Governor's Bond Plan Would Monopolize State's Debt for More than a Decade

The following appeared in Capitol Weekly today Once again, Gov. Arnold Schwarzenegger is thinking big--proposing the largest investment in the state's infrastructure in its history. But lost amid the sheer size of the governor's $222 billion infrastructure package and $68 billion in proposed bonds was the potentially powerful new debt ceiling that could fundamentally change how--and perhaps more importantly--which state programs receive government funding. As written, the governor's infrastructure plan would essentially monopolize the state's entire general obligations bonding capacity for most of the next twenty years, boxing out any group whose pet projects are not contained in the package. "We want to cover the whole field," says Mike Genest, Schwarzenegger budget guru and current Director of Finance. "We want to take all the bonding capacity that we think is prudent for the state…and use the money wisely instead of letting it get chipped away with this or that flight of fancy." Here's how: By setting a new general obligations bond debt ceiling at 6 percent of general fund revenues and proposing new bonds that take the state within inches of that very ceiling (literally within 0.09 percent in the closest year), the Schwarzenegger administration effectively boxes out any other group seeking to leverage the state's borrowing capacity. Under the governor's proposal, the state wouldn't have any bonding wiggle room until 2020, though Genest admits that "iron-clad enforcement" of the ceiling would be difficult. Still, a strict ceiling would mean that any new voter-approved bonds--for investments like stem cell research, hospitals, or new state parks, none of which are included in the governor's plan--would have to wait at least a decade and a half to be implemented. "It would not only lock up the borrowing capacity, it would lock up any flexibility in the budget whatsoever," said Assemblyman John Laird, D-Santa Cruz, who is the chair of the budget committee and was recently appointed to the conference committee that will ultimately determine the shape of the bond. Some Democrats are not only frustrated by the governor's set of priorities--the package includes no money for new parks, affordable housing or high-speed rail--but also his usurping of the state's entire borrowing capacity. "We don't believe we should tie the hands of future generations on how they can spend their money," said Speaker of the Assembly Fabian Nunez. In a typical decade, the state's voters approve tens of billions of dollars in bonds for various projects--from education to transportation to prison construction. The state's voters have approved more than $97 billion in borrowing through more than 60 bonds since 1980. But instead of using the bonding capacity piecemeal as the state has historically done, the governor is proposing to leverage all the borrowing at once. Tim Blake, a senior vice president who tracks state debt for Moody's Investors Service in New York, says that the governor is proposing what is "roughly a doubling a baseline projection of new bonds" for the next decade, cornering the California general obligations bond market. G.O. bonds are the only state bonds without a dedicated revenue stream, and are guaranteed through the state's general fund. John Ellwood, a professor of public policy and budgeting at UC Berkeley, says the cap, above all, is about politics. "The first take is that he put that cap in there as a sweetener to conservatives. He can pretend to be fiscally conservative while introducing massive borrowing," says Ellwood. "But he could be shrewder than that. He could be saying I am going to lock in my priorities." And those interest groups not included on the governor's list of priorities are beginning to chafe about being left in the cold. "If the way this bond is set up is so that it elbowed aside all other important needs of the state such as parks, affordable housing and habitat and water protection, that would be a major concern," said Bill Allayaud, state legislative director of the Sierra Club. Specifically, the governor's "strategic growth plan" is a set of five bonds in 2006 totaling some $25.2 billion, with about half going to education, $6 billion to transportation, $3 billion to flood control and water, $2.6 to prison and jail construction, and $1.2 to rebuild the court system. The rest of the $68 billion package is spread across biennial elections until 2014, with another $10.2 billion in bonds appearing before voters in 2008, $18.9 billion in 2010 and education bonds of $8.7 and $5 billion appearing in 2012 and 2014, respectively. Even with the proposed debt cap, Republican response to the size of the package has been tepid. "What we don't want to do is get trapped into setting a figure… and then looking for a list of projects to do," said Assemblyman Rick Keene, R-Chico, who will be the Assembly's lone Republican on the bond conference committee. "To set a figure artificially of say, $60 billion, and to say for sure we will spend it--and we may not even spent it wisely--we really want the decision making to be different than that." Other Republicans have expressed dismay at the $68 billion figure, particularly from a governor who less two years ago proclaimed his intent "to tear up the credit card and throw it away." But Genest says the package is more like a mortgage than a credit card--a long-term investment that promises pay dividends. And like most first-time home buyers, the mortgage is likely to be the only borrowing California can afford in the near future. Says Genest, "That is the nub, that is the key thing in the strategy, is to do exactly that."