Features

SACRAMENTO – In 1996, supporters marveled at the decisive victory of Proposition 203, a $3 billion school bond measure that was then the largest in state history. 

Now, six years later, Californians will be asked to pass another school bond measure worth four times as much. Proposition 47 will authorize selling $13 billion in general obligation bonds to build new schools and repair existing ones, and recent polls suggest voters will approve it in November. 

California, already the state with the nation’s largest bond debt, will have three bond issues on the ballot in November worth $19 billion. 

While those bond issues await approval on the ballot, the government is also inundating the market with a number of lease-payment bonds that don’t require voter approval. 

The state is currently preparing for an $11.1 billion bond sale — the largest one-time borrowing by a government agency in U.S. history — to pay off the significant budget shortfall caused by last year’s energy crisis. 

Gov. Gray Davis’ current budget plan includes closing off some of the state’s $23.6 billion budget deficit by selling bonds to be paid off with the state’s share of the $206 billion settlement between states and tobacco companies. 

California expects to receive about $21.4 billion from the 1998 settlement over 25 years, but the Davis proposal would sell bonds to collect a smaller lump sum payment now. 

Once resistant to passing large bond issues, California voters have been approving them in record amounts over the last six years. Since March 1996, voters have approved 12 of 14 measures on the statewide ballot. 

“We went through a long period where they were not passing bond issues. It’s a catch-up right row,” says Zane Mann, publisher of the California Municipal Bond Advisor, a newsletter monitoring the California bond market. 

Voters snubbed the first bond measure to reach the billion-dollar mark in 1988, a transportation bond defeated in the June primary. All other bond measures that year were approved. As California fell into a budget crisis in the early 1990s, voters turned away from long-term borrowing, only approving five of 23 bond proposals between November 1990 and November 1994. 

Since 1996, however, bonds have regained favor. The 12 bond measures passed since then have added about $24 billion to the state debt. With about $27 billion in bond debt, California leads the nation, followed by New York, Texas, Pennsylvania and Illinois. 

Voters have been especially receptive to school bond issues. According to a recent report from state Treasurer Phil Angelides, almost 60 percent of California’s current bond debt has gone to education-related programs. 

“There’s a general belief that we have under spent,” said Kim Rueben, a research fellow, specializing in education, at the Public Policy Institute of California. 

The size of the recent school bond issues is a response to studies that have predicted the state needs $32 billion over the next five years. 

More than in most states, Rueben said, California’s state government ends up paying for school bonds more than local governments. 

In 2000, voters made it easier to pass school bond measures by lowering the vote requirement from two-thirds to 55 percent. 

As interest rates have fallen to 30-year lows, the use of bonds has increased. Angelides has urged selling about $25 billion in new bonds over the next four years to save millions of dollars in the future. The majority of the bonds will be paid with state tax revenue. 

While bond supporters revel in the low interest rates, others say California is launching into a bond frenzy that is fiscal mismanagement. 

“There are many voters who confuse bond measures with free money,” said state Sen. Tom McClintock, a Northridge Republican and an advocate of the pay-as-you-go policy. “The fact is that bonds are the most expensive way to finance any government project.” 

For every dollar of capital, McClintock said, taxpayers must pay roughly $2 in principal and interest. 

McClintock, who is running for state controller in November, has been a staunch opponent of bond measures and has called for a blanket moratorium on long-term borrowing. 

Despite the cost of incurring bond debt, the state treasurer’s report showed California’s current debt service as a percentage of general fund revenues to be well within credit analyst recommendations of five percent or less. In fact, if the state were to increase its debt service to five percent in the coming years, it could handle as much as $63 billion in bonds by 2010. 

Despite concerns over running up a large bond debt, the demand for California bonds remains strong, according to the treasurer’s report. 

While last year’s energy crisis led bond rating agencies to reduce California’s credit rating to one of the lowest among the 50 states, the report indicated that bonds have still sold. 

Amy Doppelt, the managing director in public finance at the credit rating agency Fitch, said investors who face high state taxes consider the tax-free bonds, backed by the world’s fifth largest economy, sound investments during uncertain times.