Since 1974, voters have considered hundreds of statewide propositions, including more than 100 measures to approve bond financing of various projects, particularly public infrastructure projects.
What Is Bond Financing? Bond financing is a type of long-term borrowing that the state uses to raise money for various purposes. The state obtains this money by selling bonds to investors. In exchange, it agrees to repay this money, with interest, according to a specified schedule.
What Do Bonds Fund and Why Are they Used? The state has traditionally used bonds to finance major capital outlay projects such as roads, educational facilities, prisons, parks, water projects, and office buildings (that is, public infrastructure-related projects). Bonds also have been used to help finance certain private infrastructure, such as housing. A main reason for issuing bonds is that these facilities provide services over many years. Thus, it is reasonable for not only current, but also future taxpayers to help pay for them. Additionally, the large dollar costs of these projects can be difficult to pay for all at once.
In addition to selling bonds for to pay for infrastructure, the state has also sold them to close major shortfalls in its General Fund budget, as authorized by the voters in Proposition 57 of 2004. However, Proposition 58 of 2004 limits the state’s future ability to sell bonds to help balance its budget.
What Types of Bonds Does the State Sell? The state sells three major types of bonds to finance projects. These are:
What Are the Direct Costs of Bond Financing? After selling each individual bond, the state makes annual principal and interest payments until that bond is paid off. The annual cost of repaying bonds depends primarily on the interest rate and the time period over which the bonds have to repaid. The state typically pays back investors in each individual bond with level payments over a 30-year period (similar to payments homeowners would make in most 30-year fixed-rate mortgages). Assuming that a bond carries an interest rate of 5 percent, the cost of paying it off with level payments over 30 years is close to $2 for each dollar borrowed—$1 for repaying the amount borrowed and close to $1 for interest. This cost, however, is spread over the entire 30-year period. So, the cost after adjusting for inflation is considerably less—about $1.40 for each $1 borrowed.
To see election results for propositions providing general obligation bond authority on the ballot since 1986, see here.