California has the lowest credit rating of any state in the nation, just above
junk bond status. One major problem is the rise in California's debt-service
ratio (DSR). That is, the ratio of annual general fund
debt service costs to annual general fund revenues and transfers. This is often
used as one indicator of the state's debt burden. The higher it is and the more
rapidly it rises, the more closely bond raters, financial analysts, and
investors tend to look at the state's debt practices, and the more debt service
expenses limit the use of revenues for other programs. Debt servicing is
projected to comprise 9% of general fund revenues by the end of 2014-15.
to Bloomberg News, the market believes a developing country like
Kazakhstan, with about 15.7 million people, is less likely to default on its
debt than California, which is the eighth largest economy in the world.
The over 9 percent DSR is
considerably higher than it has been in the past. In part, this reflects the
sharp, recent falloff in general fund revenues, which drives up the ratio for a
given level of debt service. To the extent additional bonds are authorized and
sold in future years beyond those already approved, the states debt service
costs and DSR will be higher. Until California's fiscal house is put in order,
the prudent course would be to avoid taking on new debt, even for worthwhile
projects such as the $11.1 billion bond to finance an overhaul of California's
water system, and the $5.5 billion of debt already approved but not yet sold.
Unfortunately, I see no serious calls for reforms in
California's fiscal management by the Governor, the legislature or even the
candidates for governor. Where is the movement to change the inherent
inequities in the Proposition 13 tax scheme, to change the two-thirds rule to pass a budget and to raise
taxes, and to reform the initiative process? When the dust settles over the
2010-11 budget, nothing will be done to put California's fiscal house in order
and we will again face the same budget battle next
It will take a Constitutional Convention to
address California's dysfunctional fiscal problems; it won't happen in the
legislature or by the governor.