State Bonds: What’s a Prudent Limit? : More Than $9 Billion of Debt Now on the Books

Whenever the federal government racks up more deficit spending, someone demands that Washington balance its budget just like the states have to. California is among those states requiring a balanced budget each year. But that does not mean that California doesn’t go into debt, too.

California now has more than $9 billion of debt on the books in the form of voter-approved bonds, costing the state nearly $700 million annually in interest payments. More than $8 billion worth of bonds have been authorized, but not yet sold. The California electorate is being asked to approve $5 billion worth of new bonds in the June 5 primary. More billions have been proposed for the general election, although a decision on November bond measures will not be made until this summer.

So far, California’s bond debt remains within prudent bounds. We are one of only four states boasting the highest credit rating awarded by New York bonding companies. But the popularity of bonds, growing from $2 billion worth in 1982, has prompted some state fiscal experts to start ringing precautionary alarms. Without restraint, California could find itself too deeply in debt, with its good credit record in jeopardy.

The issuance of bonds generally is a good way for state and local governments to borrow money, especially for public works like prisons and university buildings that cost a lot at the outset but benefit the state for many years after. Bond financing has become increasingly popular with the Legislature as tax-restriction measures such as Proposition 13 and the Gann spending limit have tied lawmakers’ hands in raising new revenue.

Also, the Legislature has proposed statewide bond issues to raise money to be used by local governments for projects like county prisons. Local bond issues are difficult to pass because they require a two-thirds vote of the people. State bonds require only a simple majority. Adding to the debt burden, citizen-activists have begun using the initiative petition process to put bond issues before the voters. One such plan is Proposition 116 on the June ballot to raise $1.99 billion for rail and other public transportation.

Just what is a prudent limit for California’s bond debt? How close is the state to reaching that level if all the June bonds are approved? Both Treasurer Thomas W. Hayes and the office of legislative analyst Elizabeth G. Hill say the state still is well within the safe zone, but must begin exercising care. Both argue correctly that the state does not do an adequate job of planning capital expenditures into the future and should have a separate future construction budget. The first step in that process is under way with legislation proposed by Hayes that would require the state Finance Department to prepare a report outlining the state’s construction needs for 10 years in advance. The Legislature and Gov. George Deukmejian should make this legislation a priority.

Hayes says the state is safe as long as it does not commit more than 5% of its annual budget to interest payments needed to pay off the bonds. Current debt service now is only about 2%, but that could grow to more than 5% by the start of the next century if voters continue to approve bonds at the current rate. State officials thus must begin disciplining themselves in the approval of new bond issues. Most important, they should develop a long-range capital spending plan to make certain that the bond issues of today actually fit the state construction needs of tomorrow.