Borrowing Binge or Good Investment?

The 1990s seem to be as much about thrift as the 1980s were about debt. So why is California now on a borrowing binge?

The simple answer is that the voters decided over the last few years that some things were worth buying on credit: more schools, more mass transit, more prisons and more parks.

The use of 10- to 20-year bonds to fund such projects is partly an outgrowth of Proposition 13 and the limits on the taxing power of local authorities. And such debt isn’t necessarily bad, despite its image. What’s important is how the money is used.

A school or a mass transit system is an investment, not merely a one-time use of state funds. “The growth of the California economy is going to require investment in the future,” notes state Treasurer Kathleen Brown, who directs the state’s bond sales. “If we don’t issue bonds to build schools now, you will just create more problems later on.”

But Brown also says she could not accept the idea of using state borrowing power to directly bail out increasingly stressed local governments. And the danger that politicians and voters might be swayed in that direction is real, she warns.

Her message to investors who own bonds of troubled California municipalities or school districts: “I’m of the opinion that investors need to do due diligence (before investing). I don’t believe it’s the state’s duty to bail out people who made bad investments.”