees state bond sales as chief of the Trust Services Division of the treasurer’s office, said, “This is a big step for California to take. But we’re very comfortable that the state can handle the amount of bonds on the ballot.

Legislative Analyst Elizabeth G. Hill, testifying before the Assembly Ways and Means Committee before the bond package was approved, said, “California’s debt burden is well below average compared to other states (and is) a very manageable amount.”

Supporters of bond financing argue that borrowing gives the state more purchasing power with current dollars because the impact of long-term costs are mitigated by the effects of inflation. Dollars the state uses to pay off the bonds, they point out, will not be worth as much as the dollars the state collects now from taxpayers.

Supporters also note that bond financing is a way to beat the state spending limit, because voter-approved bond payments are exempt from it.