Bond Measure Textbook Case
By JOE MYSAK
No razzle-dazzle.
Bipartisan support.
Personal appearances at rallies.
An advertising campaign you couldn’t get away from.
That’s how Gov. Arnold Schwarzenegger persuaded California voters to approve measures to cap spending and sell $15 billion in bonds to refinance the state’s past budget deficits.
Politicians who want to learn how to get voters to approve bond issues will have to study how Arnold did it. This bond election campaign, which cost $10 million, sets the standard. The governor’s propositions didn’t just pass. They did it by 2-to-1 margins, impressive in anyone’s book, and especially for a subject not many people get excited about. People care about public finance how things get paid for a little, but municipal bonds, not at all.
“The governor’s ability to turn the sentiment around on this issue is nothing short of remarkable,” says Richard P. Larkin of J.B. Hanauer in Parsippany, N.J. “That kind of referendum approval is extraordinary for any type of bond authorization, let alone the largest deficit financing to fund state consumption overspending in history.”
Larkin has been watching municipal bond elections and analyzing municipal credit for three decades, including 21 years at Standard & Poor’s and five at Fitch Ratings.
The measure’s passage gives the state new flexibility. Schwarzenegger should “use this bond issue to begin impressing fiscal management on a state that runs out of control every time there is a slowdown,” says Larkin.
After the bonds are paid off, he adds, Schwarzenegger should propose that the state use money earmarked for debt service to build up reserves, as well as set up a pay-as-you-go capital-spending program.
Just a few weeks ago, nobody thought that the next word attached to the state’s battered general obligation bond rating might be “upgrade” instead of “downgrade.” Yet that’s precisely what David Hitchcock, an analyst at Standard & Poor’s, held out the day after the bond referendum.
“Standard & Poor’s GO debt rating on California will improve to the extent the state uses the time provided by the new bond proceeds to reduce its structural deficit,” said Hitchcock. S & P; rates California BBB, the lowest of any state.
Students of the municipal market know that most people tend to vote against bond issues, especially big bond issues, unless they are championed very aggressively. The ads, when they finally started to run, weren’t exactly inspiring. They were as plain as oatmeal. There wasn’t any razzle-dazzle to them, beyond Schwarzenegger’s own considerable star-power and seemingly inexhaustible sincerity. “Join us,” said Schwarzenegger and Controller Steve Westly, a Democrat, in one of the TV ads. “So that we never get into this mess again.”
What the ads may have lacked in excitement, they made up in number. They were inescapable.
Yet even all of this Arnold, the bipartisan nature of the campaign, the lack of any kind of serious opposition, the ’round-the-clock advertising bombardment in the final weeks may have not saved the day.
Let us conclude with a bit of Hollywood. Perhaps, just perhaps, what swung voters behind the bonds was, to borrow from the title of a 1958 Orson Welles movie, “A Touch of Evil.”
Californians, enough of them, were afraid of the consequences of not approving the bonds. “A failure is no option here,” Schwarzenegger said on “Meet the Press” in February. The alternative to the bond issue was just too horrible to contemplate: grass growing in the streets.
Graduate students looking for a thesis topic need look no further than the California bond election of 2004.
Joe Mysak is a columnist with Bloomberg News. Mark Lacter writes about the travails of Michael Eisner this week, beginning on the front page.
