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WHAT IS A BOND?

A bond is a form of borrowing often used by state and local governments, usually to pay for capital outlay projects that would be too costly to pay for at one time. In effect, investors loan money to the government for a specific project and are repaid with interest over a specified number of years.

HOW DOES REPAYMENT AFFECT THE STATE BUDGET AND MY TAXES?

The principal and interest payments on about eighty-five of general obligation bonds are made from the state’s General fund, which comes primarily from state income taxes and sales taxes. The remaining general obligation bonds are selfsupporting and, therefore, do not require General Fund repayment and support.

HOW ARE BONDS REPAID?

According to the Legislative Analyst, most general obligation bonds are paid off over a period of 20 to 30 years. Assuming an interest rate of 5.25 percent (the current rate for this type of bond), the cost of paying off bonds over 30 years is about $2 for each dollar borrowed $1 for the dollar borrowed and $1 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 $1.25 for each $1 borrowed. Currently the state’s bond debt is about 4.3 % of the General Fund revenues. Payments on the state’s General Fund debt will be around $2.9 billion during the 2001-02 fiscal year.

WHY ARE BONDS ON THE BALLOT?

In California, when the state wants to borrow money through a general obligation bond, this action must be approved by a majority of the voters. This ensures investors that the bonds are backed by the full faith and credit of the state.

HOW DO STATE GENERAL OBLIGATION BONDS GET ON THE BALLOT?

They are put on the ballot by a two-thirds vote of both houses of the legislature with the signature of the Governor, or through a voter initiative.

For more information, see "State Bond Debt: Detail".