Overview of California’s debt condition: Priming the pump for a water bond

State Capital side view smallerOn February 26, 2013, the Senate Governance & Finance Committee and the Senate Natural Resources & Water Committee held a joint informational hearing entitled “Overview of California’s Debt Condition: Priming the Pump for a Water Bond.”

Senator Lois Wolk, Chair of the Senate Governance and Finance Committee, began by stating that this is the first in a series of hearings that will focus on financing infrastructure and the water bond.  Currently, there is an $11 billion water bond on the ballot in 2014, but much has changed since 2009 when that water bond was formulated: “So we ought to be asking new questions to collect the information that we’ll need to determine whether the bond that was approved and is on the ballot currently is the right one to consider in 2014.  And if not, we need to ask where we may wish to focus new priorities or different emphases on priorities with respect to water supply and reliability improvements while taking on importantly less debt.  In other words, I think we’re looking to get more bang for less bucks,” she said.

Senator Fran Pavley, Chair of the Senate Natural Resources and Water Committee, added that we need to consider the impact of a water bond on the general fund, as debt service is something that needs to be carefully considered, as well as the state’s overall bond capacity and other pressures on the general fund.  Senator Pavley also expressed her concerns that there are other competing bonds and competing priorities that will need to be taken into consideration, noting that Governor Brown is preparing to release his 5-year infrastructure plan for highways, light rail, school modernization, libraries and more.  Senator Pavley added: “A lot has happened since 2009 to this year, so we need to pause and relook at if those are indicative of priorities or technologies or ways that we’re going to ensure that we’re going to meet the coequal goals that were part of the package,” she said.

First to testify will be Blake Fowler from the State Treasurer’s Office who discussed the state’s overall debt condition and credit rating; Mark Whitaker and Anton Favorini-Csorba from the Legislative Analyst’s Office followed with a discussion on how the state has been paying for infrastructure, and in the final segment, Ellen Hanak from the Public Policy Institute of California provided further analysis of the state’s infrastructure spending and needs.

BLAKE FOWLER, STATE TREASURER’S OFFICE

Blake Fowler is director of the public finance division of the State Treasurer’s Office.  He began by reading a statement from Treasurer Bill  Lockyer:

It has been and remains the Treasurer’s view that to the extent possible and equitable, debt service for water transport system improvements be paid for by beneficiaries and not from the state’s general revenues.  On the other hand, paying for environmental improvements in the Delta certainly merits favorable consideration as a state-funded expenditure providing a direct benefit to all Californians and protecting the life of a vital resource that belongs to all Californians.  Most importantly, the treasurer agrees wholeheartedly with the LAO’s view that policymakers need to consider the entire universe of the state’s infrastructure needs, including water, transportation, school construction, ports and goods movement, and adapting to climate change and come up with a coherent strategy for setting priorities to meet those needs, allocate available resources and find new ways to finance and manage those priorities.  The treasurer believes we need a master plan that takes into account our needs not just for the next 5 years but for the next 25 years.  The treasurer and our office stand ready to help in any way we can to assist the Legislature in building and carrying out that plan.”

Mr. Folwer then dove into the specifics on the state’s outstanding long term bond indebtedness: 2 26 13 Presentation on Debt Condition Final_Page_02The state currently has $86.4 billion in general fund supported debt outstanding that includes $72.8 billion of voter-approved general obligation bonds, $11.6 billion of lease revenue bonds for state facilities, and $1.89 billion of proposition 1A receivables bonds,” he said.  “The state also has $6.4 billion outstanding of special fund or self-liquidating issues; these are bonds that are expected to be paid by non-general fund sources but have general obligation backing if those revenues are ever insufficient.  Those bonds include $5.4 billion of economic recovery bonds that were approved by voters in 2004 to fund the state’s accumulated budget deficit, $326 million of veteran’s general obligation bonds that fund veterans’ housing programs, and $698 million of water resources development bonds which helped fund the state water project many years ago.  Those two categories of bonds total $92.9 billion.”

