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	Ballot Measure Summary
	Proposition 55
	Proposition 56
	Proposition 57
	Proposition 58
	Bond Overview

AN OVERVIEW OF STATE BOND DEBT

Prepared by the Legislative Analyst

This overview of state bond debt replaces a similar analysis in the principal ballot pamphlet. This overview discusses the impact of the two bond measures on the ballot—Proposition 55 (education facilities) and Proposition 57 (budget deficit). The latter measure qualified for the ballot after the printing deadline for the principal ballot pamphlet.

This section provides an overview of the state's current bond debt. It also discusses the impact the bond measures on this ballot would, if approved, have on this debt level and the costs of paying it off.

Background

What Is Bond Financing? Bond financing is a type of long-term borrowing that the state uses to raise money for various purposes. The state obtains this money by selling bonds to investors. In exchange, it agrees to repay this money, with interest, according to a specified schedule.

Why Are Bonds Used? The state has traditionally used bonds to finance major capital outlay projects such as roads, educational facilities, prisons, parks, water projects, and office buildings. This is done mainly because these facilities provide services for many years and their large dollar costs can be difficult to pay all at once. Recently, however, the state has also used bond financing to help close major shortfalls in its General Fund budget.

What Types of Bonds Does the State Sell? The state sells three major types of bonds. These include:

General Fund-Supported Bonds. These are paid off from the state's General Fund, which is largely supported by tax revenues. Such bonds take two forms. The majority are general obligation bonds. These must be approved by the voters and their repayment is guaranteed in the State Constitution. The second type is lease-revenue bonds. These do not require voter approval, are not guaranteed, and are paid off from lease payments (primarily from the General Fund) by state agencies using the facilities they finance. As a result, they have somewhat higher interest costs than general obligation bonds.
Traditional Revenue Bonds. These also finance capital projects but are not supported by the General Fund. Rather, they are paid off from a designated revenue stream—usually generated by the projects they finance, such as bridge tolls. These bonds also do not require voter approval.
Budget-Related Bonds. During the past two years, the Governor and Legislature authorized other bonds to help address the state's budget problem. These included a $10.7 billion deficit-financing bond enacted in 2003 to pay off the state's deficit. This bond, which is currently being challenged in the courts, has not yet been sold. The cost of repaying principal and interest on this bond would be borne by the state's General Fund.

What Are the Direct Costs of Bond Financing? The state's cost for using bonds depends primarily on their interest rates and the time period over which they are repaid. For example, most general obligation bonds are paid off over a 30-year period. Assuming current tax-exempt interest rates for such bonds (about 5.25 percent), the cost of paying them off over 30 years is about $2 for each dollar borrowed—$1 for the dollar borrowed and $1 for interest. This cost, however, is spread over the entire 30-year period, so the cost after adjusting for inflation is considerably less—about $1.25 for each $1 borrowed.

The State's Current Debt Situation

Amount of General Fund Debt. As of November 2003, the state had about $36 billion of General Fund bond debt outstanding—about $29 billion of general obligation bonds and $7 billion of lease-revenue bonds. In addition, the state has not yet sold about $21 billion of authorized bonds, either because the projects involved have not yet been started or those in progress have not yet reached their major construction phase. (This total does not include the authorized $10.7 billion deficit-financing bond.)

General Fund Debt Payments. We estimate that General Fund debt payments will be about $2.5 billion in 2003—04. This amount is lower than it otherwise would be because of the deferral of certain bond principal repayments to help deal with the General Fund's budget shortfall. Absent these one-time impacts, debt payments will increase to about $3.5 billion in 2004—05. As previously authorized but currently unsold bonds are marketed, outstanding bond debt costs would rise to approximately $4.1 billion in 2007—08, and slowly decline thereafter if no new bonds are authorized.

Debt-Service Ratio. The level of General Fund debt payments stated as a percentage of state revenues is referred to as the state's debt-service ratio. This ratio increased in the early 1990s and peaked at slightly over 5 percent in the middle of the decade. The ratio currently stands at about 3.3 percent, and is expected to increase to 4.6 percent in 2004—05, and further to a peak of 4.9 percent in 2005—06 as currently authorized bonds are sold.

Effects of Bond Propositions on This Ballot

There are two bond measures on this ballot:

Proposition 55, which would authorize the state to issue $12.3 billion of general obligation bonds for construction and renovation of public K—12 schools and higher education facilities.
Proposition 57, which would authorize the state to issue a $15 billion bond to address the state's budget shortfall. This bond would be used instead of the currently authorized $10.7 billion deficit-financing bond.

The impacts of these measures on the state's debt situation are discussed below.

Impacts on Debt Payments. If the $12.3 billion in bonds for education facilities authorized by Proposition 55 on this ballot are approved and eventually sold, there would be additional debt-service payments averaging over $800 million a year over the life of the bond. The currently authorized deficit-financing bond would, if sold, result in $2.4 billion in added General Fund costs in 2004—05, increasing moderately each year until the bonds are paid off (in roughly five years). If the $15 billion in bonds authorized by Proposition 57 is used instead of the currently authorized deficit-financing bond, the annual debt-service costs would be $1.2 billion in 2004—05, increasing moderately in subsequent years. (If the supplemental payments from the budget reserve established by Proposition 58 were included, annual payments could be higher in individual years.) Because of the lower annual debt repayment amounts and larger volume, however, these debt-service costs on the proposed bond would be in place for a longer time period—anywhere from nine to 14 years.

Impacts on Debt-Service Ratio. If the $12.3 billion in education bonds on this ballot are approved and eventually sold, the ratio would increase to about 5.3 percent in 2006—07 and decline thereafter. If the debt service on the currently authorized deficit-financing bond is included in this calculation, the total debt-service ratio would jump to between 8 percent and 8.5 percent per year until the bond is paid off (probably in 2009—10). If, however, the bond proposed in Proposition 57 is approved and sold instead of the currently authorized bond, the ratio would increase by less in the near term—to between 6.4 percent and 6.9 percent annually between 2004—05 and 2008—09. However, this higher ratio would remain in place for a longer time period, since the proposed bond would take longer to pay off. (If supplemental payments from the budget reserve created by Proposition 58 are included, the ratio could be higher in individual years.)