As governor from 1959 to 1967, Pat Brown presided over the most breathtaking period of public works construction in California’s history. During those years, California built the finest highway system in the world, one of the largest water projects in history and the foremost university system in the country. At a time when the population grew twice as fast as it does today, the state kept pace with the demand for schools, ports, prisons, libraries, parks and power plants.
Today, Californians are locked in perpetual freeway gridlock, schools are bursting at the seams and potential shortages of everything, from electricity to water, are just one hot summer away. The Pat Brown years are now looked upon with rightful nostalgia, and politicians from all parties are falling over one another to propose massive new spending programs to restore that era of public works.
Those politicians who admire Brown’s commitment to public works would do well to study his discipline in public finance. Not that Brown was a fiscal conservative—he left the state with a gaping deficit and a pile of debt. By the end of his administration, the state had a $711 million general fund deficit, and total per capita spending had ballooned from $856 to $1,442 (all in 2004 inflation-adjusted dollars). Debt service costs had increased from 0.3 percent to 2.2 percent of the state’s general fund. But at least he bought a lot of cool stuff.
By modern standards, though, he was a paragon of fiscal restraint. California’s operating deficit today is four times larger than Brown’s—nearly $3 billion. Per capita spending is more than $3,000—twice that of Brown’s final year. Today’s debt service consumes 5.9 percent of the general fund—more than the entire University of California budget and two and a half times the percentage in 1966.
As Governor Schwarzenegger grapples with the resulting fiscal paradox of a crumbling infrastructure, despite record spending and borrowing, he should remember three principles of public debt that Brown’s generation respected and that the current generation has abandoned.
First, bonds should only be used for capital projects with a useful life at least equal to the debt service. If our children are called upon 30 years from now to repay a bond, they should have the full benefit of the project built with that bond. While Brown borrowed for lasting works like university buildings and state hospitals, our generation has squandered long-term bonds to pay for day-to-day operating expenses, deferred maintenance and equipment that is obsolete long before the debt is repaid.
Second, state bonds should be used only for projects that benefit the entire state. Projects that exclusively benefit local communities should be paid for exclusively by those communities. A state university, for example, accepts qualified students wherever they live in California—a local school does not. In the past, state bonds were used for university facilities while local bonds paid for local schools. Today, state bond funds are doled out in a grab bag of local pork projects, literally robbing Piedmont to pay Pasadena.
Third, revenue bonds, not general obligation bonds, should be used for capital-intensive projects that provide direct services to distinct users. A general obligation bond is repaid directly by the state’s taxpayers. A revenue bond is repaid by users of a particular project, such as a bridge financed by tolls paid by bridge users. Today, general obligation bonds are used indiscriminately, including a pending $10 billion high-speed rail bond that would force taxpayers who don’t use the train to pay for those who do.
Bonds are seductive. They promise immediate gratification, but they conceal a heavy price. They are certainly the most expensive way to finance projects, costing $2 to retire every $1 of debt. Moreover, the state’s borrowing capacity is finite, requiring careful attention to priorities since debt once issued cannot be rescinded—only repaid. And every dollar borrowed by this generation reduces the ability of the next generation to meet its own needs.
Pat Brown understood this. His recent successors have not. And Governor Schwarzenegger is now dealing with the result. He must restore the public works built by a generation of giants while discharging a mountain of pointless debt racked up by a generation of spendthrifts. Only by rigorously applying these principles can he hope to do so.
Senator McClintock represents the 19th district in the California Legislature. His website address is www.sen.ca.gov/web/mcclintock.
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