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Delay for Reckoning Day

May 06, 2003

Anyone who's had a nasty problem with credit card debt understands exactly what California's elected officials are proposing to do in order to get through the state's budget crisis: borrow money to pay the bills and postpone the reckoning until a later day.

Issuing state bonds for up to $10 billion might shelter education, health-care and law enforcement programs from even more drastic cuts -- for now. But the risk is the same one facing a family that, having maxed out one credit card, puts new debt onto another, betting that future income will grow.

It's one thing to refinance $2.1 billion in existing debt over many years -- as state Treasurer Phil Angelides has done over the last year, taking advantage of record-low interest rates. But it's another to do what Republicans in Sacramento are suggesting and issue $10 billion in new bonds to be paid within five years from existing revenue. Even if Republicans accept a temporary sales tax hike to help pay off the bonds, there's no such thing as free money. During the last budget crisis, the state agreed to pay more than $4 billion to borrow $2.8 billion against future tobacco settlement payments.

Consider Orange County, which declared bankruptcy in 1994 after a string of terrible investments. The county is still cutting funding for public clinics and neglecting sewer repair (thus tainting the shoreline), among other penny-pinching moves to get rid of its debt burden.

The bond debt that Republicans are discussing isn't about improving health care or adding classrooms, and in fact could hinder the state's ability to make needed capital investments for years to come. The discussion is really about buying time for legislators who aren't doing their jobs -- many of whom will be termed out of their offices when the bills come due.

Democrats too are culpable, viewing bonds as a way to avoid the heavy budget cuts that would alienate key constituencies. Much smaller borrowing could be an appropriate part of solving the state's $35-billion shortfall. But a responsible Legislature would first agree on a balance of painful cuts and mostly temporary tax increases before saddling future budgets with the dead weight of so much added debt.

Wall Street investment bankers are in Sacramento this week to handicap the state's financial situation. The visits come just months after three major agencies that measure investment worthiness dropped the state's rating to levels last seen in the crisis of the early 1990s. If investors are rattled now, imagine their response if the state opts for the "creative" financing now proposed.

No matter what Wall Street says, the only safe way to solve California's budget crisis is to do it in the here and now.

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