From the Legislative Analyst's explanation in the California Voter Information Guide ballot pamphlet for the March 5, 2002 Primary Election.

Background

What Is Bond Financing? Bond financing is a type of long-term borrowing that the state uses to raise money for specific purposes. The state gets money by selling bonds to investors. The state repays this money plus interest.

The money raised from bonds primarily pays for the purchase of property and construction of facilities--such as parks, prisons, schools, and colleges. The state uses bond financing mainly because these facilities are used for many years and their large dollar costs are difficult to pay for all at once.

General Fund Bond Debt. Most of the bonds the state sells are general obligation bonds. The state's debt payments on about 85 percent of these bonds are made from the state General Fund. The money in the General Fund comes primarily from state personal and corporate income taxes and sales taxes. The remaining general obligation bonds (such as housing bonds) are self-supporting and, therefore, do not require General Fund support. All general obligation bonds must be approved by a majority of voters and are placed on the ballot by legislative action or by initiative.

The state also issues bonds known as lease-payment bonds. These bonds do not require voter approval and require the state to pay a higher interest rate and selling costs than general obligation bonds. The state has used these bonds to build higher education facilities, prisons, veterans' homes, and state offices. The General Fund is also used to make debt payments on these bonds.

What Are the Direct Costs of Bond Financing? The state's cost for using bonds depends primarily on the interest rate that is paid on the bonds and the number of years payments are made. Most general obligation bonds are paid off over a period of 20 to 30 years. Assuming an interest rate of 5 percent (the current rate for this type of bond),the cost of paying off bonds over 25 years is about $1.65 for each dollar borrowed--$1 for the dollar borrowed and 65 cents for the interest. This cost, however, is spread over the entire period, so the cost after adjusting for inflation is less. Assuming a 3 percent future annual inflation rate, the cost of paying off the bonds in today's dollars would be about $1.23 for each $1 borrowed.

The State's Current Debt Situation

The Amount of State Debt. As of October 2001, the state had about $26 billion of General Fund bond debt--$20 billion of general obligation bonds and $6 billion of lease-payment bonds. Also, about $12 billion of authorized bonds have not been sold because the projects to be funded by the bonds have not yet been undertaken.

Debt Payments. We estimate that payments on the state's General Fund bond debt will be around $3.2 billion during the 2001-02 fiscal year. As currently authorized bonds are sold, bond debt payments will increase to about $3.7 billion in 2005-06 and decline thereafter.

The level of debt payments stated as a percentage of state General Fund revenues is referred to as the state's "debt ratio." This ratio stood at well under 3 percent at the start of the 1990s, and peaked at over 5 percent in the mid-1990s. It has since declined and currently stands at 4.7 percent. Based on current authorizations, the ratio will continue to decline in future years. Approval of the bonds on this ballot would increase the projected debt service ratio slightly.

Bond Propositions on This Ballot

Proposition 40 - California Clean Water, Clean Air, Safe Neighborhood Parks and Coastal Protection Act. This measure would authorize the state to sell $2.6 billion in general obligation bonds for natural resources conservation, state and local park acquisition and improvement, and historical and cultural resources preservation purposes.

Proposition 41 - Voting Modernization Bond Act of 2002. This measure would allow the state to sell $200 million in general obligation bonds for the purchase of updated voting systems.