This op-ed originally appeared in the Orange County Register
Is California Trapped in a Debt and Tax Spiral? I applauded when Gov. Jerry Brown announced that he was not asking Wall Street for additional long-term debt this year. While employment is showing modest gains, state debt and defaults are the topic du jour in financial circles, with California topping the charts. It’s not that California can’t repay, it’s that we cannot seem to rein in debt. That translates into increased costs to repay what we have already borrowed. It seems the governor’s reputation for frugality might actually apply to more than just a few token items like cell phones and cars.
However, the reality seems to be that California is having a tough time convincing investors to buy more debt at any cost. The state treasurer is considering a creative financing program this year to sell “mini-bonds” in $25 increments. The state needs another $10 billion or so in short-term “revenue anticipation” loans to cover cash flow needs in the 2011-12 fiscal year. Traditional short-term borrowing requires California to show it has extra cash flow to repay before the end of the fiscal year. The treasurer said that since Brown’s budget depends on the extension of temporary tax increases, Wall Street may be unwilling to lend unless the budget includes more spending cuts if the legislature rejects taxes. It appears the treasurer is preparing some wiggle-room just in case the unpopular taxes fail to get the nod.
In addition, tucked away on the final pages of Brown’s May Revise Budget you will find $11 billion in debt issued but not spent, for which we are paying hundreds of millions annually. When our excess cash dried up, to ensure ready money on hand, the treasurer, controller, and governor appointees, determined to pre-fund debt. Reviewing the categories of unspent bond funds, the governor’s and Legislature’s inability to set priorities and face economic realities is apparent.
Housing and Emergency Shelter claims $1.1 billion, education $1 billion-plus, more than $3 billion for water (mostly studies I’d have to guess based on our recurrent droughts), $2.7 billion for traffic reduction and highways, and more for clean air and prison construction. And while the Legislative Analyst, Legislators, and statewide groups are realizing the emperor has no clothes, high-speed rail has $205 million reserved, and the governor plans to peddle an additional $1.53 billion in bonds next fall and another $2.37 billion next spring.
To Gov. Brown’s credit, we have reduced spending by $7 billion and implemented nearly $13 billion in “solutions” to help balance our budget. Thankfully, income tax revenues are up, and our deficit has shrunk to $9.6 billion from $25 billion. Republicans have provided options to fully fund education and public safety without adopting this governor’s tax, spend, borrow and draconian cut solutions to fill the gap.
While the immediate crisis is almost over, next year’s battle begins. Even if unemployment continues to inch downward, we still face mountains of debt, and increasing costs at the state level. While underfunded pension liabilities gain the most scrutiny, we have racked up deferred education payments, repayment of stimulus funds, future increasing medical expenses due to Obama-care, additional deferrals and inter-account borrowings.
The cure? Halt unnecessary borrowing, implement cost-saving reforms, debt tracking mechanisms, and a real spending cap. Also, allow businesses to cease fretting about the next targets for taxation and regulation and concentrate on getting people back to work. Fortunately, this governor and his Democrat-controlled Legislature can still reverse the bankruptcy “debt and tax spiral.”