Testing voters' courage, California seeks $20 billion in bonds

(Bloomberg) — California will ask voters next week whether to borrow another $20 billion for schools and climate programs, the most the country has had to approve in a single election in nearly two decades.

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Proposition 2 would authorize $8.5 billion in bonds for K-12 schools and another $1.5 billion for community colleges. Proposition 4 would allow California to sell $10 billion in bonds for climate and environmental programs such as clean water projects. The two proposals come in addition to at least $37 billion available on local ballots nationwide as of Nov. 5, according to S&P Global Market Intelligence data analyzed by Bloomberg.

The measures are facing a squeamish electorate that will allow the most indebted U.S. state to take on more taxpayer-funded loans despite a $50 billion budget deficit and inflated prices for everyday goods. California has about $80 billion in outstanding bonds and another $32.8 billion that have already been approved but not yet issued.

“It's difficult to ask voters for money at this time when the main issue on their minds is the economy and the cost of living,” said Mark Baldassare, statewide poll director at the Public Policy Institute of California, a nonpartisan research organization.

Both proposals have been put to a vote by the legislature and only require approval by a simple majority. Additionally, there is a statewide ballot measure, Proposition 5, that would lower the approval threshold for local affordable housing and public infrastructure bonds from 66% to 55%.

In June, lawmakers and Gov. Gavin Newsom had to cut spending, suspend some tax breaks for businesses and withdraw cash from reserves to offset a nearly $50 billion deficit for the fiscal year that began July 1. The state's Legislative Analyst's Office projects deficits through fiscal year 2027-28.

Before 2020, an overwhelming majority of California voters supported several large borrowing measures. Voters approved a $7.1 billion bond for water storage and drought preparedness in 2014 by a 35-point margin. In 2016, they approved a $9 billion bond for school improvements and construction by a 10-point majority. And voters approved a $1.5 billion bond for children's hospitals by a 25-point margin in 2018.

But with the Covid-19 pandemic, the tide turned. Voters in 2020 rejected a $15 billion education bond that lawmakers put on the ballot. And last March, a $6.4 billion bond for mental health facilities sponsored by Newsom narrowly passed. The Democrat, who is in his second term, has since said the close election has made conversations about voters' willingness to support borrowing “sobering.”

Lawmakers have been working to balance the budget after running into a deficit earlier this year, which meant funding for certain education and climate programs had to be delayed, Baldassare said. “So spending is on people’s minds,” he added.

While polls from the Public Policy Institute of California suggest there is a majority in favor of the education and climate bonds, the races are still too close for supporters to feel comfortable. Additionally, a new national poll from PPIC shows that likely voters are divided on whether to lower the approval threshold for certain borrowings: 48% said they would vote “yes” and 50% said they would vote “no.” The PPIC survey on statewide bond measures surveyed 1,646 Californians from October 7-15.

“People don’t have strong attachments to proposals they just heard about, and the easiest thing for voters to do is vote no,” Baldassare said.

Proposition 2 would provide $10 billion to modernize, repair and construct school facilities at K-12 schools and community colleges. According to a PPIC poll, about 52% of likely voters say they would vote yes for the measure and 46% said they would vote no.

According to Jared Boigon, partner at Team CivX, a consulting firm that works with state and local issuers to market bonds, support for the school bond is dampened by emerging political sentiments in the electorate, such as debates over access to bathrooms and library books.

“Public education is in the crosshairs right now,” Boigon said.

The $10 billion climate bond would invest in clean drinking water and help communities prevent and recover from wildfires, floods, droughts and extreme heat. It would be the largest single public investment in climate resilience in California’s history. Polls show that 60% of likely voters said they would vote “yes” on Proposition 4, while 38% said they would vote “no.”

“We're going from drought to fire in California, so these climate messages are embedded in people's minds,” Boigon said.

Proposition 5 is opposed by groups such as the Howard Jarvis Taxpayers Association, the California Chamber of Commerce, the California Republican Party and Catalyst For Local Control. According to the California Secretary of State, opposition groups have spent a total of about $29 million as of October 22 to defeat Prop 5.

“We have a debt problem in California,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “We have an executive branch and a legislative branch whose vast majority are absolutely anti-tax.”

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