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Massive Loan for State Weighed

Aides to Gov.-elect Schwarzenegger float the idea of borrowing $20 billion to balance the budget as key players reverse fiscal stances.

November 11, 2003|Evan Halper and Jeffrey L. Rabin | Times Staff Writers

SACRAMENTO — As Gov.-elect Arnold Schwarzenegger prepares to take office, his aides are testing the waters for a possible budget solution that would include having the state go into debt to pay off a substantial portion of the coming year's deficit.

Officials with the new administration say they are still developing their budget plan, and its final elements remain unsettled.

But aides to Schwarzenegger have approached financial institutions to discuss how the state could go about securing a loan large enough to cover the entire deficit, according to sources on both sides of the discussions. That bond could be as large as $20 billion, perhaps more. The sources spoke on condition that they not be identified.

The queries, according to one source who has been involved in the discussions, focus on what kind of guarantees would have to be built into a budget to reassure bond buyers that the debt would be repaid.

Such a loan would be based on the assumption that the economy is already beginning to revive, which would cause future tax revenues to rise. If the state can get past this year's deficit, according to that line of thinking, future budgets could be kept in balance by a mandatory cap on state spending.

Schwarzenegger seems likely to put both the borrowing and the spending cap before state voters in March. Doing so would require gaining legislative approval by Dec. 5.

Some of the most fiscally conservative advisors to Schwarzenegger say there may not be any other options if Schwarzenegger intends to keep his promise not to raise taxes and to rescind the recent increase in the state's vehicle license fee.

"You are probably going to need to have this kind of borrowing package," said Carl DeMaio of the Reason Foundation, which is advising Schwarzenegger on the budget. "Otherwise you are talking about massive cuts in services."

Joel Fox, a Schwarzenegger campaign advisor and the former president of the Howard Jarvis Taxpayers Assn., said: "You're looking at a lesser of two evils strategy -- the bond issue versus tax increases."

Those statements come as at least an implicit acknowledgment by Republican strategists of a position Democrats have taken for most of the past year -- that despite talk about government waste, the budget cannot be balanced without either tax increases or deep cuts in services.

Republicans and Democrats also seem to be shifting positions on the desirability of further government borrowing.

During his campaign, Schwarzenegger promised to "end the crazy deficit spending" and "ensure that California government lives within its means -- something working families manage to do every day -- and rein in spending to close the operating deficit."

Many of those now helping craft the governor-elect's budget plan -- including the Reason Foundation, the current president of the Jarvis Assn. and conservative economists from Stanford University's Hoover Institution -- have also been sharp critics of past borrowing.

What makes Schwarzenegger's borrowing plan better than Democratic borrowing plans is that "this time ... we truly balance the budget going forward," said Assemblyman John Campbell (R-Irvine), another advisor to Schwarzenegger.

The idea, Campbell said, would be to give the state a clean slate; wipe out the debt and then move forward with a spending freeze and a constitutional cap on the growth of government that would force Sacramento to bring spending into line with revenues.

"The size of [the borrowing] is not as critical to me as the fact that, once we are done, that this will be the last borrowing," Campbell said.

Last year, the Legislature approved a budget that included $13 billion in borrowing. Those bonds have been under legal challenge because they were not approved by voters. Schwarzenegger's aides have suggested asking voters to approve that amount of debt. The question now is how much larger a bond might be needed to cover next year's deficit as well.

Democrats, many of whom backed past bond measures, say the Republicans are being hypocritical.

"If Gray Davis had contemplated a $20-billion bond, I could imagine the outcry from fiscal conservatives," Treasurer Phil Angelides said last week.

Angelides, who is considering a run for governor in 2006, used a briefing on the state's annual debt affordability report to show how borrowing $20 billion would hurt Californians. He said it would cost almost another $20 billion in interest and other expenses over the 30-year life of the bond.

"It doesn't make sense to keep running up a credit card debt that will become due," the treasurer scolded. "There are real costs. It's not magic money."

Angelides has restructured roughly $10 billion of California's debt, pushing the full cost of government programs further into the future.

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