Mr. Fowler continued: The state currently has $40.3 billion authorized but unissued bonds, 2 26 13 Presentation on Debt Condition Final_Page_03including $31.8 billion of general obligation bonds, $1.3 billion of self-liquidating general obligation bonds, and $7.19 billion of state public works or leased revenue bonds.  The largest amounts of authorized but unissued bonds are for transportation, which includes $9.5 billion for high speed rail.  The next largest category is natural resources and environment at $5.9 billion for water, flood control, and other resource-related projects, $2.1 billion for K-12 facilities, $1.75 billion for stem cell research, and $1.3 billion for housing and miscellaneous smaller programs.  In the leased revenue bond program, the largest amount of authorized but unissued bonds are for the Dept of Corrections and Rehabilitation for $3.5 billion; the remainder is for a whole slew of different departments, he said.

2 26 13 Presentation on Debt Condition Final_Page_04The state’s outstanding debt has increased significantly over the last 10 years.  In 2003, it was approximately $34 billion; today it stands about $86 billion, and with the issuance of the authorized but unissued bonds and with the water bond debt service, it would be estimated to peak at about $103 billion in 2020.

Based upon the funding needs that we were provided, we developed an issuance schedule and came up with a debt service payment in 2017 of $140 million; that amount would continue to increase until 2022 to where it would be just below $800 million per year, and would remain at that amount to 2046.  The bonds would be paid off in 2051. 2 26 13 Presentation on Debt Condition Final_Page_05 In total, aggregate estimated debt service on the $11.1 billion would be $24.1 billion.”

Mr. Fowler explained that as our outstanding debt has increased, our debt services have increased as well.  In 2003 our annual general fund supported debt service was under $2.5 billion; this year it is $8.4 billion.  With the issuance of the authorized but unissued bonds and the proposed water bond, it would peak at about $9.8 billion per year in fiscal year 20 and then it would decline after that.

Our debt service as a percent of revenues has also increased sharply and it estimated to peak at this year due to Prop 1A bond repayment at about 8.82% of general fund revenues.  It’s estimated to decline to 7.8% next year and remain at that level or go down slightly over the following three years.

One important thing to note here that our numbers reflect the actual gross debt service that the state has to pay.  It does not reflect any offsets to reimburse the general fund from Build America bond subsidies or transfers from truck weight fees that reimburse the general funds for transportation-related general obligation bonds, and those amounts are significant,” 2 26 13 Presentation on Debt Condition Final_Page_06Mr. Fowler said.  “This year, those offsets total about $1.1 billion and next year they total about $1.4 billion, so when you see some of the LAO’s numbers later, they showed the net numbers after those offsets that are shown in the governor’s budget.”

Mr. Fowler continued:  “We frequently get asked if there is a right amount of debt, and our office’s opinion is the answer is no, that the right amount of debt is a policy choice for the Legislature and the Governor.  We believe debt can be a very effective tool to fund long term infrastructure projects and align repayment with the long useful lives of projects, however, every general fund dollar spent on debt service and any related ongoing costs of the projects funded is a dollar that is not available for education, health care and other programs,” he said, noting that debt service has grown more than most other programs in recent years, and that once bonds are issued, the debt service must be repaid and cannot be repealed.

Debt service is one of the factors used to determine state credit quality, he explained, with the key consideration being the impact on the state’s financial flexibility and whether and to what extent debt service crowds out other needs.  “Their view of debt burden depends not only on the amount of debt issued and authorized but unissued, but also on the state’s economic and revenue growth.”

There are 2 26 13 Presentation on Debt Condition Final_Page_10four key metrics that rating agencies use to assess debt burden; they include debt service as a percent of either revenues or expenditures, debt as a percent of personal income, debt per capita, and debt as a percent of gross state domestic product, he explained, noting that the rating agencies view California’s bonded indebtedness differently.  “Standard & Poors updated the state’s credit rating from A- to A at the end of January and in that report, they described the state’s debt burden as high, but conservatively structured.  Moody’s Investors Service last fall described our debt burden as moderate, and Fitch ratings last fall described our debt burden as moderate but above average.”

California’s general obligation bonds are rated by A1 by Moody’s, A by Standard and Poor’s, and A- by Fitch.  The state’s revenue anticipation notes have the highest short term ratings from Moody’s and Standard and Poor’s, and one notch below the highest rating from Fitch.

