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Judge Blocks Sale of California Bonds

Scuttling the plan to borrow almost $2 billion for employee pensions would unbalance the state budget. The Davis administration plans an appeal.

September 24, 2003|Evan Halper | Times Staff Writer

SACRAMENTO — A judge on Tuesday blocked as unconstitutional the state's plan to borrow nearly $2 billion for employee pensions, throwing the fragile budget out of balance and threatening possible cutbacks and new taxes that legislators had tried to avoid.

The pension bonds were part of more than $15 billion in borrowing lawmakers relied on to balance the budget. Most of that borrowing involves new techniques that critics say run afoul of provisions in the state Constitution that ban borrowing over several years to pay routine government expenses.

The ruling, if upheld on appeal, could threaten to unravel much of the budget passed this year by undermining the authority of the state to make any such bond sales to keep the budget balanced.

The Howard Jarvis Taxpayers Assn. filed the suit against the state, hoping to stop the bond sale on grounds that it violates a constitutional provision, drafted in 1849, that prohibits borrowing more than $300,000 from one year to the next to cover routine expenses.

Sacramento Superior Court Judge Thomas M. Cecil blocked the bond sale in a preliminary opinion issued orally Tuesday afternoon, saying the state had not made a persuasive case that the borrowing is structured in a way that does not violate the constitution.

"This is a significant victory for taxpayers," said Jon Coupal, president of the Howard Jarvis Taxpayers Assn. "The constitution says today's politicians can't spend tomorrow's money -- not without voter approval.... We have never had this kind of bond before and it would simply put Californians and their children into debt."

Hilary McLean, a spokeswoman for Gov. Gray Davis, said the administration has asked the court to hear an expedited appeal.

McLean acknowledged that if the ruling stands, the $8-billion deficit that is already anticipated for next year could grow by as much as $2 billion.

"We are going to do our best to keep all the pieces of this budget moving forward," she said, defending the bonds as an appropriate budget-balancing technique. "This was an extraordinary year in which the state was facing an unprecedented shortfall. We had to think outside the box in terms of how to address it. The borrowing was supported by both sides of the aisle."

Officials from the state attorney general's office, which represented the state in this week's trial, said they are declining to comment on the ruling until a written opinion is issued. Budget experts say the courts have been inconsistent in interpreting the debt provision of the Constitution, which has been little changed since it was drafted.

The state had argued that another provision in the Constitution allows the state to borrow to make a payment that it is legally obligated to make, in this case the payment to the pension fund. But the judge sided with the Jarvis attorneys, who argued that the state was really planning to use the loan to free up funds for other expenses and to avoid spending cuts in dealing with a record shortfall.

The ruling probably will energize the plaintiffs in another lawsuit expected to be filed today, which cites the same provision in the Constitution in challenging a much larger borrowing that was the linchpin of the budget deal worked out in the Legislature. State fiscal experts were already anxiously anticipating that complaint, to be filed by the Pacific Legal Foundation, when the pension bond ruling was issued Tuesday.

"It's an arcane but very interesting public finance problem the state is faced with," said Fred Silva, a budget analyst with the Public Policy Institute of California. "The legal and public finance communities have constructed a whole series of legal mythologies about how to avoid the debt clause."

Silva said he expects the case filed by the foundation to result in a "landmark ruling" in which the courts either reaffirm the 150-year-old debt clause and limit borrowing by lawmakers, or weaken it and give legislators carte blanche to push deficits out several years.

At issue in that case is $10.7 billion in "deficit bonds" the state plans to sell to pay off the deficit accumulated through this past June.

California taxpayers would pay back the bonds over the next five to seven years through existing sales taxes. If the court decides those bonds are illegal, the budget passed this year would come close to collapsing and service cuts or tax hikes would have to be swiftly enacted to keep the state from going into financial freefall.

"If the courts put further restrictions on borrowing, they would have to get much more serious about budget making," Silva said.

Most budget analysts agree that the state probably could absorb the loss of pension bond savings and deal with it in next year's budget. But if the other bond sale falls through, Wall Street could come down hard on the state, and even cut off its ability to borrow.

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