November 2006 Voter Guide

Analysis and recommendations for the November 2006 ballot

Voter Guide



For SPUR, this November is different. This marks the first election in which we have chosen to review, debate and analyze a lengthy list of state ballot measures. We heard from our members that SPUR's ballot analysis should extend to state initiatives, so we're trying it. Our process still carefully presents both sides of the issue and tries to get to the question about conflicting values at the core of each ballot measure.

This fall we selected six state ballot measures: four bonds and two policy reforms. All speak to urgent concerns in California.

Overview of State Bonds

The state traditionally issues three types of bonds to finance long-term infrastructure projects: general-obligation bonds, lease-revenue bonds and revenue bonds. General-obligation bonds are typically used for schools, transportation, prisons, housing, seismic retrofit, environmental resources and parks. Lease-revenue bonds are typically used for construction and renovation of state buildings. Revenue bonds are typically used for revenue producing projects such as tools bridges and parking facilities. The voting requirements are different for each of these three types of bonds:

General-obligation bonds The California Constitution requires general-obligation bonds to be approved by a two-thirds vote of the Legislature and a majority of the voters. General-obligation bonds can be placed on the ballot either by the Legislature or through the voter initiative process. These bonds are backed by the state's General Fund, rather than by any specific revenue stream. Unlike similar bonds for cities, state general-obligation bonds do not raise taxes; instead, they are repaid by existing taxes. The principal and interest for state bonds are repaid from General Fund revenues. Repayment of state bonds takes priority over other General Fund programs. In other words, state bonds act as a "set-aside" of revenues for the bond repayment. Because no new revenues are raised, some will argue that state bonds place a squeeze on other programs financed by the state's General Fund. By comparison, San Francisco General Obligation bonds raise property taxes to finance repayment of principle and interest. The City's bonds must be approved by a two-thirds vote.

Lease-revenue bonds. Lease-revenue bonds, also called lease-payment bonds, require a majority vote of the Legislature but do not require voter approval. State agencies make annual lease payments to bond holders, funded primarily through General Fund appropriations. For example, a state agency may have a building built for their use funded through lease-revenue bond sales. Then, as the agency receives its approved portion of the General Fund to run the agency's operations, it uses that money to pay the "rent" on its facility, which is then used as money to retire the bonds. Unlike general-obligation bonds, lease-revenue bonds are not backed by the full faith and credit of the state. As a result, lease-revenue bonds carry higher interest than general-obligation bonds. The 2005-06 state budget included $622 million for service of General Fund lease-revenue bond debt (0.7 percent of total General Fund spending).

Revenue bonds. The state uses revenue bonds to finance revenue-producing projects such as toll bridges or parking structures. Revenue bonds are authorized by the Legislature and generally are not subject to voter approval. Revenue bonds do not raise taxes, but are repaid by fees or other revenue streams.

In addition, during the state's recent fiscal crisis voters authorized deficit-financing bonds to close the budget deficit. Deficit-financing bonds totaling $10.4 billion were issued in 2004. These bonds are secured by 0.25 percent of the local sales and use tax. Some $4.1 billion in deficit-financing bonds have yet to be issued. In March 2004, voter-adopted Proposition 58 prohibited any future deficit-financing bonds. The state's 2006-07 budget accelerated repayment of a portion of outstanding deficit-financing bonds.

Once long-term infrastructure bonds are authorized by the voters or Legislature, the state treasurer sells bonds based on project needs and market conditions. Usually, bond debt service payments are made over a 30-year period. Currently, each $1 billion of bonds sold costs the state approximately $65 million per year for debt service. At an interest rate of 5 percent, the state will pay $2 for each $1 borrowed over a 30-year period. After adjusting for inflation, each dollar borrowed will cost the state approximately $1.30.