In a comparison of California’s debt ratio to the 10 most populated states, 2 26 13 Presentation on Debt Condition Final_Page_09California has the second highest debt both as a percentage of personal income and debt as a percentage of GDP among these 10 states.  California has the third highest debt service as a percentage of revenues and debt per capita.  “As far as the overall ranking among the 50 states for these for metrics, we rank 8th highest in one of the categories and 9th highest in the other three categories, and we are significantly higher than the median and mean for all 50 states,” he said.

Credit spreads are the difference in interest rates on the state’s 30 year bonds compared to the municipal market data index, Mr. Fowler explained.  In general, the state credit spreads are impacted by general market conditions, the state’s credit and the timing and the amount of bonds the state sells.   2 26 13 Presentation on Debt Condition Final_Page_11At the height of the state’s fiscal challenges, the credit spreads spiked dramatically, but since then, with two on-time budgets and the passage of Prop 30, the credit spreads have the declined sharply and are close to where they were back 10 years ago. “This is good news for the state because lower credit spreads mean lower borrowing costs,” he said.

Finally, Mr. Fowler wrapped up with an overview of the roles of various state parties in the general obligation funding process.  The Legislature has to appropriate most bond funds for general obligation bond programs, Mr. Fowler said, with the biggest exception is for K-12 facilities, which historically has included a continuous appropriation.  2 26 13 Presentation on Debt Condition Final_Page_12The Department of Finance surveys the various departments that administer general obligation bond programs to determine and evaluate their project funding needs; they then request the state treasurer’s office to issue a specified amount of bonds or commercial paper notes.  The State Treasurer’s Office then prepares, markets, and issues bonds and commercial paper notes to fund the project needs as provided by Department of Finance.  The State Treasurer’s Office also determines the amount of refunding bonds to be issued for savings, coordinates the bond disclosures with the Department of Finance and the State Controller’s Office, and they work with departments to ensure bond funded projects meet federal tax law requirements.  Finally the departments administer the bond programs and approve disbursements of bond funds, he said.

  • Click here for Blake Fowler’s power point presentation.

MARK WHITAKER AND ANTON FAVORINI-CSORBA, LEGISLATIVE ANALYST’S OFFICE

Mark Whitaker from the Legislative Analyst’s Office began with a general overview of the state’s infrastructure spending, and general obligation and leased revenue bond debt.

There are several different mechanisms the state can use to pay for its infrastructure, such as pay-as-you go, Legislative Analyst's Office_Page_02which is where repayment is made with current revenues rather than borrowing; this occurs mostly in the transportation sector where there are special funds coming from fuel taxes as well as weight fees and other things, he explained.  A larger portion comes from borrowing, the majority being general obligation bonds, but also some leased revenue bonds and the traditional revenue bonds, which are backed by a user fee or some other revenue source. “Over time, the general trend has been for the state to move towards more borrowing and less pay as you go, especially in the general fund category,” he said, noting that most general funds that are spent on infrastructure are used to repay bonds.

The state funds a lot of infrastructure programs, the biggest category being transportation, which includes the state highway system, local streets and roads, transit, and so far, a small amount for high speed rail although that’s expected to grow.  Legislative Analyst's Office_Page_03The next biggest category would be education: local assistance to the state’s K-12 districts to help them finance facilities, as well as the community colleges and university systems.  Smaller amounts are spent for prisons, courts, state office buildings, veteran’s homes, CalFire stations and other categories that the state needs to provide infrastructure for.  About 3/5ths of that are grants or direct project money that is given out to local governments, mainly school districts and local transportation providers, he said.

Most recent funding for new infrastructure has largely come from general obligation bonds that have been approved since 2000, Legislative Analyst's Office_Page_04with voters approving almost $100 billion in new general obligation bonds between 2000 and 2008. Of the total, about $35 billion was for education, another $30 billion for transportation, including high speed rail, and a series of other bonds for various things including resources, environmental protection, stem cells, and children’s hospitals.

The Legislature also has the authority to issue or approve authorize leased revenue bonds which the Legislature has done largely for prisons, CalFire stations and also for the state’s trial courts.  “One thing to note is that on the leased revenue bonds and some of these general obligation bonds, although they are backed by the general fund, the state has adopted policies so that they aren’t all repaid from the general fund,” he said, using the example of transportation bonds repaid with weight gees or bonds for trial court facilities that are repaid with court fines and fees rather than the general fund.  “But for most of these bonds, the debt service is paid out of the general fund,” he said.

