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Bond Proposals Emerge from California's Democrats

DEC 20, 2012 2:58pm ET
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SAN FRANCISCO — Newly empowered with supermajorities in both houses of the Legislature, some California Democrats have introduced legislation that would increase borrowing and make taxing easier.

The bills introduced this month at the start of the new legislative session include a bond authorization for statewide spending on school construction, requiring lower voter thresholds to pass local taxes, and selling "social impact bonds."

The proposed legislation comes shortly after the November election gave Democrats more two-thirds of the seats in both the Senate and Assembly. That's enough to put constitutional amendments on a statewide ballot without any Republican votes, assuming the Democratic caucuses hold together.

The potential for more bond sales out of California, the largest state in the country and the lowest rated by two of the three major ratings agencies, may be good news for the market that has been mostly starved this year of the kind of yield that Golden State debt offers.

"There is always an interest in Cal state GO bonds; they are on the upswing still," said Kelly Wine, executive vice president of R-H Investment Corp., a broker-dealer in Los Angeles. "We actually have not had enough bonds in our market this past year and we have had customers waiting for new issues."

But what is good for the market may not be good for the state's credit rating.

The percentage of the general fund that pays for debt service has been rising rapidly in recent years.

Gabriel Petek, an analyst with Standard & Poor's, which earlier this year raised its outlook on the state's A-minus credit rating to positive, said debt service has absorbing a larger share of the state budget than even earlier in the last decade.

"The state's debt load has increased substantially in recent years," Petek said. "The fiscal position remains tenuous. In a way, the budget politics may be harder now because the perception is out there that things are so much better. This might make it more difficult to enact an austerity budget."

The state's debt service payments from its general fund are expected to increase by more than $400 million over the next two fiscal years on estimates California will sell $13 billion of new money debt, according to the State Treasurer's Office.

Debt service as a percentage of the budget is expected to rise to 8.9% from 7.9% in fiscal 2013, according to the annual Debt Affordability Report Treasurer Bill Lockyer's office issued in October.

Gov. Jerry Brown successfully waged a ballot measure campaign resulting in November's approval of temporary hikes to sales and income taxes. The expected revenue from those tax hikes is expected to ease California's frequent budget shortfalls.

California's nonpartisan Legislative Analyst's Office forecasts the state will face a $1.9 billion budget deficit for the next fiscal year, which is down from last year's $15.7 billion shortfall.

Spreads between the state's general obligation bond rating and the triple-A benchmark index have been tightening since Brown took office, partly due to the state's improving budgets and partly due to demand in the market.

Those improvements could be hindered by more state debt.

Earlier this month, Assemblywoman Joan Buchanan, D-Alamo, introduced a bill that would create a general obligation bond act to provide funds to build and upgrade schools facilities if voters approve. The dollar amount for the statewide ballot measure, which needs approval from two-thirds of lawmakers, has yet to be set.

State voters authorized $36 billion of bonds for schools, colleges and universities through acts in 2002, 2004 and 2006. About $2.5 billion of the long-term bonds approved by those acts have yet to be issued, according to the Treasurer's Office.

Another major borrowing proposition is already set for the ballot.

State lawmakers approved an $11.4 billion bond act to pay for upgrades to waters systems across the state that, after a postponement, is scheduled for the November 2014 ballot. Legislators in July removed the water-bond proposition from this year's ballot due to worries too many spending measures could hurt the chances of Brown's tax measure.

Critics say the water bond proposal is laden with pork and bills have been introduced to reduce the amount of debt voters would be asked to approve.

It is still very early in the legislative process, said Mark Hedlund, a spokesman for Senate President Pro Tem Darrell Steinberg, D-Sacramento.

"When you start a new session there are a lot of bills that are introduced, and that starts the ball rolling," Hedlund said. "On all these things, you are talking about going through hearings, having debates and discussions and meeting with stakeholders."

Constitutional amendments have been proposed to lower voter thresholds for local government tax and bond measures.

Sen. Mark Leno, D-San Francisco, put forward a proposal to would ask voters to amend the constitution to lower the bar to pass local school parcel taxes from two-thirds to 55%. Such property taxes typically boost districts' operational budgets.

Another plan by Sen. Lois Wolk, D-Davis would put a constitutional amendment on the ballot to lower the voter requirement for local GO library bonds  from two-thirds to 55%.

"In general, for instance on lowering the threshold to 55% for local parcel taxes, [Steinberg] thinks the public would be behind that, but it will all go through the vetting process," Hedlund said.

Another piece of legislation would create an office under the governor charged with using so-called social impact bonds.

Sen. Curren Price, D-Los Angeles, introduced the bill that would create the California Office of Social Innovation and Entrepreneurship, which would help foster the use of the bonds to tackle social problems in the state, such as homelessness and recidivism rates.

Also called "pay for success" bonds, they are not traditional financial instruments. Although there are few examples, they typically work when a private investor loans money to a non-profit that is only paid by a government for reaching goals. The investor makes money from the government payments if the program is successful.

New York City and Goldman Sachs & Co earlier this year announced it would use the financing structure to try to reduce reincarceration rates of youth on the city's Rikers Island Prison.

In Massachusetts, the state is trying to use the funding mechanism to help reduce youth crime and homelessness.

"We have been dormant in generating solutions that would reduce homelessness, improve delivery of critical health care and reform our criminal justice system, and inaction has only exacerbated these problems," Price said in statement. "It's essential that we create private- public partnerships to leverage our limited resources."

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Ridiculous! The election is barely over and the public union owned Democratic party is all ready on a tax and spend feeding frenzy. We don't even know the new tax rates if they resolve the fiscal cliff or the effect if nothing done. Or the effects of obama care taxes that are known and the ones still hidden in the thousand page obama care document. America is in serious financial straits with California and Washington DC lack of leadeship. We have the best government money can buy, crony union capitalism and crony corporate capitalism. The youth of America don't know what they are signing off on. I am a public school teacher and ignorance is worse than anyone can imagine!!!!!!!!!!
Posted by educator | Friday, December 21 2012 at 11:01AM ET
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