Funding Alternative #3

Funding Alternative #3 to the Proposed Tax on Drinking Water in the Budget Trailer Bill

Lease Revenue Bonds for Safe Drinking Water

During the height of the budget crisis in 2008, the Legislature authorized the issuance of Lease Revenue Bonds through AB 900 to pay for a variety of costs related to the building of new prisons. A Lease Revenue Bond (LRB) can be generally described as a loan made to the State that is repaid by revenue generated by the project.

Under AB 900, the state envisioned that the Department of Public Works would design and build the prison and incur the debt, and the Department of Corrections would generate the “revenue” to repay the debt. In the case of AB 900, the “revenue” was a transfer of money between two government agencies, and the money came from the General Fund.

Based on a presentation provided by the Treasurer’s office on their website, the issuer of an LRB – in this case the State – covenants to appropriate annual lease payments from the General Fund to meet the lease obligations. In this proposal, there would be a commitment of the new revenue from the agricultural taxes proposed in the bill, and revenue would ultimately be deposited in the General Fund. The financial instrument would be structured as lease revenue bonds or “certificates of participation” (“COPs”) that are not subject to constitutional debt limits per a lease exception. Unlike General Obligation bonds, no voter approval of the bond issuance is required. Of course, the disadvantage is that the debt payments compete with other General Fund priorities.

These types of bonds are often used for projects of general community benefit and to indirectly leverage a General Fund revenue stream. These bonds are often used to provide “credit enhancement” for less credit-worthy borrowing for desired “risk sharing.” Under the LRB alternative financing concept, the State Water Resources Control Board would ask the Board of Public Works to issue Revenue Bonds up to an amount to be determined. The proceeds from the bonds could be used to fund operation and maintenance costs. Capital projects could be constructed with the use of ongoing federal funds and General Obligation bond funding. The debt for the bonds would be securitized by the ongoing cash flow from the agricultural taxes in the budget trailer bill along with a one-time appropriation of General Fund money into a special account –the ultimate guarantor would be the General Fund. All of the funds would be continuously appropriated to pay off the debt obligations.

By the issuance of the LRBs that would be securitized with the already-proposed agricultural tax revenues, this approach ensures that the money would only be spent for the desired purpose.