Pros, cons on Prop. 57: State budget bond issue |

Pros, cons on Prop. 57: State budget bond issue

Prepared by the League of Women Voters of California

This is the third of four pro/con looks at statewide propositions on the March 2 California election ballot, prepared by the League of Women Voters of California. Voters are urged to save each of them to refer to when voting. (A Spanish-language version can be found online at

The Economic Recovery Bond Act

The question

Should the state of California borrow $15 billion through the sale of bonds to provide financing for California’s budget deficit?

The situation

California’s General Fund budget supports a variety of programs, including public schools, higher education, health, social services, and prisons. In 2001, the economic and stock market downturns caused state revenues to decline sharply. Policymakers reduced program expenditures, raised revenues, and used a variety of other measures, including various forms of borrowing, to deal with the shortfalls.

Bonds have been traditionally used to finance major capital outlay projects. Recently, the state used bond financing to help close shortfalls in its General Fund budget. Last year the Legislature and the governor authorized the sale of a $10.7 billion bond to eliminate the budget deficit that would have existed at the end of 2002-03. This bond is currently being challenged in court and has not been issued. (Short-term borrowing, due to be repaid in June 2004, is being used to finance the carry-over 2002-03 deficit.)

The state is facing another large budget shortfall in 2004-05, which is estimated to be in the range of $15 billion. This estimate assumes that the currently authorized $10.7 billion deficit-financing bond is sold and the carry over 2002-03 deficit is taken off the books.

The proposal

Proposition 57 would authorize the state to issue a $15 billion bond to address this year’s budget shortfall. This bond would be used instead of the currently authorized $10.7 billion deficit-financing bond. Certain funds transferred to the state’s Budget Stabilization Account (created by Proposition 58 on this ballot) would be used to accelerate the repayment of the bond. Proposition 57 would become effective only if Proposition 58, on this ballot, is also approved by the voters.

Fiscal effect

The bond would provide up to $4 billion more now to help with the budget shortfall but would have higher costs in the long term and take longer to pay back than the currently authorized bond. It would be repaid by one-quarter-cent of sales tax revenue. Funds from the state’s Budget Stabilization Account (BSA) created by Proposition 58 would be used to accelerate the repayment of the bond. Assuming the maximum contribution from the BSA, the bond would be paid back in nine years. Annual cost would be $1.2 billion in 2004-05, increasing moderately thereafter.

A yes or no vote means …

A YES vote means the state could sell $15 billion in bonds to pay existing budgetary obligations.

A NO vote means the state would not sell $15 billion in bonds but could instead sell $10.7 billion in bonds as previously authorized by the Legislature to pay a smaller level of existing budgetary obligations.

Supporters say …

– The California Recovery Bond and the California Balanced Budget Act, Proposition 58, together will give California’s leaders the tools necessary to restore confidence in the state’s financial management.

– Without this bond, California may be out of cash by June. The only choice will be to drastically increase taxes. Proposition 57 will let us refinance our inherited debt and give the state time to deal with its ongoing structural deficit.

– Proposition 57 will keep the state from running out of money and prevent drastic cuts in vital programs like education and health care.

Opponents say …

– Since 1849, California’s Constitution has forbidden bonds like this from being used to paper over deficit spending. In order to put this unprecedented borrowing on the ballot, politicians propose repealing this historic constitutional provision and have the audacity to call it “a balanced budget amendment.”

– California is billions of dollars in debt and this measure plunges us deeper in debt. California has the lowest credit rating in the nation because of its out-of-control borrowing. Total debt service from Proposition 57 will cost an average family more than $2000.

– Long-term bonds usually pay for building projects that will serve coming generations. This bond doesn’t buy a single school, road, or park.

For more information:

Supporters: Join Arnold, 916-442-7757,

Opponents: Senator Tom McClintock, 916-448-9321,


MONDAY: Proposition 58, the “California Balanced Budget Act.”

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