Bonds Head for Ballot, But Debt Ceiling and Priorities Remain Uncertain
California has plunged into recession. We are faced, as always, with a chronic backlog of infrastructure projects necessary to accommodate our growing population. We could certainly use some kind of economic stimulus. But the state faces a $12.4 billion budget deficit, according to the Legislative Analyst's Office. And by conventional measurements, the state's debt load is just about topped out. About 5% of the state's general fund – close to $5 billion a year – is being spent to service general obligation debt.
Yet interest rates are lower than they have been in decades. So there is a lot of talk around California these days about taking advantage of the situation by refinancing existing debt or by getting voters to approve new bonds. State Treasurer Phil Angelides has even proposed to President Bush that the federal government guarantee state and local bonds, which would permit California's public pension funds to buy those bonds, thus priming the pump.
The "infrastructure crisis" has become a cliché in California. From the '50s through the '70s, we built a huge amount of public infrastructure that did a good job of accommodating a state of perhaps 20 million to 25 million people. Now we're at 34 million people and counting – and the common perception is that we have not built much of anything during the last 25 years. So, the argument goes, it's probably time to dump $100 billion or so into the next generation of infrastructure.
But it is not that simple.
First of all, it is not clear that we have the capacity in California today to build all this stuff even if we wanted to. Caltrans has had a tough time actually getting projects designed and built – not for lack of money, but for lack of skilled personnel and absent a culture focused on getting things built.
Second, it's not clear what we should build even if we could build it. The days of cheap land and wide-open construction are long gone, and there is little consensus on what pieces of infrastructure should be built and where they should go.
Finally, there is the question of how we pay for this stuff. A great deal of the transportation funding still comes from the federal government and from special funds, such as the gas tax, earmarked for transportation. Beyond that, the infrastructure issue is largely a question of whether the state's voters are willing to approve bond measures. They have done so in record amounts during the last four years, but, given the recession and the budget deficit, it is not clear that they will keep it up.
Public support for bonds is usually a function of the economy. During the boom of the late 1980s, Californians passed almost $20 billion in bonds. But during the big bust of the early '90s, state bonds were iffy propositions at the ballot box. From 1990 through 1994, voters turned down almost as much in bonds ($10.3 billion) as they approved ($10.9 billion). Bonds got especially hammered in the depths of the recession during 1994, when $6 billion worth were defeated and only a $900 million school bond passed.
Since then, economic times have been better – and the Legislature has been smarter about what plays well with the voters. (Almost all bonds that appear on the ballot must win legislative approval first, and there is considerable horse-trading in Sacramento about which bonds reach the electorate.) From 1996 through 2000, voters approved about $20 billion in bonds and defeated only $220 million – this last being the "crime lab improvement" debacle in March 2000.
To a large extent, the success rate has gone up because legislators have become more daring in throwing the "big-dollar bomb." Up until 1992, no single bond ever appeared on the ballot for as much as $1 billion. In recent years, however, we've seen a $9.2 billion school bond, a $2 billion seismic retrofit bond, and two $2 billion natural resources bonds. All of those multi-billion-dollar bonds passed.
The single biggest reason for the uptick in bond successes, however, is the fact that voters love schools. Combined, K-12 education and higher ed account for more than half of the $40 billion in state bonds passed since 1982. And K-12 remains the most popular type of bond. Over the past 15 years, voters have approved $16 billion in K-12 bonds and rejected only the $1 billion on the ballot in 1994.
During the next few years, however, the state's biggest infrastructure needs may lie in other areas – parks, housing, transportation, and the like. This is the kind of infrastructure that will shape the future of our state most profoundly, yet the electoral record for these issues is mixed.
Despite the passage of Propositions 12 and 13 (land and water bonds totaling $4 billion) in March of 2000, park and natural resources bonds don't always do well. Before Propositions 12 and 13, California had seen only one major park bond issue pass since the mid-80s – $770 million back in 1988. Similarly, housing bonds and bonds aimed at rail construction have had mixed success.
Housing bonds have a 50-50 track record (unless you count veterans' bonds, which always pass). State rail bonds, too, have lost as often as they've won. This record reflects the recession-era failures of rail bonds proposed by the Planning and Conservation League that reached the ballot by initiative rather than going through the Legislature. The legacy of those efforts is that, despite a lot of talk among "smart growthers" and the pavement crowd alike, we have not seen a transportation bond on the state ballot since 1994. Simply put, the bonds that could be leveraged to plan a different kind of California are politically riskier. They don't get on the ballot very often, and they frequently lose during a recession.
Are we headed for another downturn in bond enthusiasm – especially for the riskier, planning-oriented bonds? A good "leading indicator" on that trend is probably Proposition 40, the $2.6 billion park bond on the March ballot. Proposition 40 has polled well, and it comes on the heels of the success of Propositions 12 and 13. But it is not clear whether a park bond can make it during a recession on the heels of a war.
If Proposition 40 does pass, that may open the door for more planning-oriented bonds, such as the housing bond proposed by Senate Pro Tem John Burton in SB 1227. But a Proposition 40 defeat might end the enthusiasm for state bonds for a while. Or a loss might encourage a trend toward using schools as housing and as parks because school bonds could be the only ones voters are willing to support.