The 2005-06 state budget appropriated $3.2 billion out the state's General Fund for debt service of general-obligation bonds (3.5 percent of total General Fund spending). According to the Legislative Analyst's Office, as of November 2005 the state had almost $53 billion of outstanding General Fund debt, including $42 billion in bond debt related to public works (roughly $35 billion in general-obligation bonds and $8 million in lease-revenue bonds). In addition, about $30 billion in bonds has been authorized, but not yet issued.

Currently, California's bond ratings are A, A2 and A as rated by Standard and Poor's, Moody's Investor Services, and Fitch Ratings, respectively. These ratings represent the lowest given to all the states rated by these agencies. Some of the factors underpinning these ratings include the state's structural deficit, the continued imbalance between revenues and investment, and the multibillion-dollar operating deficits projected through 2010-11. The current budget has an operating deficit on the order of $7 billion. Lower bond ratings frequently result in a higher interest-rate premium for new bond issues.

There is no accepted state rule or legal limit for how much debt is too much, or how many bonds the state can afford. Rather, this depends on policy choices about how much of the state's revenues to devote to the funding of infrastructure versus other state spending priorities, and also what level of taxes and user charges is appropriate for the funding. In addition, it depends on the state's ability to sell its bonds at reasonable interest rates in the financial marketplace.

In January 2006, Gov. Arnold Schwarzenegger proposed a Strategic Growth Plan for California's Future. He proposed $68 billion in general-obligation bonds for infrastructure projects. Even though some Democrats thought the plan was an election-year ploy by the governor and the program was too costly, they also thought the state's infrastructure requirements warranted bond financing. The general-obligation bond proposal was scaled back by the Legislature to $37 billion, altering the governor's plan and reducing or shifting allocations. The governor is requesting a special session of the Legislature to consider $6 billion for prison construction and reforms to sentencing practices, and to consider shifting some resources to rehabilitation and parole programs.

In addition, the governor's plan proposed to place a cap on the amount the state would spend for debt service each year relative to the state's General Fund revenue. Specifically, the governor proposed a constitutional amendment to set that limit at 6 percent. His state constitutional amendment did not make it to the November ballot.

The Bay Area Economic Forum and other infrastructure-investment advocates argue that a limit of 6 percent limit would be too restrictive. They say that the proposed state bond measures totaling $37 billion represent only 1 percent of the state's gross domestic product.

The forum estimates the infrastructure need to be $527 billion, or 2.5 percent of the state's gross domestic product. Gov. Pat Brown's "golden age" of infrastructure investment was 3.6 percent of state GDP. European countries average 2.5 percent of GDP. The forum argues that the "golden rule" is that over a state economic cycle, the government should borrow only to invest and not to fund current spending. The long-term "sustainable infrastructure investment rule" is that net debt as proportion of the state GDP will be held over the economic cycle at a stable and prudent level, or a flexible 0 percent to 10 percent of state GDP, averaging 6 percent over a predetermined timeframe. Many European countries have adopted these public-finance principles.

By comparison, San Francisco's general-obligation bond debt service limit is 3 percent of General Fund revenues. The City normally considers a "prudent" bond limit to be 1.5 percent. San Francisco also issues revenue bonds for specific projects, such as sewer and water bonds. SPUR's "Big Fix" policy paper, published in February 2005, recommended that annual General Fund infrastructure expenditures should be between 2.5 percent and 3 percent. This would be in addition to general-obligation bonds.

The proposed state 10-year bonds placed on the ballot by the Legislature and governor - transportation/air quality, $19.9 billion; education (higher, K-12) $10.4 billion; affordable housing, $2.85 billion; and flood control and water supply, $4.1 billion - total $37 billion and make up the largest bond package in California history. If voters adopt all November general obligation infrastructure-type bonds plus deficit-financing bonds, then the state's debt service ratio would be approximately 6.3 percent in 2006-07. This ratio does not include the $5.3 billion Proposition 84 general-obligation bond for water quality, flood control, and park and natural resource protection.

SPUR Ballot Analysis Committee