There is about $73 billion in outstanding general obligation bonds and $12 billion in outstanding leased revenue bonds that the state is still paying principal and interest on, Mr. Whitaker said, noting that there are also $37 billion of general obligation bonds and leased revenue bonds that have been authorized by either the voters or the legislature, Legislative Analyst's Office_Page_05but those bonds have not yet been sold; as those are sold over the next 5 to 10 years, those will add to the state’s debt service and debt load.  “A lot of the authorized but unissued bonds are for transportation and high speed rail; there’s also a fair amount of resources and flood control bonds that have yet to be sold.”

It’s estimated that the general fund costs of paying back both GO and leased revenue bonds in 13-14 will be about $5.8 billion, which is roughly what the governor proposes to spend in total on UC and CSU systems, to give you a sense of the magnitude, and it represents roughly 6% of the state’s total general fund revenues in 13-14, estimated,” Mr. Whitaker said.  “Assuming that no additional bonds are sold and no additional bonds are authorized and only those bonds are authorized but unissued are sold, the percentage of the state’s budget that we spend on debt service is expected to remain roughly around 6% and then decline.”  With the water bond included, “the water bond wouldn’t have a substantial effect on the state’s debt service ratio under current revenue estimates even though it would be relatively expensive with average annual payments of about $565 million, and these estimates could change.”

Mr. Whitaker explained the difference between the treasurer’s debt service calculated to be closer to $800 million annually, and that depends on the assumptions that are made: “how long it takes to sell the bonds – we assume that they are sold gradually over 10 years but I think the treasurer assumes they are sold a little faster, in which case the annual payments would be higher.  Also the interest rate they are sold at – we assume the interest rate is going to be a little lower than the treasurer does,” he said.

The water bond is not the only infrastructure need the state will have to fund over the next 10 years, he said, so they developed three different scenarios:  Legislative Analyst's Office_Page_07the first is if the voters approve $35 billion over the next 10 years – $35 billion is significant as it is the amount of bonds that voters have authorized for education between 2000 and 2008, so if the voters and legislature which to fund education just at the same level we did over the last decade in terms of bond capacity, they would need to authorize $35 billion in new bonds over the next 8 years:  “That would raise the debt service ratio up to about 6.5 % which would be the highest it’s ever been and but not terribly high.  At $65 billion, debt service is approaching 7%, and at $95 billion, it would be about 8%,” he said, adding “$95 billion is the total amount that voters authorized between 2000 and 2008.”

There was much discussion about the authorized but unissued general bond funds, with the question being asked if the state could decide to not issue them or transfer funds to something else?  Mr. Whitaker replied, “Most of the bonds that are authorized but unissued are subject to appropriation.  That said, a lot of these already been appropriated and allocated to specific projects and so they just have not been sold, but certainly the legislature and the governor could choose to remove the authority of some of these bonds.  I think those would largely be policy calls depending on the priorities that are set between the governor and the legislature …  but certainly there’s no guaranteed or requirement that the state sell these bonds that remain unissued.”

Mr. Whitaker was asked why the bonds haven’t been sold yet.  He answered: “The reason is largely because the projects they would fund are not ready to go.  Some departments have proceeds from previous bonds that they still have not spent as they have had trouble getting projects started; for example, high speed rail is obviously not ready to move forward and sell all these bonds.  At this point it’s not an issue of the state not being able to go to the bond market; it is that the locals aren’t ready to move forward on these projects.”

Lastly, Mr. Whitaker said “Continuing the general obligation and leased revenue bond authorization at the same pace in the last decade would require devoting a substantial amount of the state’s general fund to debt service.  As the treasurer said and we’ve noted before, there’s not a right level for state infrastructure spending and debt service.”  The legislature could consider the state’s aging infrastructure needs and feels that 8% of the budget should be devoted to infrastructure spending, but that would crowd out funding for other important programs.

There are strategies to reduce infrastructure demand, whether that’s increasing utilization of existing infrastructure, putting a greater focus on repair and maintenance so less costly repairs are needed in the outyears, or congestion pricing to reduce demand.  Another option is to reconsider the scope of infrastructure that receives state support.  “Roughly 3/5th of the state’s infrastructure spending goes out as local assistance, so it might be worth reevaluating which programs are a state responsibility, what mechanisms locals might have or the private sector might have to fund these infrastructure improvements instead,” Mr. Whitaker said.  “The other side of the issue is identifying additional revenue to support infrastructure, such as the beneficiary pays principle. There are opportunities to exist to charge users for some of the infrastructure.”

