Commentary

San Francisco Examiner
October 11, 2006

California's Proposed Bonds are Fiscally Irresponsible
Bonds cost taxpayers nearly $2 for every $1 borrowed
By Samuel R. Staley, Ph.D.

A virtual alphabet soup of special interests has predictably lined up to support the $42.6 billion worth of bond initiatives on the November ballot. City and county officials, transportation agencies, housing advocates, environmentalists, school districts, and dozens of other groups are all pushing for the bonds because they will get billions of dollars from taxpayers for their preferred programs after failing to get them funded through the normal state budget process in Sacramento.

Some of the programs in the bond propositions might be justified on their own merits - if they were squeezed into the state budget. But long-term bond financing, the most expensive way to fund projects (costing taxpayers nearly $2 for every $1 they approve), should not be used to pay for current spending or ongoing programs.

The state is already borrowing and spending at an astronomical clip. Sacramento has increased general fund spending by 29 percent over the last three years. Despite billions of dollars in unexpected tax revenue – a 23 percent increase in revenues the last three years - the state government's operating budget deficit is still $7 billion because of runaway spending.

And if all of the November bonds pass, California will add a stunning total of $80 billion in new debt. California is already paying off $55 billion in General Obligation debt, $10.5 billion from the recent "economic recovery" bonds. And then there's the $30.5 billion in authorized debt that hasn't been issued yet.

When individuals or families declare bankruptcy, overwhelming debt is often the cause. The problem isn't necessarily buying a big house. A house is a physical asset that, particularly in California, tends to increase in value over time. Assets cost a lot, but we can finance them over time because they keep their value, and we simply need to earn enough money to make the payments.

We get into trouble when we start borrowing to spend beyond our means. Millions of families file for personal bankruptcy each year because their current paycheck can't cover the expenses and the interest on the money they borrowed. Rather than sticking with the TV we have, we use the credit card to charge a new plasma screen.

And that's what California is doing. Though advertised as infrastructure bonds to rebuild the state, much of the proposed bond money is slated for current, ongoing operating expenses for programs. These programs should be funded by the general fund, the state's equivalent of a monthly paycheck, just like how typical families pay for basic expenses and not the credit cards.

Proposition 1B, for example, would cost California taxpayers $19.9 billion. The state undoubtedly needs more roads, but most of the bond money is earmarked for ongoing maintenance, transit funding, retrofitting busses, improving security on transit systems, and other non-infrastructure expenses. Thirty years from we'll still be paying these bills – and our kids will be paying them - but we won't have new roads to show for them because the money was spent to repair potholes.

Likewise, Proposition 1C will cost taxpayers over $2.85 billion to fund various housing programs. But many of the programs would not build or add housing. Instead they would fund planning initiatives, acquisition of land for parks, stop-gap funding for water and sewer programs, and providing direct subsidies to homebuyers.

Affordable housing is reaching crisis levels for millions of struggling families in urban areas like the Bay Area. California desperately needs to invest in new roads, bridges and levees. But there are right ways and wrong ways to achieve goals. Violating basic principles of public finance and pushing the state and its taxpayers toward bankruptcy is not one of the right ways.

Samuel Staley, Ph.D., is director of urban growth and land use policy at Reason Foundation, a free market think tank based in Los Angeles. He is co-author of the new book The Road More Traveled (Rowman and Littlefield, 2006) on the nation's transportation and traffic crisis. An archive of his work is here and Reason's California research and commentary is here.

Samuel R. Staley, Ph.D., is director of Urban and Land Use Policy for Reason Foundation and adjunct scholar of the Indiana Policy Review Foundation. Staley is co-author of the forthcoming book The Road More Traveled: Why The Congestion Crisis Matters More Than You Think, and What We Can Do About It. (Rowman and Littlefield, Fall 2006). An archive of his work is and Reason's urban growth research and commentary is .