State Looks at Bonds as Way to Jump-Start the Economy

Frustrated by the long wait for a national economic recovery, state officials are taking novel steps to stimulate the state’s economy from within.

They are preparing to use one of the most powerful economic weapons in the state’s arsenal: the billions of bond dollars spent annually to build classrooms, prisons, university buildings and other capital works projects.

Republican Gov. Pete Wilson and leaders of the Democratic-controlled Legislature are working on a bipartisan deal that would shape a $6-billion bond package in a way that would best promote economic recovery.

At the same time, other state officials are accelerating work on public works projects that have been approved by voters.

State officials say they want to pump as much money into the economy in as short a time as possible, and some predict that the $6-billion package will create about 100,000 jobs.

But skeptics say that California will be in trouble as long as the national economy is ailing.

They say the proposed bonds will have little impact on the recession because the economic slump is likely to be over by the time all the legal and procedural steps are taken and the jobs are created.

Dollarwise, the bond package is similar to the $5.9 billion in bonds approved by voters and the Legislature in 1990. But officials say this year’s bond plan will be different in that priority is being given to projects that are labor intensive--for building things rather than, say, buying parkland.

Senate President Pro Tem David A. Roberti (D-Los Angeles) said he believes a massive infusion of bond dollars into public works projects may be enough to help get the state’s economy moving again. Spending on public works projects during the 1930s helped pull the nation out of the Depression, Roberti noted.

But there are skeptics. State Treasurer Kathleen Brown said “bond sales are not enough” to turn the economy around.

Complaining that she has had to prod Wilson and various government agencies to move on capital works projects approved by voters, she noted that the state now has a backlog of $6.7 billion in bond projects that have been authorized in recent elections.

“The important thing to remember is the amount of time it takes for those bonds to work themselves into the economy,” Brown said. “Voters approved billions of bonds over the last five years and they simply built up as a backlog because government agencies were not ready to let contracts go.”

Legislative analyst Elizabeth G. Hill said: “(Bond sales) would give a positive signal that the state is moving and moving forward and wants to invest in its future. That positive signal would have an effect on the economy. I don’t think it would pull the entire state out of recession because the state economy is intricately linked with the national economy and that is not pulling out right now.”

Cynthia Katz, assistant director of the state Department of Finance, said: “We don’t expect the impact of the bond sales to kick in until 1993.” Even then, she said Finance Department economists believe that the $6-billion bond package would create about 35,000 jobs, not the 100,000 cited by Roberti and others. “During a good year, the California economy produces an increase of more than 400,000 jobs on its own, so we don’t think the bond program will have a major impact in jump-starting the economy,” she said.

Wilson and legislative leaders say they want state and local government agencies to get the construction projects going well before 1993.

To make that happen, the Legislature may approve some new bond projects on its own. Now under consideration is an $878-million package that includes $724 million in prison construction projects, $139 million to build facilities for higher education and $15 million to build a lab for the Department of Food and Agriculture.

These fast-track spending proposals would be sold as revenue bonds, also known as lease-purchase bonds. The state must pay a slightly higher interest rate on these bonds because they are not backed by the full faith and credit of the state, as are so-called general obligation bonds, the type of bonds that voters approve.

Assemblyman Steve Peace (D-Rancho San Diego), chairman of the Banking, Finance and Bonded Indebtedness Committee, said that even though revenue bonds carry a slightly higher interest rate, he believes that the state would come out ahead if it moves on the bonds quickly enough to take advantage of current low interest rates.

“Interest rates are the lowest they’ve been in years. Selling revenue bonds now, even though the rates may be slightly higher, will be much less expensive for the state than if it waits until November and sells general obligation bonds. Who knows what interest rates will be then,” he said.

But that approach may run into political difficulties. Some Assembly Republicans are saying they will oppose approval of all bonds except those designed to build new classrooms; if they vote as a bloc, they can keep the bond measures from the getting the necessary two-thirds vote in the Legislature.

In that case, political leaders would be forced to put the measures on the June primary ballot and take their chances with voters. Voters in November, 1990, rejected all but one of the bond proposals on the ballot.

Meanwhile, officials are speeding up final work on public school construction and mass transit projects that are part of the $6.7-billion backlog in bonds approved in previous elections. They are pressing for quick decisions on new projects that the governor and Legislature might not normally consider until later in the year.

Lyle Smoot, assistant executive officer of the State Allocation Board, which oversees bond-financed school construction projects, said he is pressuring school districts to speed their plans for nearly completed projects.

“If it were normal year, we would apportion money out over a three- to six-month period and school districts would have four to six months to put the projects out to bid,” Smoot said.

But he said that bidding could be accelerated so that contracts could be awarded within 21 days of a bond sale.

“We have about $1.5 billion in projects ready to go, projects that are just sitting waiting for money. Once the money is there, they can go out to bid. We believe we can shorten that up so that in fact if we get bonding authority we will have a substantial number of those projects done by early summer.”

Smoot said that if Wilson and legislative leaders approve a revenue bond package that includes school bonds within the next two or three weeks, he believes “we can have $500 million in construction under way by spring, another $500 million under way by midsummer, and the final $500 million by end of year.”

He predicted that the $1.5 billion would “create at least 40,000 jobs.”

Brown is scheduled to sell $1 billion in bonds to Wall Street investment and banking firms in February for school and transit projects. “Clearly, if we have projects ready to go to construction, I am prepared to sell those bonds to make that happen,” she said.

With that sale and others later this year, Brown has plans to sell at least $3 billion in bonds this year and maybe $5 billion if various proposals being put forward by the governor and legislative leaders are approved.

Even so, Brown and others caution against expecting too much.

Before ground can be broken on various projects, state and local officials must overcome restrictive federal tax laws, environmental regulations, city and county building codes and purchase of rights of way for rail projects.

Officials also point out that even if 100,000 jobs are created, that would not come close to restoring all the jobs lost as a result of the recession. In the period between June, 1990, and March, 1991, the state lost 325,000 jobs as a result of the recession.

What is more, officials say that while the $3 billion to $5 billion infusion of bond money into the economy would have a positive effect as the dollars began circulating, it would be a relative drop in the bucket when measured against the $760 billion in economic activity expected in California in 1992.

State Bond Program

Here is how the program works: * State or local governments identify need for new school, prison, transit line or other project.

* Applications for construction money made to state agency, such as State Allocation Board (public schools) or California Transportation Commission (mass transit line).

* General obligation bond measure put before voters, or Legislature approves revenue or lease-purchase bond measure, which does not require voter approval.

* Agencies draw up plans, arrange for necessary permits, meet various zoning and environmental laws, buy land or rights of way. Initial money comes from short-term loans arranged by state treasurer.

* Treasurer sells state bonds to Wall Street banks and investment firms, attracted by tax-free interest rates.

* Money in hand, state solicits bids and awards contracts; ground-breaking begins; temporary loans paid off.

* State treasurer, using taxpayer funds, pays off bonds for next 20 years. Principal and interest costs next year on previously sold bonds: $1.4 billion.