There are some good opportunities coming up for the legislature to consider these issues.  The governor has indicated that he intends to release a 5-year infrastructure plan and that could be a good start to the dialog,” he said, suggesting the legislature take a coordinated approach when considering the size of the water bond, taking into consideration all of the other infrastructure demands, how much to spend on infrastructure, and where all the pieces fit, so a discussion about what bonds might go on the 2014 ballot are a good places for those to begin,” he concluded.

Anton Favorini-Csorba with LAO was next.  He started by making the distinction that with authorized but unissued bonds, there is also the consideration of appropriated versus unspent or unencumbered, meaning legally committed to a project.  We’ve looked at the appropriations made by the Legislature, and most of the bond funds for resources have been appropriated; less of that has been spent.  “About 18 out of the $20 billion in resources bonds passed since 2000 has been appropriated, but it’s closer to about $12 billion to $12.5 billion of that funding that’s actually been spent, meaning there’s closer to 6 billion of appropriations that have been made but for one reason or another, haven’t been spent,” he said.  “If the legislature’s priorities are changing, some of those appropriations that have been made to the extent that they are not negatively impacting projects could be reverted by the legislature and allocated to different priorities,” noting that it’s something that should be considered on a case by case basis.

As for available bond funds, there’s about $2 billion in prop 1E that has been appropriated but not legally committed and encumbered; the money is slated for flood control, levees and flood bypasses as well some overlap with ecosystem.  With Prop 84, there is some funding left for Integrated Regional Management Projects and flood control, about $600 million left on Prop 50.

In the handout are some funding principles in regards to bonds, said Mr. Favorini-Csorba: “The take home point up front is that a bond is just one financing mechanism and funding source among many in a portfolio.  Some mechanisms may be better suited to certain types of activities than others, and a bond is one you can choose from that.  With that in mind, we’ll just run through a couple of steps that we think can be helpful to identify what ought to go in a bond,” he said.

The first step is to define the scope of water activities that will get state funding.  Historically, there have been a number of reasons the state has supported water related activities with public funds; those reasons include providing services that might not otherwise be provided privately, things with broad public benefits like the state water plan, to address ability to pay issues, or to take advantage of economies of scale or other efficiencies.

There are a couple of broad categories that we think have a significant kind of public purpose component to them, said Mr. Favorini-Csorba.  Planning and management is a big one; also broadening access to necessary services, managing risks like floods that are associated with water, ecosystem improvements and in some cases possibly recreation.  “When you look at that list, it basically says we could fund anything that the government might reasonably want to do, so one of the things that we would recommend to fund the portion of activities that really have this state level of benefit.”  He added:  “When you think about providing drinking water assistance to disadvantaged communities, certainly there’s a public benefit to making sure that everybody in California has access to safe water, but there is a significant private benefit is those people can now drink safe water, so they should bear some share of the cost there.”

The next step is to consider ways to reduce the demand for state funding.  “One of the ways that you can do that is to ensure that beneficiaries and polluters pay their share of the costs.  Beneficiary pays just means when you have a program to the extent possible, the beneficiaries of that program should pay its costs.  Polluter pays is where you have a party that is imposing some sort of harm on something that benefits the public at large, they should to the extent possible be responsible for those costs,” he said.

If the legislature so chooses, they can define principles in statue in order to guide the use of state funds, Mr. Favorini-Csorba said, adding that another means by which the legislature could ensure that state funds are only being used for state benefits would be to say which things are a private benefit and therefore should not be funded from state funds.  Another way to reduce the demand for state funding would be to enact those policies that increase utilization of existing infrastructure, pass policies that encourage water use efficiency or that put some restrictions in development in flood plains.  All of these things than can narrow down what the legislature needs to fund from state funding sources.

Then it is a matter of considering what mix of funding sources and mechanisms and how you are going to meet these demands for state funds, he said.  Bonds are useful for when you have a need that you couldn’t ordinarily fund through ongoing sources; they may be best suited for large discrete capital projects that meet a need over a long period of time, while pay as you go sources are those may be best suited for ongoing expenditures like monitoring or maintenance or even in some cases, programs that fund numerous small scale capital projects.

