LEAGUE OF WOMEN VOTERS OF CALIFORNIA EDUCATION FUND - Nov. 4, 2008 Election
AN OVERVIEW OF STATE BOND DEBT
Background
The state uses long-term borrowing to raise money for various purposes. The state obtains money by selling bonds to investors and agreeing to repay this money, with interest, according to a specific schedule. The state has traditionally used bonds to finance major capital outlay infrastructure projects such as roads, schools, prisons, parks, water projects and office buildings. These facilities provide service over many years, and their costs would be difficult to pay for all at once. The different taxpayers who pay off the bonds benefit over time from the facilities. Bonds have also been used to finance certain private infrastructure, such as housing.
The state sells three major types of bonds to finance projects.
- General Obligation (GO) Bonds are usually paid off from the state’s General Fund (GF), which is largely supported by tax revenues. Others are paid from designated revenue sources (e.g. the Cal-Vet program under which bonds are issued to provide home loans to veterans and are paid off using veterans’ mortgage payments). General obligation bonds must be approved by the voters and their repayment is guaranteed by the state’s general taxing power.
- Lease-Revenue Bonds are paid off from lease payments, primarily financed from the GF, by state agencies using the facilities the bonds finance. They do not require voter approval, are not guaranteed by the state’s general taxing power, and therefore have somewhat higher interest costs than general obligation bonds.
- Traditional Revenue Bonds also finance capital projects but are not supported by the GF; they are paid off from designated revenues generated by the projects they finance, such as bridge tolls. They are not guaranteed by the state’s general taxing power and do not require voter approval.
Budget-Related Bonds have recently been used to help close major shortfalls in the GF budget. In March 2004, voters authorized $15 billion in general obligation bonds to help pay off the state’s budget deficit and other obligations. Of this, $11.3 billion was raised in 2004, and remaining authorizations sold this year. These bonds will be paid off over the next several years. They are not included in the rest of this discussion, which focuses on infrastructure-related bonds.
The Direct Cost of Bond Financing depends on the amount sold, the bonds’ interest rates, the time over which they are repaid and their maturity structure. For example, the most recently sold GO bonds will be paid off over 30 years with fairly level annual payments. If a bond issue carries a tax-exempt interest rate of 5 percent, the cost of paying it off with level payments over 30 years is close to $2 for each dollar borrowed—$1 for the amount borrowed and close to $1 for interest. After adjusting for inflation, the cost is about $1.30 for each $1 borrowed.
The State’s Current Debt Situation
Amount of General Fund Debt as of June 1, 2008 was about $53 billion of infrastructure-related GF bond debt outstanding on which it is making principal and interest payments, including about $45 billion of GO bonds and $8 billion of lease-revenue bonds. About $68 billion of authorized GO and lease-revenue infrastructure bonds have not yet been sold. Most of these bonds are committed to projects that have not been started or have not yet reached their major construction phase,
General Fund Debt Payments for GO and lease-revenue bonds were about $4.4 billion in 2007-08. As previously authorized but not yet sold bonds are marketed, outstanding bond debt costs will rise, peaking at approximately $9.2 billion in 2017-18.
Debt Service Ratio (DSR) is an indicator of the state’s debt situation. It indicates the portion of the state’s annual revenues that must be set aside for debt-service payments on infrastructure bonds and are therefore not available for other state programs. The DSR increased in the early 1990s and peaked at 5.4 percent before falling back to below 3 percent in 2002-03, partly due to some deficit-financing activities. The DSR then rose again beginning in 2003-04 and currently is at 4.4 percent for infrastructure bonds. It is expected to increase to a peak of 6.1 percent in 2011-12 as the currently authorized bonds are sold.
Effects of the Bonds on this Ballot
There are four GO bond measures on this ballot, totaling $16.8 billion in new authorizations.
- Proposition 1 would authorize $9.95 billion in bonds to finance a high-speed rail project.
- Proposition 3 would authorize $980 million in bonds for capital improvement projects at children’s hospitals.
Proposition 10 would authorize $5 billion in bonds for various renewable energy, alternative fuel, energy efficiency, and air emissions reductions purposes.
Proposition 12 would authorize $900 million in bonds under the Cal-Vet program to be paid off from mortgage payments.
Impacts on Debt Payments. If the three GF-supported bonds (Propositions 1, 3, and 10) were all approved, they would require total debt-service payments of about twice their authorized amount. Once all these bonds were sold, the estimated annual budgetary cost to the GF would be about $1 billion.
Impact on the Debt-Service Ratio. If all the bonds were approved and sold, the DSR would peak at 6.2 percent in 2011-12 and decline .
Prepared by the Legislative Analyst’s Office
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