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Taxpayers Challenge $7.4 Billion Prison Bond

•  Recent Cases     updated  2008/05/07 09:02


The State of California illegally approved issuance of $7.4 billion in "lease-revenue bonds" to build facilities for 53,000 more state and county prisoners, Californians United for a Responsible Budget claims in Superior Court.

Plaintiffs CURB and individual taxpayers claim AB 900, signed into law in 2007, violates the state constitution because it was not approved by voters and is deceptively and illegally described as a revenue bond.

The lawsuit comes as California faces an annual budget deficit of nearly $20 billion. A similar budget deficit led to the recall of Gov. Gray Davis and his replacement by Gov. Arnold Schwarzenegger, a defendant in this case.

"Article XVI, Section 1 of the California Constitution requires voter approval for all long-term debts greater than $300,000. However, the state contends that the AB 900 bonds do not require voter approval because they are secured only by 'lease' payments. This lawsuit contends the opposite: namely, that the $7.4 billion in lease-revenue bonds in AB 900 are actual debts that will further impair the credit of the state, and that require voter approval before they can be incurred," the complaint states.

"A revenue bond is backed by the future revenue stream created by a given construction project. For example, a revenue bond allows a cit or the state to build a tool bridge or a convention center and then to repay the debt with user fees generated by the project. ... Prisons, however, do not generate revenue. ... Under the lease-revenue bond transactions at issue here, the state will not receive any funds from the operation of the new prison facilities financed by the bonds, but will instead incur substantial additional costs - in excess of $1.4 billion each year. ...

"In the past, the state itself clearly recognized that bonds used to finance prison construction had to satisfy the constitutional requirement of voter approval. Until 1996, the state routinely used general obligation bonds to finance prisons and submitted proposed prison expansion projects to the voters. However, the last two times that state did so, in 1990 and again in 1996, the voters rejected the prison bonds. The state has not submitted any of its prison expansion plans to the voters since 1996."

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