For funding, there’s the choice of special funds versus general funds.  “Special funds are best used when you can really pinpoint a set of defined beneficiaries or polluters and you can feasibly charge them for the costs of the program,” said Mr. Favorini-Csorba.  “On the other hand, you have uses of more general purpose funds, and general purpose funds are well suited to where there isn’t a really easily definable or clear set of beneficiaries or polluters that you can charge.”

Mr. Favorini-Csorba advised: “It’s really important to consider water expenditures in the context of all the things that the state might want to provide to people.  We suggest defining eligible uses in the ways we’ve talked about.  Perhaps setting a statutory definition for beneficiary pays might be a helpful policy, as well as identifying what entities are eligible to receive state funding, whether it’s a bond or another source.  And then consider what bonds should be used for and how those bonds should be repaid versus other funding sources and mechanisms that you have available.”

He concluded:  “Finally, just a couple of implementation considerations.  It can enhance the ability of the legislature to meet its priorities if allocations in the bond act are written a little more broadly.  The allocations could be larger and not necessarily targeted to specific agencies or specific projects, because if bonds are being spent over 10 years the priorities might change.  It can also enhance legislative flexibility and the ability of the legislature to meet its priorities if bond funds are available upon appropriation by the legislature instead of continuously appropriated.  The last point … it can be helpful to consider alternative repayment sources.”

  • Click here for the Legislative Analyst’s Office report.

ELLEN HANAK – PUBLIC POLICY INSTITUTE OF CALIFORNIA

Ellen Hanak, Co-Director of Research and Senior Fellow with the Public Policy Institute of California, then provided some further anlaysis of the State’s infrastructure spending.  1st bond hearing Ellen Hanak Powerpoint_Page_2Ms. Hanak began with an overview of how the water sector is doing, drawing on some of the work the she did last year for the PPIC report, Water and the California Economy.

Figure 1 breaks down spending by the local, state, and federal level; this spending is ‘water writ large’ so it includes water supply, wastewater management, flood management, and aquatic ecosystem management, she said.

The total amount spent in the late 2000s was about $34 billion per year, on average, and about 86% of the money spent came from local sources – 1st bond hearing Ellen Hanak Powerpoint_Page_2-2ratepayers and landowners.  The next highest is the state at 11%, and the federal government 3%.

Most of the money is spent for water supply and wastewater, which includes all of the delivery and treatment of drinking water and all of the local infrastructure to get water in to our homes, as well as the wastewater to get it out of our homes and to treat it before we put it back into our rivers and streams.  Floods are about 5% and ecosystem spending is only about 1%.

Supply and wastewater agencies are generally meeting their capital needs, said Ms. Hanak, explaining that 1st bond hearing Ellen Hanak Powerpoint_Page_3this chart is based on an EPA survey that is conducted every four years.  “You can see that we’ve been spending more on average than this estimate of needs – which admittedly might be missing some of the needs are there.  I’m certainly not suggesting that local agencies are overspending, but it’s more a sign that relative to this one way of tracking needs that we seem to be on track, on average … it suggests the system is not broken.”

Ms. Hanak continued: “My assessment is that the basic funding mechanisms that we have for water and wastewater system are sound in the sense that it is ratepayer funded, and there’s an ability for the elected or appointed boards to make a case and raise the rates based on needs and get that approved,” she said, noting that there are some issues in some areas, such as drinking water quality, which is important:  “It’s a drop in the bucket in terms of the kinds of dollars we are talking here.  That’s a totally doable thing for California.  I think the estimates that UC Davis came up with were in the $30-35 million per year range to address that problem, so it’s something California should be doing.  It won’t break the bank,” she said.

There are some structural problems which are small in comparison to where most of the dollars are going, such as how we pay for 1st bond hearing Ellen Hanak Powerpoint_Page_3-2flood management, Ms. Hanak said.  Historically, the federal government has been a major cost sharing partner, paying up to 65% of the costs, but in recent years, federal money has not been available, she said. The State and the voters did step up to the plate after Hurricane Katrina by approving funds for flood management in Prop 1E and Prop 84, but these funds are not going to carry us through much farther.  “DWR estimates that it’s about a 17 billion need just in the Central Valley and that’s not counting the Delta … and we’ve got huge flood issues in coastal areas and other parts of the state.  So that’s a broken area, I would say,” said Ms. Hanak.  Another area with funding difficulties is ecosystem management, which is usually funded by general obligation bonds and therefore unreliable.  Statewide data analysis, planning, data gathering and monitoring has suffered from budget difficulties as well.

