Days after lawmakers agreed to ask voters for $11.1 billion in debt for water projects, the state had to pay more than expected to sell its most recent bond issue…As a result, millions of dollars more of the state’s dangerously depleted revenues will go to debt service and less to schools, health care, social services, prisons and other priorities.
Brokers underwriting the sale of $1.9 billion in state general obligation bonds originally thought investors would demand a 3 percent yield. Instead, as the Los Angeles Times reported Wednesday, “the state was forced to offer a 4 percent annualized tax-free yield to lure investors.”
That pushed the state’s cost of borrowing at least a third higher than originally projected. That means the state, in order to borrow $1.9 billion, will pay millions of dollars more in interest than originally projected. As a result, millions of dollars more of the state’s dangerously depleted revenues will go to debt service and less to schools, health care, social services, prisons and other priorities.
Myriad factors influence individual bond sales. But at least one bond manager said the higher cost in the state’s latest sale was related to the “saturation of the market” by California. Over the last seven weeks, California has sold more than $21 billion in debt. The state’s growing debt burden is cause for alarm.
Currently the state has more than $130 billion of outstanding bond debt. A little more than half, $66.4 billion, has been sold to investors. The state will pay $5.75 billion to service that debt this fiscal year, or 6.7 percent of general fund revenues. The state treasurer’s office projects that those debt payments could more than double, growing to $13.54 billion by 2018, or more than 10 percent of revenues. That’s an astounding number.
In the 1980s, debt service consumed less than 2 percent of the state’s general fund revenues, but had drifted to 5.5 percent by the mid-1990s. According to the Legislative Analyst’s Office, debt service has become “one of the fastest growing items in the state’s strained general fund budget.”
The state’s growing debt load and its inability to cut spending or raise taxes explains why California has the lowest credit rating of all of the 50 states. If approved by the voters, the $11.1 billion water bond, a package filled with pork-barrel projects, will only add to that burden.
The choices will be tough. If voters see water borrowing as a necessary investment, lawmakers may have to consider rationing future state bond sales. Borrowing for high-speed rail and children’s hospitals might have to be held back in favor of bond sales for other priorities, such as education.
One thing is increasingly clear: California needs to tear up the credit card. It would be great to hear Gov. Arnold Schwarzenegger use that line.
Oh, that’s right. He already has.