The End of Good Times for Debt-funded Restoration?

General obligation bonds, approved through ballot initiatives, finance the majority of California’s restoration activities. Since 2000, the state has raised over $13 billion for water-related projects through the issuance of these bonds (see Table). Of this, $3.3 billion has gone to watershed restoration and protection. However, the general public appears increasingly less willing to support bond-funded restoration programs, as the margin of victory for the measures has steadily decreased, from 30-percent in 2000 to 8-percent in 2006. Furthermore, as of March 2009, many of these restoration programs are on-hold, given the multi-billion dollar budget deficit facing California. Another issue with the bonds is that they cost significantly more money than they raise. In order to raise such large sums of money up front, the state must offer a return on investment for the bond holders. This interest rate is usually between four and six percent per year. Therefore, even though California received $13 billion to spend on water-related projects through the four bond propositions listed above, the state must ultimately pay $23.9 billion. Because of these factors,  it appears unlikely that California will be able to finance watershed restoration with general obligation bond funding to the degree that it did before.

The most sustainable bonds are those that are funded by dedicated revenue streams, where these revenue streams are structured in such a way that the fee or tax is directly related to the restoration efforts at hand. For example, Maryland’s Bay Restoration Fund collects revenues through fees on sewer connections and septic tank usage, both of which contribute to degraded water quality in the Chesapeake Bay. Some of these revenues go to pay back bonds issued by Maryland that pay for water treatment plant upgrades. Only 20-percent of the money within the Bay Restoration Fund comes from bonds, however. This is an economically efficient funding mechanism, as the causes of the ecological degradation are taxed in order to pay for restoration, and those people who pay the taxes receive its benefits, as much of the Bay Restoration Fund financed projects go to upgrade sewer and septic infrastructure.