We’re doing mostly okay for water supply infrastructure and wastewater infrastructure, not in the sense that we don’t have needs, 1st bond hearing Ellen Hanak Powerpoint_Page_4but in the sense that our system is relatively able to meet those needs through increases in water and wastewater rates,” said Ms. Hanak.  “Flood management infrastructure failing because we’re still grappling how do we make up for the fact that the federal partners be counted on in the future for 65%; Ecosystem management, I’d say failing because we don’t really know where we’re going with that; in terms of how we’re going to pay for it if we don’t have bonds forthcoming, and then the small category of state planning and oversight, same thing.”

In terms of general obligation bond financing, there was a huge increase in the 2000s due to 1st bond hearing Ellen Hanak Powerpoint_Page_5voter approval of a number of different measures, including those put on by initiative and those put on by the legislature.  “No question that the bond monies have been very valuable in a lot of different ways.  I think they’ve been vital for environmental programs and for stepping up our flood protection investments and they’ve certainly being useful in other areas, but there is the question of unreliability; the ‘stop and go’ nature of bond funding makes it hard to plan and manage, and there’s the question of whether or not voters are going to be as excited as approving another one as they were in the 2000s,” said Ms. Hanak.

State general obligation bond financing is helpful for projects that generate broad public benefits:1st bond hearing Ellen Hanak Powerpoint_Page_6Ecosystem enhancement to me is one of those areas … you could say that’s broad benefits; you could also say it’s broad causes of the problems, but either way it’s the kind of thing where a lot of Californians stand to benefit as well as so many of us have a responsibility in the long term decline in the ecosystem that you could argue that state bonds could be an appropriate way to support that,” she said.  Bonds can be useful for supporting health and safety, environmental justice concerns such as safe drinking water, and filling the federal gap on funding for flood control.

Bond funds can also be used to leverage good behavior; this is one of the things we’ve got pretty good at doing in California, said Ms. Hanak.  Grant money and low interest loans have been used to create incentives for entities to cooperate with other local entities on groundwater management and other regional projects.  Completing an urban water management plan was a criterion for receiving certain bond fund:; “That increased rate of complete urban water management plans dramatically, and DWR has continued to use that as a principle; people have gotten used to it and it’s the kind of helpful thing, if there are good behaviors that you want to encourage, certainly you can encourage that by leveraging things for the carrots that state bond funds can provide.”

However, there are other funding sources that could do these same things; it’s not necessary to 1st bond hearing Ellen Hanak Powerpoint_Page_6-2only to do this with bonds, said Ms. Hanak.  There could be a public benefit or public goods charge associated with water and wastewater fees that could fund various publicly oriented items.  Special mitigation fees, such as the electronic waste disposal fees we pay when we buy computers, could be applied to nitrates, for example:  “It’s not going to solve our problem overnight on nitrate contamination but it sends the right kind of incentive signals to farmers and urban landscapers.”  The Delta Plan’s approach to have a regional approach to funding flood management is a step in a good direction.

I would close by saying that a mix is likely to be the most appropriate way to go, and so it’s valuable when you are considering what to do about a water bond, to think about where you might want to encourage some of these other areas.

  • Click here to view Ellen Hanak’s full handout.

FOR MORE INFORMATION:

  • Click here for the hearing agenda.
  • Click here  for an audio recording of the hearing.
  • Click here to watch the video of the hearing from the California Channel.
  • Click here for an extensive background report prepared by Committee staff
  • Click here for the Debt Affordability Report from the State Treasurer’s Office.
  • Click here for the a report on California’s general obligation bonds from Standard & Poor’s Ratings Direct.
  • Click here for Blake Fowler’s power point presentation.
  • Click here for the report from the Legislative Analsyt’s Office.
  • Click here for Ellen Hanak’s written testimony.
  • Click here to view Ellen Hanak’s power point.
(Visited 129 times, 1 visits today)

Leave a Reply