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California's $15-Billion Question

Even if voters pass Prop. 57, the state will face a structural budget problem, experts say.

February 15, 2004|Doug Smith | Times Staff Writer

When Californians go to the polls March 2, they will be asked for the first time in the state's history to borrow money, not to build something, but to pay off existing debts.

As the vote nears, both the long-term cost of the borrowing and the need for it are subjects of campaign debate.

Proposition 57, the $15-billion Economic Recovery Bond Act placed on the ballot by the Legislature, is a centerpiece of Gov. Arnold Schwarzenegger's proposal to clean up the state's financial mess.

His political strategists acknowledge what polls have shown -- many voters balk at a large debt that would not provide anything tangible, like a new school or smooth highway, in return.

For The Record
Los Angeles Times Wednesday February 18, 2004 Home Edition Main News Part A Page 2 National Desk 2 inches; 92 words Type of Material: Correction
Proposition 57 -- An article in Sunday's Section A about the $15-billion deficit bond measure on the March 2 ballot incorrectly explained one aspect of the fallback plan that the Schwarzenegger administration would use if voters reject the bond. The story correctly stated that the state's annual payment would be twice as large under the fallback plan because loans under that plan would be repaid faster. But the story erred in describing the costs as "annual interest payments." The higher cost would result from faster repayment of the principal of the loan.

To persuade a majority to back the bond issue and its companion measure, Proposition 58 -- a constitutional amendment to restrict the state's ability to sell deficit bonds in the future -- the governor and his supporters have begun a multimillion-dollar television and radio advertising blitz.

In those advertisements and in his campaign speeches, Schwarzenegger says the bond issue would save taxpayers money because it would "refinance past deficit borrowing at low interest rates." The bond issue is needed to clean up problems he inherited and would not add new debts, the governor says.

Opponents, who include liberal Democrats and conservative Republicans, contend that the bond issue would cost, not save. Because payments would be stretched out over time, taxpayers would pay billions of dollars in additional interest, by some estimates $1,664 per household.

Borrowing to cover a budget shortfall shifts the bill for today's spending onto tomorrow's taxpayers, a practice fiscal experts generally frown on unless the money is spent on something concrete, like a bridge, that will be used by those future taxpayers.

"My view is the bond issue is a way to spread the pain over time," said Stanford economist John B. Shoven. "It doesn't get rid of the pain."

All sides agree that the state continues to face two serious budget problems: one short-term, the other long-term.

The long-term problem is that California's government programs cost more money than the state's tax system brings in, and they are likely to continue doing so for years.

The short-term problem is a huge current shortfall, about 12% of this year's general fund.

Both problems grew out of the stock market collapse of 2001. Steady spending increases for education, health and human services, and tax relief during the boom years under former Govs. Gray Davis, a Democrat, and Pete Wilson, a Republican, were built on soaring personal income taxes. That source proved unreliable when the state's high-tech bubble burst.

Over the last three years, as state revenue dropped sharply, spending declined more slowly. To fill the gap between the two and balance the budget, California borrowed money from banks, special state funds and local governments. Many of those loans have to be repaid this year.

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The Wisdom of Borrowing

How best to do that is one of the central elements in the campaign over the bond issue.

Those who oppose borrowing the money offer two sharply divergent alternatives.

Some conservative legislators argue that the state could balance its budget without borrowing if it cut spending.

"Long-term bonds are supposed to be used for schools, parks, highways and water projects that will serve coming generations," state Sens. Tom McClintock (R-Thousand Oaks) and Bill Morrow (R-Oceanside) say in their ballot argument opposing the bond issue.

On the other side of the political spectrum, state Treasurer Phil Angelides and some other liberal Democrats argue that the state should raise taxes. California would be better off if it eliminated the shortfall the "old-fashioned way, where you actually raise revenues to do it," said Angelides, who is gearing up to run for governor in 2006.

"You increase the income tax for three years on the highest earners," he said in a recent interview, adding that former Govs. Ronald Reagan and Wilson used that approach during recessions.

Raising taxes on the wealthiest of California's nearly 14 million taxpayers "would raise $11.9 billion in three years," the treasurer said. One upper-income tax increase proposed last year would have increased rates for about 400,000 Californians, but would have raised somewhat less money than Angelides projects, according to the state Franchise Tax Board.

Combining a tax increase with a smaller amount of borrowing would cost the state's taxpayers considerably less money in the long run than would Schwarzenegger's bond proposal, Angelides argues.

The governor has repeatedly said he would not raise taxes. He has also rejected the kind of spending cuts that would be needed to balance the budget without borrowing. Cuts large enough to do that would be "Armageddon" for the state's economy, he has said.

Like Davis, Schwarzenegger has turned to borrowing as the best option.

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The Cost of Borrowing

The cost of that borrowing is the other central issue in the campaign.

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