Proposition 53 Public Vote on State Revenue Bonds (Official Title: Revenue Bonds. Infrastructure Projects. State Legislature and Voter Approval.

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1 Proposition 53 Public Vote on State Revenue Bonds (Official Title: Revenue Bonds. Infrastructure Projects. State Legislature and Voter Approval.) CALTAX POSITION: NEUTRAL The California Taxpayers Association is neutral on Proposition 53, because the measure has pros and cons it would bring additional transparency to a rising source of infrastructure funding, but there is uncertainty about how it would be interpreted and implemented, and the scope of what projects might be covered by its provisions. DIGEST Changes state law to require a public vote on any state bond issuance of $2 billion or more that is paid for out of state lease revenue, ratepayer funds, or other revenue that is not obligated to the general fund. MAJOR PROVISIONS Statewide Vote on Revenue Bonds. Requires voter approval in a statewide election prior to the issuance or sale of any revenue bond issued or sold by the state in a single amount or aggregate amount of $2 billion or more. Not Applicable to Local Governments. Excludes revenue bonds issued or sold by a city, county, or special district (including community college and school districts) from the voter-approval requirement. Project Definition. Specifies that the measure would apply to any state project, or project financed, owned, operated, or managed by the state, including a joint powers agency or a similar body created by the state or in which the state is a member. Inflation Factor. Increases the $2 billion revenue bond threshold each year based on the Consumer Price Index. FISCAL IMPACT The Legislative Analyst s Office (LAO) was unable to determine the fiscal impact of this measure. The LAO notes that Proposition 53 will not likely affect many state projects, except the High-Speed Rail Project and the Delta Tunnels. 1

2 According to an analysis by the State s Treasurer s Office, the measure may result in higher borrowing costs, as several major credit rating agencies have threatened to downgrade the state s credit rating if this measure passes. If Proposition 53 is approved and makes it more difficult for the state to issue revenue bonds, the state may need to turn to alternative financing, including general obligation bonds, pay-as-you-go financing, shifting the responsibility to local governments (which are not subject to the provisions of this measure), or tax increases. BACKGROUND Revenue bonds have become a major source of funding for high-profile infrastructure projects, including California s High-Speed Rail Project and the Delta Tunnels. Unlike a traditional general obligation bond, which has lower borrowing costs, a revenue bond uses the revenue-generating ability of government such as taxes, fees, bridge tolls, parking fees, and water contract payments to repay the principal and interest from the sale or issuance of a bond. In 2014, Central Valley agriculture entrepreneur Dean Cortopassi, the sponsor of this initiative, began a statewide media campaign to inform voters of inefficiencies in government, including state debt management practices. The State Treasurer s Office notes that California has issued, or plans to issue, revenue bonds for the following projects: High-Speed Rail. The current business plan for California s High-Speed Rail Project includes the issuance of more than $5 billion in revenue bonds from the revenue the state expects to obtain from the sale of allowances through cap-andtrade auctions. Delta Tunnels. The state plans to issue more than $15 billion in revenue bonds to build two 30-mile tunnels to divert water from the Sacramento River to an aqueduct that would transport water to the Central Valley and Southern California. Of the $15 billion, $8 billion would fund habitat restoration and conservation. The bonds would be repaid largely by urban water users in Southern California. State Water Project. The Department of Water Resources has issued revenue bonds for the State Water Project, which includes a system of dams, reservoirs, aqueducts, pumping stations and electric generation facilities. To date (and excluding costs associated with the Delta Tunnels), the state has issued more than $10 billion in revenue bonds, and may issue another $1 billion to complete ongoing projects. Health Facilities. The state issues revenue bonds to benefit private and nonprofit healthcare facility borrowers. More than five borrowers have received the issuance of $2 billion each in revenue bonds. This measure would require a vote for future facility funding of a similar nature. Refinancing Debt. In 2015, the State Treasurer s Office refinanced more than $4.5 billion in previously issued revenue bonds to obtain lower interest and 2

