Rising Debt Payments Increase Budget Pressures

Among the points made in State Treasurer Bill Lockyer’s wide-ranging testimony to the Senate and Assembly Select Committees on Improving State Government (See the post below) is that California can no longer keep issuing debt willy-nilly.

He explicates the point in his recently issued annual Debt Affordability Report which shows the amount of debt service the cash-starved General Fund pays doubling from $6 billion this year to more than $12 billion in seven years.

That $12 billion in the 2016-2017 state fiscal year represents nearly 10.5 percent of the General Fund, up from 6.7 percent his year.

Lockyer recommends creating a commission, which, in turn would create a master plan on long-term investment in public works, which currently are inadequate for a state of 39 million residents, let alone the 50 million residents California is expected to have within 25 years.

“Rising debt service costs during the next three budget cycles will crimp the availability of General Fund monies to pay for state services,” the report says.

“The problem will not begin to recede until the state’s revenue flow begins to recover from the recession. Even then, (the treasurer’s office) estimates debt service costs will be at historically high levels through the coming decade and beyond.”

Worse, most of that higher level of debt service stems from already issued bonds so “balancing the budget will have to be accomplished with little help from the debt service side of the ledger.”

Using Department of Finance revenue estimates created in July, the report notes that as debt service payments increase, so does the recurring gap between state revenues and spending commitments.

In the fiscal year beginning July 1, 2010 the Schwarzenegger administration estimates there will be a budget gap of $7.4 billion. The following year there will be one of $15.5 billion and $15.1 billion the year after that.

And since those estimates were made in July it is likely the imbalances have worsened. For example, in July 2009 unemployment was 11.9 percent statewide. It climbed to 12.3 percent in August and dropped slightly to 12.2 percent in September.

What were previously the fastest growing parts of the state – Riverside and San Bernardino have unemployment rates of 14.7 percent and 13.6 percent respectively. Los Angeles County has a 12.7 percent rate.

Among the report’s other grim news, California’s current bond ratings are the lowest of any state. “Significantly lower,” as the report says. Low bond ratings translate into higher borrowing costs.
A continuing concern of Moody’s Fitch and Standard & Poor’s, the bond rating agencies, is that the majority of state revenues – in particular personal income tax – are sharply affected by the boom-bust of economic cycles.

“The state’s dependence on income taxes, including the capital gains tax and sales taxes increases budget pressures during periods of economic weakness – especially if spending is not properly managed during boom times. In addition, the state’s use of one-time budget solutions continues to concern the rating agencies,” the report says.

One-time solutions like the ones that will likely be used by lawmakers and Schwarzenegger as they grapple with next year’s budget shortfall.

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