Gov. Arnold Schwarzenegger pledged during the recall election campaign to put California's finances in order. So Tuesday, in his first move on that score, he proposed that the state borrow $15 billion, like some credit card junkie trying to consolidate his debts.
Off to a lousy start?
Not judging by the reaction from the municipal bond market, the mechanism through which California will borrow the money if voters approve the debt issue in March.
After the governor announced his proposal, no frenzied trading in California securities ensued -- even though the bond issue would be the largest borrowing ever undertaken by a state or private corporation, surpassing General Motors Corp.'s recent $13-billion deal. No howls of protest rose up from managers of municipal bond funds.
Rather, traders seemed intent on giving the new governor a pass -- a reasonably accepting, if muted, welcome to office.
One big reason for this reception was that Schwarzenegger coupled his bond proposal -- which effectively replaces a $13-billion borrowing plan offered up by Gov. Gray Davis to cover the state's looming deficit -- with a spending cap on future state budgets.
"A spending cap," says Joe Deane, a manager of Smith Barney's California Municipal Fund, "is sorely needed."
Actually, Sacramento has a spending cap on the books now. But it's effectively a dead letter. What the market seems to be hoping for is that Schwarzenegger's political muscle will match the set he developed at the gym, giving him the ability to wring real budget cuts out of the Legislature.
"The market wants to see a plan for controlling spending" -- not just a cap without any specifics attached to it, says Robin Rappaport, senior municipal credit analyst for Payden & Rygel, a Los Angeles investment firm.
An inability to get a handle on the budget already has cost the state dearly. Investors in California general obligation bonds have driven Sacramento's borrowing costs to the highest level of any major state.
Not everyone is convinced that Schwarzenegger has the stuff to turn the situation around. California Treasurer Phil Angelides, who is positioning himself to take on Schwarzenegger in the 2006 gubernatorial race, blasted the bond proposal Tuesday.
"A balanced budget should be the first step to California's fiscal recovery, and borrowing $15 billion is not the way to go," Angelides told reporters. As to the proposed spending cap, the Democrat called it "the illusion" of fiscal restraint.
