Politics and money

Geoff

 

“While experts disagree on how much is too much when it comes to debt service, 7.8 percent is high. In fact, it’s the highest since 1977.”

The buzz in the Capitol is that the $11.1 billion borrowing planned for the November 2012 ballot may get pushed back or downsized, in part because of the miserable economy, in part because of the ballot’s volatile political mix.

The size and timing of the bond election has been part of the political calculation since lawmakers and then-Gov. Schwarzenegger approved it two years ago. When times are flush, voters are more prone to approve spending for public works projects than when times are tough – and times are tough. In 2010, tight-fisted voters rejected new spending on a number of levels, and even refused to allow an $18-a-year levy – that’s $1.50 per month — to keep California’s state parks open. Now, that’s cheap.

State Treasurer Bill Lockyer noted recently that California’s debt service accounts for about 7.8 percent of the state’s General Fund, its main coffer of personal income, sales, corporation and insurance taxes. That’s a lot of dough in an $80 billion-plus General Fund, and while experts disagree on how much is too much when it comes to debt service, 7.8 percent is high. In fact, it’s the highest since 1977 even though the state is borrowing less than before – the disparity here is that the state’s revenues went down, driving the debt service proportion up.

Last fiscal year, from July 1, 2010, to June 30, 2011, the debt service level was 7.1 percent. Twenty years ago it stood at 2.36 percent.

Those are not good numbers. In California, General Obligation bonds – voter-approved borrowings – have the full faith of the state behind them and bond holders go to the front of the line and take priority over other state debts. Nobody ever lost money on California’s GO bonds, as Lockyer often points out, and bond buyers know it: The state is the nation’s largest issuer of municipal debt.

If lawmakers decide to trim the $11.1 billion bond offering, the big question is what will be cut and what will be left? Cut each project by 25 percent – that’s one proposal on the table – or cut entire projects out all together? Politically, this is a tough call, since the fragile agreement that put the bond on the ballot in the first place reflected compromises between environmentalists, agriculture, Delta protectionists, water districts, reservoir construction advocates and others. If entire projects are removed, the support could dwindle and rewriting a scaled-back plan could prove difficult.

If there were solid indications that the recession was waning – and with it, the parsimonious views of voters – the bond could be pushed back two years. There is precedent for this – a major school bond for example – but it is a gamble, too. Putting it on the November 2014 ballot may give it a better chance of passage — or it may not. Voters are fickle.

Politically, the November 2012 ballot is probably the bond’s best shot. A presidential ballot brings out a higher turnout than off-year or special elections, and a high turnout in California traditionally means more Democrats at the polls, which means more voters likely to approve spending.

But there are other issues on the ballot that could affect passage of a multibillion-dollar bond offering.

One proposal would modify the term limits of lawmakers, allowing them to serve up to 12 years in any one house. State lawmakers used to have unlimited terms of office, but in 1990 angry voters – led by Republicans – approved limiting them to six years in the Assembly and eight years in the Senate. The term modification on the ballot in 2012 may draw large numbers of Republicans to the polls to oppose it – and the Legislature with a 14 percent approval rating is even less popular now than it was in 1990.

If Republicans come to the polls in droves – it’s a presidential election, remember – will they be inclined to oppose the bond issue?

Also on the ballot is a $1-per-pack tax on cigarettes – and in tight times, new taxes typically aren’t too popular. But will anti-tax sentiment spill over into an anti-borrowing mood?

Another ballot proposal is a constitutional amendment for a “rainy day fund” for the state budget, a set aside to act as a buffer for the state’s books when revenues dip.

{Update: Gov. Brown has signed legislation that pushes the “rainy day fund” election to 2014.}

Just how this proposal will play out as voters decide whether to borrow $11.1 billion is anybody’s guess, but now we paraphrase Bette Davis in All About Eve: Fasten your seat belts. The November 2012 ballot is going to be quite a ride.

 

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