California’s Debt Bondage

APRIL 20, 2010

By JOHN SEILER

In my previous article on finding ways to suspend some state spending for a year to help solve the $20 billion deficit problem, “Initiatives tax state budget,” I looked at initiatives voters passed that mandated spending. I wanted to isolate such spending, so I left out state bonds. I found that, if spending on such initiatives could be suspended for a year, $5.45 billion could be sliced from that $20 billion deficit – not the whole solution, but a start.

I since have looked into whether similar savings could be achieved by suspending bond sales that have been run up by the initiatives passed by voters. The short answer is: No. But read on.

As of this writing, according to the front page of the California Treasurer’s Web site, the state has taken on $110.7 billion in “voter-approved general obligation (GO) bonds.” That debt comes in two types:

1. Sold/Not Yet Repaid: $63.2 billion. Nothing can be done about this debt because the money already has been built on projects such as roads, schools and parks.
2. Approved/Not Yet Sold: $47.5 billion. This money has not been spent. But because the voters approved the spending, it would be nearly impossible to repeal it.

Moreover, because bonds are paid off not in one year, but over from 20 to 40 years (depending on the specifications in the bond initiatives), suspending the issuance of such new bonds for a year “would be a fraction” of the total amount,  Tom Dresslar told me; he’s director of communications in the office of Treasurer Bill Lockyer. The actual amount would depend on the amount of bonds scheduled to be issued and the interest rates the state must pay.

He added that “to the extent you don’t issue bonds, that threatens jobs up and down the state” that are created by the bond spending, “and threatens businesses that depend on it. That could exacerbate the budget problems.”

However, if higher taxes are needed to pay for these bonds, then businesses and persons would have less money to spend and invest in new business and jobs creation.

The long-term situation

In my “Initiatives tax state budget” article, I talked to Esmail Adibi director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis. I talked to him, again, about the bond situation. He concurred that a one-year suspension of bond sales wouldn’t do much for the budget.

“What’s done is done,” he said of past bonds. “The budget whole we dug – it’s there. The question now is the future.”

Although the numbers are slightly out of date, an analysis of the debt situation is the October 2009 “Debt Affordability Report,” a surprisingly readable document from Treasurer Lockyer’s office.

It found (page 7) that the fiscal 2009-10 budget (which ends June 30, 2010) would include $6.01 billion in “projected general obligation and lease revenue bonds debt service payments.” That money comes from the general fund. Put another way, if half those bonds had never been issued, the current budget deficit would be $3 billion smaller.

The Report calculated that the total “debt service payments” would rise over the next 20 years to:

2014-15 – $11.09 billion
2019-20 – $14.59 billion
2024-25 – $17.59 billion
2027-28 –  $19.64 billion

The increase in the percentage of the general fund going to pay off the bonds is even more alarming:

2009-10 – 6.71 percent
2014-15 – 10.16 percent
2019-20 – 10.32 percent
2024-25 – 9.60 percent
2027-28 – 9.18 percent

No wonder the report warns:

It is clear that rising debt service costs will take the state’s debt ratio to high levels exceeding 10 percent during the middle years of this period. If policymakers find these levels unsustainable, the necessary adjustments to revenues, expenditures, debt authorization or some other combination of all these, should begin soon.”

State comparisons

The report also provides a useful comparison with other states (page 18). Here’s the debt per capita, as calculated by Moody’s Investors Service, in their “2009 State Debt Medians,” released in July 2009, for the ten most populous states:

Texas: $520
Michigan: $766
Pennsylvania: $950
Ohio: $962
Georgia: $984
Florida: $1,115
California: $1,805
Illinois: $1,877
New York: $2,921
New Jersey: $3,621

Moody’s Median of all 50 States: $865.

There are couple of things to note here. First, for a family of four, $7,220 is owed just for the California’s state-government debt.

Second, California’s debt per capita of $1,805 is more than twice that of the 50-state median of $865.

Third, the states with the worst rankings – New Jersey and New York – also join California on the “States That Do Everything Wrong” ranking that I wrote about in my article, “CA doing ‘everything wrong’.” The ranking was based on a study by the American Legislative Exchange Council. And in that same study, California and New York headed the list for the “Moving Van Effect” – citizens leaving a state for other states.

When a family of four moves from California to Texas, for example, its state debt drops from $7,220 to $2,080.

Crisis and reform

A crisis is a time for reform. And California’s continuing $20 billion budget deficit certainly is a crisis. What can be done?

“There’s no end to this unless something is done about it,” Adibi advised. “There should be a rule against the special interests putting these bonds on the ballot. Individually, each bond might not seem very much. But when you add them in the aggregate, it’s a serious budget cost. You can’t back out. That would mean bankruptcy. For the future, we need to bring some sanity to this problem.”

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].