On December 14, the Assembly Budget Committee met to review California’s growing general fund debt and the need to plan the use of future infrastructure bonds. With bond repayment growing faster than any other part of our budget, we need to plan how we can best use bonds to create jobs, invest in our crumbling infrastructure, and grow our economy. But these investments must be balanced with the budget impacts caused by the state’s rising debt burden.
The hearing featured testimony from State Treasurer Bill Lockyer and Legislative Analyst Mac Taylor. Here are some of the highlights:
• In the mid 1980's debt service was less than 2 percent of the overall budget. Now it is approximately 7 percent. Most of this growth in debt occurred after Governor Schwarzenegger took office in 2003.
• We have the lowest bond rating in the country – BBB. But many other states—even those with big budget gaps of their own—have perfect AAA ratings.
• We pay a premium for our low bond rating – 1.72 percent in higher interest for our bonds than other states. That means $18 billion more in interest costs on our current bond debt.
• We pay more than developing nations to borrow money – 1.25 percent more in interest costs than Mexico's bonds issued this year, 1.38 percent than Brazil, 0.44 more than the Philippines, and 0.24 percent more than Indonesia.
• We borrow more than anyone—and it makes it hard for us to find investors. We borrowed $36 billion in 2009 in both long and short term debt, $19.7 billion of which was in infrastructure bonds. The year’s next biggest bond seller was New York State at $7.4 billion. The next biggest corporate bond issue was Roche at $16.5 billion, followed by Anheuser Busch-InBev at $13.5 billion, Pfizer at $13.5 billion and General Electric for $11.8 billion.
Experts estimate that needed repairs and improvements to California’s infrastructure—roads, schools, hospitals, parks, and levees—will $300-$400 billion over the next twenty years. But how can our State meet these needs when we are historically unable to produce a balanced budget, face years of future deficits, and we have the lowest bond ratings of any state in the country?
So far, we have used a "first come, first served" model to fund our infrastructure needs. We keep identifying projects we like and piling the borrowing costs for them on top of each other. This practice has built a mountain of infrastructure bond debt: $62.1 billion in repayment while another $49.5 billion waits to be spent.
The result is a "Pac-Man" of debt repayment swallowing up more and more of our General Fund budget, which pays for education, public safety, and life saving services. Over the next five years, debt service will grow at 8.4 percent a year. By 2014-2015, debt service costs will consume over 9 percent of our total General Fund budget—an unprecedented level.
We need to start thinking about how much borrowing we can afford and how we handle the legacy of these debt costs we have already incurred. Our committee hearing was a good start.
Every $1 billion of bond funds brings in approximately 18,000 new jobs. Given the state’s 12.5 percent unemployment rate, I believe we must focus on funding projects that will bring new jobs to California and help us move forward to a more prosperous future. For that reason, I will author legislation this year to address responsible management of our debt and to use existing bond funds to create jobs for Californians.