State’s Bond Measure Binge Brings Warning
Warning that California could be on its way to taking on too much debt, state Treasurer Thomas W. Hayes said Tuesday that the state could face rising interest rates and endanger its AAA credit rating if it continues to approve bond financing at its present rate.
Urging Gov. George Deukmejian and the Legislature “to show restraint” in drafting new bond measures, Hayes said that if the state sold only the $9 billion in bonds authorized during prior elections, California’s interest and principal payments could soar from $686 million a year to about $2 billion annually.
Hayes said during a Capitol news conference that the state cannot afford to continue authorizing bonds at the record rate they were approved last year, when voters gave the OK to $5.5 billion worth of bond measures.
“Quite simply, we cannot continue to sell bonds at an ever-increasing rate to finance California,” he said. “Bonds are not a bottomless pit.”
Hayes said that the state can now comfortably afford to put $4 billion in bonds on the ballot every two years. He pledged to mount a campaign against bond measures that exceed that amount.
“You don’t want to put out on the market more than the market could comfortably absorb and that would be about $2 billion a year,” Hayes told reporters.
In a printed statement circulated at the news conference, Hayes labeled as “dangerous” the trend toward ever-higher levels of bond financing.
“Unless we’re careful, we will end up like the federal government--mortgaging our children’s future by saddling them with a staggering load of debt payments. The more bonds we sell, the more we have to pay in interest,” he said.
Sen. John Garamendi (D-Walnut Grove), chairman of the Senate Revenue and Taxation Committee, said he basically agrees with Hayes.
But Garamendi placed the blame for the accelerated use of bond financing on Deukmejian. Garamendi accused the Republican governor of using bond financing as a way around the state spending limit as well as a means of avoiding politically unpopular tax or fee increases.
“Bond financing is a very serious problem in that it has the potential to consume an awesome amount of the state budget,” Garamendi said. “We ought to be willing to pay the costs of these projects ourselves and not push the costs onto future generations.”
Garamendi added, “We definitely ought to start curbing our appetite for bonds.”
The state uses bonds--promising investors a fixed rate of interest over a predetermined period of time, usually 20 years--as its chief method of raising money to construct school and university buildings, new prisons, county jails, and water and sewage lines.
Historically, the state has been relatively conservative in its use of bonds. But in recent years voters have gone from approving $1 billion worth of bonds in 1980 to the record $5.5 billion last year. As a result of prior elections, the state currently has a backlog of $9 billion worth of bonds that have been approved but not yet sold. The state has already sold, and is making payments, on $8.6 billion in bonds.
Already, Deukmejian and the Legislature have agreed to put $1.1 billion in new transportation and housing bonds on the ballot next year.
Meanwhile, the Planning and Conservation League, an environmentalist group, is circulating petitions to place a $1.9-billion bond measure on the June primary ballot to finance rail, light rail and other transportation projects.
And the Legislature is considering more than $10 billion in various higher education, public school, prison, sewer and other bond financing projects.
Hayes, a Republican, was sworn in as treasurer earlier this year after being named by the governor and confirmed by the Legislature. He will run for his first full four-year term next year.
Vows to Go to Voters
He said he would campaign against bond proposals put on the ballot if they exceed $4 billion. “I would definitely be out front telling voters it is too much,” Hayes said.
His proposed $4-billion cap has some support in the Legislature. Last week he outlined the proposal during a private meeting with several legislators and reportedly found no opposition.
Assemblyman William P. Baker (R-Danville), vice chairman of the Assembly Ways and Means Committee, was at the meeting and said he agrees with Hayes. “If we float $20 billion in bonds on the ballot and they pass, the bond houses will walk away from us in droves,” Baker said.
Hayes is not the first Sacramento officeholder this summer to express concern about the escalating use of bonds. At the urging of its Democratic chairman, Sen. Daniel E. Boatwright of Concord, the Senate Bonded Indebtedness Committee earlier this month reduced the number of bond measures that will be considered by the Senate from $7.4 billion to $2.3 billion.