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Taxpayers should beware of ‘bond bombshells’
he most breathtaking period of public works construction in California’s history. During those years, California built the finest highway sys em in the world, one of the largest water projects in history and he foremost university system n the country. At a time when he population grew twice as fast as today, the state kept pace with the demand for schools, ports, prisons, libraries, parks and power plants. Today, Californians are ocked in perpetual freeway gridlock, schools are bursting at he seams and potential shortages of everything from electricity to water are just one hot summer away. Politicians from all parties are falling over one another to propose massive new spending programs. As those politicians admire Brown’s commitment to public works, they would do well to study his discipline in public finance. Not that Brown was a fiscal conservative–he left the state with a gaping deficit and a pile of debt. By the end of his administration, the state had a $711-million general fund deficit and total per capita spending had ballooned from $856 to $1,442 (all in 2004 inflationadjusted dollars). California’s operating deficit today is four times larger than Brown’s––nearly $3 billion. Per capita spending is over $3,000—twice that of Brown’s final year. As Gov. Arnold Schwarzenegger grapples with the resulting fiscal paradox of crumbling infrastructure despite record spending and borrowing, he should remember three principles of public debt that Brown’s generation respected. First, bonds should only be used for capital projects with a useful life at least equal to the debt service. If our children are called upon 30 years from now to repay a bond, they should have the full benefit of the project built with that bond. Second, state bonds should be used only for projects that benefit the entire state. Projects that exclusively benefit local communities should be paid for exclusively by those communities. Today, state bond funds are dolled out in a grab-bag of local pork projects, literally robbing Piedmont to pay Pasadena. Third, revenue bonds, not general obligation bonds, should be used for capital-intensive projects that provide direct services to distinct users. A general obligation bond is repaid directly by the state’s taxpayers. A revenue bond is repaid by users of a particular project, such as a bridge financed by tolls paid by bridge users. Bonds are seductive. They promise immediate gratification but they conceal a heavy price. They are certainly the most expensive way to finance projects. Pat Brown understood this. His recent successors have not. And Gov. Schwarzenegger is now dealing with the result. He must restore the public works built by a generation of giants while discharging a mountain of pointless debt racked up by a generation of spendthrifts. Only by rigorously applying these principles can he hope to do so. McClintock represents the 19th district in the California Legislature. |
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