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GOP Leaders Reject Wall St. Warnings

Bankers say they would be unlikely to back bonds without a new tax to cover the state's $38.2-billion shortfall.

May 21, 2003|Evan Halper and Nancy Vogel | Times Staff Writers

SACRAMENTO — Wall Street bankers got a hostile reception from Assembly Republicans on Tuesday after warning that California would need to raise taxes if it borrows money to roll over some of the state's $38.2-billion budget shortfall.

During a frank 90-minute exchange with the GOP caucus, bankers from Goldman Sachs, Merrill Lynch and Lehman Brothers were called "yes men" for the governor and accused of trying to pressure Republicans into voting for a tax, according to lawmakers who attended the private briefing.

Consensus on a budget continued to evade the Legislature as Gov. Gray Davis also informed leaders of both parties that the state could save $40 million in borrowing costs if a budget is approved by the constitutional deadline of mid-June. A budget agreement by then, the governor explained, would lower the costs on an $11-billion "bridge" loan that top finance officials hope to secure in New York this week. That loan, which would kick in around the middle of next month, could be used to pay off other loans coming due and keep the state solvent through the summer.

But the odds of an on-time budget appeared to diminish as Republicans emerged from their meeting with the bankers. Democrats had hoped the meeting would persuade the Republicans to soften their anti-tax stand.

"If we were all opposed to taxes going in, we're more opposed to taxes going out," said Assemblyman Todd Spitzer (R-Orange). "It was a shoddy, pre-determined presentation.... There was a total unwillingness to consider any other perspective other than raising taxes."

Leaders of both parties have proposed closing the state's budget gap with more than $10 billion in loans that could be paid back over five years or more. It is one of the few potential budget moves for which there has been bipartisan consensus. But while Democrats say the borrowing should be backed with a temporary half-cent sales tax increase, Republicans oppose any new taxes and say deficit bonds should be paid back with existing revenue.

On Tuesday, the bankers said they would be unlikely to lend the state billions of dollars without a new tax. They said backing the bonds with existing taxes could result in lawsuits that stop investors from getting paid when the bonds mature. Assembly Republican leader Dave Cox of Fair Oaks said the bankers even said it would be illegal for them to lend the state the money without a new tax.

But Cox said afterward that he and others in the caucus grew frustrated when the bankers couldn't provide a written legal opinion to that effect. He said the bankers also had not reviewed the caucus' plan to balance the budget without new taxes.

"They came in and had no idea about what our plan was," Cox said. "We believe you can do it with an existing stream of revenue."

Democrats said they remain hopeful that a budget agreement can be worked out on time.

"I never anticipated that it would be magic," Assembly Speaker Herb Wesson (D-Culver City) said. "I wanted the bankers to provide the information. I was hopeful these guys would consider it."

Cox acknowledged that the Assembly GOP budget plan relies on loans from the same banks whose representatives said Tuesday it would not work. He said other experts the caucus has consulted insist that the banks will bend if it comes down to either giving the state loans based on existing taxes or not doing business with the state at all -- and losing out on millions of dollars in commissions.

Administration officials say that thinking is delusional. They say the bankers have made themselves very clear.

Meanwhile, in a letter to lawmakers, state Treasurer Phil Angelides announced that he will no longer support placing additional bond issues for infrastructure, environmental protection and other things on the ballot until lawmakers pass a balanced budget.

Angelides said there must be "a viable plan to fix the structural imbalances" between what the state spends and what it takes in before he can support putting more bond measures to a vote of the people.

Angelides has been an outspoken advocate of increasing taxes to support education programs and public works projects.

The treasurer said his new approach represents a "common-sense response" given the gravity of the state's budget crisis. Until now, Angelides, a Democrat expected to run for governor in 2006, has supported some of the one-time measures used by the state to deal with its budget problems.

For instance, Angelides last year instituted a debt management policy that will cost California taxpayers hundreds of millions in additional interest expense by deferring principal payments for up to five years on some state long-term bonds. The approach reduces the state's debt payments today, but the expense will grow in coming years.

Angelides also exempted $22.25 billion in bond measures for schools, colleges and a high-speed rail line from Northern to Southern California. Those measures have already passed the Legislature and are on the ballot.

Investors who buy California general obligation bonds are repaid out of the state's general fund revenues. Because the state is spending more than it receives, the general fund is already running the largest deficit in the state's history.

"When a balanced budget is adopted and when there is a credible structural reform plan, this office will be able to offer an informed opinion regarding the additional amount of general obligation bonds that can be authorized," Angelides said.

On Monday, the Senate Appropriations Committee announced it was setting aside bills with billions of dollars in proposed bonds until the budget crisis is resolved.


Times staff writers Jeffrey Rabin, Gregg Jones and Carl Ingram contributed to this report.

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