As a recent Public Policy Institute of California (PPIC) poll confirms, this approach is out of step with “most Californians (56%) [who] would prefer to pay lower taxes and have a state government that provides fewer services”. With respect to solving the current budget crisis, the poll found that “fewer than one in ten” respondents preferred “tax increases or say it is okay to borrow money and run a budget deficit.”
Issuing bonds can be an appropriate funding mechanism if appropriately used, which means the programs (ideally capital projects) provide good value to citizens and the interest payments on the debt are affordable. The state must also recognize that there is a limit on how many bonds it can issue. Issuing bonds for climate programs precludes the state’s ability to issue bonds to fund some other state priorities, such as new school construction or highway improvements.
These trade-offs are important considerations because a large portion of California’s current infrastructure needs repairs and upgrades. And while many people may value the dam safety projects that have been considered as part of the climate bond more than investments that expand key highways, this is likely not the case for other projects such as the proposed trail access expansions. By combining all sorts of unrelated projects into a $10 billion bonding package (or whatever the ultimate dollar value may be), the legislature is all but guaranteeing that the state will waste money on lower valued projects while important capital needs go unmet.
It is also important to explicitly acknowledge that issuing debt does not absolve taxpayers of the cost burden. When California issues a bond today, it commits future governor and legislators to repay these costs for many years into the future. And unless there are offsetting spending cuts, issuing more debt today equivalently means that the state is increasing taxes tomorrow.
The results of the PPIC poll indicate that most Californians would oppose the issuance of these new bonds without offsetting spending cuts. How large the tax increase or spending offsets need to be depends upon the size and terms of the debt issued.
The current interest rate on long-term California state bonds is around 4.23 percent.[1] If the state issued bonds with an average 30-year duration and assuming an average interest rate of 4.23 percent, then the total payments across the life of the bond would cost the state $17.7 billion or an annual financing cost of $588.6 million. Adding on these costs reduces the government’s financial flexibility.
For instance, had the legislature already approved these additional climate bonds, then the current budget crisis would have required substantially more spending cuts or other “budget solutions”. The deteriorating state fiscal position between the January Budget and the May Revise, required Governor Newsom to propose an additional $3.3 billion in spending cuts. Including the costs of financing the climate bonds, achieving the same fiscal position as his May Revise would have required the Governor’s suggested cuts to be 18 percent higher than what he proposed, see the figure.
Future spending restraint may be too much to ask for given the Governor’s and legislators’ demonstrated aversion to stricter spending controls and overuse of spending gimmicks and budget shifts to address the current fiscal crisis. The inescapable conclusion, then, is that the legislature would turn to future tax increases to fund the climate bonds under consideration. The higher taxes would add another blemish to the state’s already uncompetitive economic environment.
From a broader perspective, the debate over issuing new bonds illustrates that the state’s political leaders do not understand the severity nor the causes of the current fiscal crisis. California is facing an historic budget problem because the overly volatile tax system empowers politicians to spend too much money. Add in the fact that this money is often spent ineffectively (or even counterproductively) worsens the outcomes further. Until the political leaders recognize these fiscal realities, California’s periodic budget crises will continue to plague the state.
Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.
[1] See: https://california.municipalbonds.com/bonds/yield_curve/. Interest rates are the average of the outstanding interest rates for bonds maturing between 25 and 35 years.
