The California Constitution bars state and local governments from issuing tax-supported bonds unless they obtain voters’ approval in advance. It sets a particularly high bar for local measures, requiring a two-thirds majority (although state voters in 2000 lowered that threshold to 55% for school bonds).
Notably, this requirement does not apply to bonds designed to be repaid by user fees, lease payments or other forms of non-tax revenue. Governments have used these “revenue bonds” to pay for a host of infrastructure improvements, from new parking structures to sewer systems, hospitals, toll roads and bridges. And they have done so without seeking voter approval, even for projects costing more than $1 billion.
In November, voters will decide whether to roll back that authority. Proposition 53 would require that California voters grant their approval (by a simple majority) before the state can issue revenue bonds for certain types of blockbuster projects. The measure would apply to revenue bonds worth at least $2 billion issued or sold by the state for any project “financed, owned, operated or managed” by the state, including those done by agencies in which the state has a role.
Dubbed the “No Blank Checks” initiative by its proponents, Proposition 53 presents itself as a safeguard against unelected and unaccountable bureaucrats running up state residents’ costs through revenue-bond issues for bloated construction projects. But it’s founded on an exceedingly shaky premise, and it’s written so broadly that it could give state voters veto power over large but purely local projects in which they have little or no stake.
The fundamental problem with that argument — and with Proposition 53 — is that voters don’t pay for the bonds. That money comes from whoever uses the asset the bonds were used to build. Even if the tolls, fees or other revenue tied to the project fail to cover the bond payments, investors can’t go to the agency that issued the bonds and demand to be made whole by the taxpayers. When properly designed, a revenue bond completely insulates taxpayers from liability.
Worse, because the state contributes to the financing of many large local projects — for example, the Orange County Toll Roads, or a replacement for a major bridge — the proposition would give voters across the state a say over projects they may never use. Similar veto power could apply to bonds to create or expand a campus in the University of California or California State University system. Even a private, non-profit hospital, which issues revenue bonds through the state and may rely on state Medi-Cal funds to help pay them off, could have to win approval from state voters, rather than just the investors who will shoulder the risk.
Supporters of the proposition point to failed revenue-bond issues across the country that wound up costing taxpayers, such as when Stockton had to bail out an unsuccessful hockey arena. But those weren’t conventional revenue bonds; in those cases, governments had pledged to cover the bonds’ losses. Besides, the track record in California is that revenue bonds have rarely failed.
The problem that Proposition 53 aims to solve is speculative, but the potential damage to local control is real. Requiring state voters to approve large revenue bond issues would make it more difficult to make badly needed infrastructure improvements in this state, and could even discourage the public-private partnerships that could help fill the gap between what the state needs to build and what it can afford. Voters can enforce fiscal discipline in Sacramento with their votes for governor and legislators, not by approving Proposition 53.