California’s state budget is under stress from stagnating tax revenues, leading Gov. Gavin Newsom and legislators to make some hard choices about priorities and enticing them to adopt alternative strategies to maintain spending.

The recently adopted 2023-24 budget contains examples of both and as the income/outgo squeeze continues, as a recent Department of Finance projection indicates, the search for new strategies will become more intense.

One of those strategies emulates the federal government’s chronic addiction to borrowing money to cover operating deficits. The 2023-24 budget includes several examples, including directly tapping the state’s special funds for loans and indirectly borrowing from employers by forcing them to repay the state’s $18 billion debt to the federal government for unemployment insurance benefits during the COVID-19 pandemic.

When the Legislature returns to the Capitol in mid-August for the last month of its 2023 session, one of its unfinished chores is to decide how many bond issues to place on the ballot for two 2024 elections.

Gov. Gavin Newsom and various lawmakers have collectively proposed something north of $100 billion in bonds, which is far more than either voters or financial markets are likely to swallow. Newsom has indicated that he wants a $26 billion lid on bond issues, telling reporters at a recent press conference, “A number of legislative leaders have come to – ‘Hey, support this, support my bond, this bond.’ We have to work together on what the priorities are going to look like for November.”

Some of the proposals are for things that have traditionally been financed with borrowed money, such as school construction and water projects. But there’s a disturbing trend in other proposals – using borrowed bond money to operate programs and services that are usually backed by budget appropriations.

Violating Bedrock Principle of Bond Financing

It’s disturbing because it violates what should be a bedrock principle of bond financing, which is to use it only for projects with long-term benefits, such as construction.

California has generally adhered to that principle but has deviated occasionally, such as issuing long-term bonds in 2004 to pay off billions of dollars in short-term budget debt which threatened to destroy the state’s credit rating. Another example is two voter-approved bond issues totaling $8.5 billion to finance stem cell research.

One of the bond measures floating around the Capitol this year would borrow $5.2 billion to deal with the state’s epidemic of opioid addiction through treatment and education. It’s being pushed by Assemblyman Reggie Jones-Sawyer, a Los Angeles Democrat who chairs the Assembly Public Safety Committee.

The committee has blocked bills that would impose harsher penalties on sellers of fentanyl, a particularly deadly opioid, and Jones-Sawyer contends that non-criminal approaches would work better.

The crisis is real but borrowing money that would have to be repaid by taxpayers over decades, with hefty interest payments, to finance short-term services is a slippery slope. Given the likelihood that California will be seeing budget deficits for the foreseeable future, approval of an opioid treatment bond would encourage advocates for other social service and medical services to seek similarly expedient financing.

California has no shortage of debt now. The state treasurer’s office says that as of July 1, the state was on the hook for $121 billion in principal and interest on bonds it already has issued. That doesn’t count the $18 billion owed to the feds for unemployment insurance, the $82 billion in unfunded liabilities for state employee health care or at least that much in unfunded liabilities for state worker pension obligations.

There is good debt and there is bad debt. In winnowing through the competing bond proposals for placement on the 2024 ballot, Newsom and legislators should remember the difference.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more columns by Dan Walters, go to calmatters.org/commentary.

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