Voters Shut Out of Prison Bond Debt Decision

Last week’s prison deal brought cheers and plaudits from virtually all political corners in California. The Legislature threatened by a federal court takeover of the state’s prison system averted the crisis — it is hoped — by enacting a comprehensive bill to deal with prison overcrowding and other corrections issues. Governor Schwarzenegger hailed the agreement as another example of how California can work in a post-partisan world.

But like most political decisions made under duress there are legitimate questions as to whether the deal reflects good public policy — or whether it was even legal.

To recap; California has a huge and growing prison population. Those who are politically conservative were not about to let convicted felons out early. Those on the left — who would prefer more leniency for those who are incarcerated — were pushing for programs dealing with rehabilitation as well as a new sentencing commission. But political compromise in California is difficult and often the only way to reach that compromise is with lots of taxpayer dollars to appease both sides. It is amazing what a soothing effect buckets of taxpayer cash can have on the adversaries in a political dispute.

That is what happened here. The tough on crime Republicans got their extra beds — 53000 of them — and the Democrats got their rehabilitation programs designed to reduce recidivism.

The centerpiece of the agreement was a bond proposal in the amount of $6.1 billion. That is a huge amount of indebtedness especially considering that voters just approved the massive infrastructure proposal last fall in the amount of $42 billion.

Which brings us to the number one question posed by taxpayers: Why were these bonds not put to voters for approval?

The short answer – which is really no answer at all — is that as "lease revenue" bonds they are exempt from voter approval.

There is no debate that lease revenue bonds and their questionable cousins "certificates of participation" are instruments of indebtedness. However because their repayment is — in theory — not guaranteed by the state’s general fund they are not considered "general obligation bonds" which if the amount is over $300000 are required by the California Constitution to be voter approved. Last time we checked $6.1 billion is a bigger number than 300000.

In any event there are instances at both the state and local level where lease revenue bonds make sense. Specifically if the improvement being financed by the indebtedness itself generates revenue an argument can be made that voter approval should not be required because the source of the repayment does not put taxpayers at risk. The clearest example of the legitimate use of lease revenue bonds is a public parking garage. Parking garages generate revenue and that revenue can be used to repay the bond holders. Some publicly financed sports facilities and their appurtenant retail and other business properties might also be candidates for lease revenue financing.

Which brings us to prisons. What revenue do prison facilities produce? Well they don’t. Lease revenue bonds in this context are based on a fiction. Rather than face the voters who might very well reject long term financing for prison construction our political leaders have signed off on a system whereby the debt will be "repaid" by future revenue appropriated to the Department of Corrections. In other words general fund money will simply be transferred from the right pocket to the left pocket.

How did this come about? Without going into all the gory details simply understand that a lot of special interests make a lot of money on the public debt "industry." Bond underwriters bond counsel and the bond buyer community love public debt and they are not going to let a little thing like a constitutional provision mandating voter approval stand in their way.

Over the last several decades the law has been carefully crafted by law firms specializing in public debt to create fictions like "lease revenue bonds" and "certificates of participation." Indeed in their marketing literature they openly brag about being able to "circumvent voter approval."

But what is good for the public debt industry and politicians looking for a quick fix to a thorny problem is not necessarily good for taxpayers. In addition to being deprived of voter approval lease revenue bonds are more expensive for the very reason that they are not backed by the full faith and credit of the state. Indeed the true cost of this "bond" proposal could be as high as $15 billion — well over twice the amount being used for the construction itself. This is truly adding insult to injury.

What is needed is to rein in politicians from both political parties with a constitutional amendment requiring a public vote for all long term indebtedness. That was the original intent of the California Constitution in 1849. Thus in addition to general obligation bonds voters should be able to approve lease revenue bonds certificates of participation long term pension obligations and other post retirement benefits that politicians and bureaucrats promise but who will be long gone when our children are still paying off this debt.

It is time to stop the fiction and have our leaders face reality.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.