3 borrowing rates. Under Proposition 53, similar actions in the future would require voter approval. Emergency Management. During past state and local crises, the state has issued revenue bonds to fund emergency response efforts. For example, during the electricity crisis of the early 2000s, the state issued $11.3 billion in revenue bonds to allow the Department of Water Resources to fund electricity procurement. This measure likely would require the state to utilize alternative financing mechanisms to fund crisis response measures. Prisons. The state has issued a number of revenue bonds of more than $2 billion for correctional facilities. Differences Between General Obligation Bonds and Revenue Bonds Feature or Characteristic Legislative Vote Requirement Is Statewide Voter Approval Necessary? Pledged Security to Bondholders Interest Rate on Bonds Underwriting Process Need for Reserve Fund to Effectively Market Bonds Need to Purchase Insurance for Property and Liability Amount of Bonds Required General Obligation Bonds Two-Thirds Vote Yes, a majority vote of the electorate is needed. Full faith and credit of the state (its taxing power). Lowest possible Usually competitive bidding, but negotiated sales allowed if cheaper. No No Based on project costs, plus small amount (less than 1 percent) for issuance costs. Revenue Bonds Majority Vote No statewide vote necessary. Annual debt-service appropriations, plus available bond reserve funds. Recently has been averaging roughly 0.2 percentage points above GO bond rate. Some competitive bidding, but most sales to date have been negotiated. Yes Yes Bond volume upsized, typically by roughly 15 percent over project costs, to cover underwriting fees, debt-service during construction period, other issuance costs, and reserve fund. Type of Amortization Schedule Currently Used Real Cost of Bond Financing Source: Legislative Analyst s Office Typically level total payment (principal and interest) over 30 years. Lowest possible (typically about $1.20 to $1.30 per $1 of capital costs). Typically level total payment (principal and interest) over 25 years. Typically 10 percent to 15 percent above GO bond cost, depending on circumstances. 3

4 POLICY CONSIDERATIONS Revenue bonds have become a major funding source for infrastructure projects, but they are not held to the same accountability and public review standards as general obligation bonds. While Proposition 53 would ensure that all major debt-financing mechanisms are treated similarly, it is unknown if the measure would have unintended consequences. Other considerations: More Taxpayer Input. This measure gives taxpayers more input and oversight, and could prompt state government to use existing funds on high-priority projects rather than spending funds on inefficient programs and borrowing to pay for needed projects. Appropriate Use of Revenue Bond Financing. Most economists and policy experts agree that revenue bond financing is an appropriate tool under certain conditions, including for projects that can be readily operated on a service charge or user-fee basis, projects that demonstrate an ability to be self-supporting, and projects that can produce sufficient revenue without jeopardizing the critical core objectives of the project mission. When using revenue bonds, policymakers must clearly establish guidelines that ensure that a project has sufficient funds to cover operations, maintenance and debt service; has sufficient operating revenue; and has a reserve fund in the event that revenue declines. Problems Associated With Revenue Bonds. Governments that fail to adequately analyze fiscal and legal conditions associated with a revenue bond project may create a false economy. In such cases, policymakers create the illusion that adequate revenue is available to fund the revenue bond debt payments, through poor revenue estimating. Revenue Bonds May Be More Costly Than G.O. Bonds. Revenue bonds are typically 10 percent to 15 percent more costly than traditional general obligation bonds, according to the legislative analyst. Lower Credit Ratings. The credit rating agencies have threatened to downgrade California s credit rating if Proposition 53 becomes law, thus making it more costly to borrow. Credit rating agencies have said that California s initiative process creates uncertainty for the state budget process, and this measure would cause delays and voter input on major infrastructure projects. When Will a Public Vote Be Required? Analyses by the Legislative Analyst s Office and the State Treasurer s Office have noted that the language of Proposition 53 does not define what constitutes a project. The legislative analyst and treasurer have questioned, for example, whether one phase of the high-speed rail system would count as a project, or if the entire train system would constitute a project. What if the state chooses to complete a project over a 20-year period? Project would need to be defined by the Legislature or the courts. 4

5 Potential Reduction in the Use of State Revenue Bonds. By requiring a vote for a state revenue bond, this measure would make it a more difficult to issue revenue bonds. As a result, the state may choose to issue additional general obligation bonds, or use other financing mechanisms, such as pay-as-you-go financing. Unknown Impact on State-Local Projects. While the purpose of this measure is to impact large state projects only, it is unknown if the measure would have the unintended consequence of impacting local projects where the state has an ancillary interest. Specifically, the project applies to any project financed, owned, operated or managed by the state, and projects operated under a joint powers agency where the state has a stake. Among the local projects that potentially could be impacted: o o State-Local Water Storage. The California Department of Water Resources is responsible for managing the state s water. Potential local projects that the state may be involved in include the Shasta Dam, Los Vaqueros Reservoir, Temperance Flat Dam, and the Sites Reservoir. Local Transportation Projects. Local projects where the state has an interest that may be covered by this measure include projects of the Bay Area Toll Authority (including the San Francisco Bay Bridge), the Transbay Terminal in San Francisco, Orange County Toll Roads, Capitol Corridor passenger train service, and the San Diego Airport. 5