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Vote No on California's Bond Time Bomb

Thursday, 26 February 2004 12:00 AM

Voters agreed with the action star that, at tens of billions of dollars in the hole, the debt-ridden administration of Gov. Gray Davis seemed poised to lead the state over a financial cliff.

Now, just after his first 100 days in office, Schwarzenegger is pushing a plan he first mentioned during his campaign: a bond issue he and other state leaders say will be a huge first step towards achieving state financial solvency.

Called Proposition 57, the "Economic Recovery Bond Act" would allow the state to borrow up to $15 billion to pay off its accumulated debt.

Another issue, Proposition 58, called the "California Balanced Budget Act," would require state lawmakers to pass a balanced budget and establish a budget reserve; the latter proposition will come into effect only if the former is passed as well. Voters will make their choices March 2.

But is borrowing to pay off current debt the best fiscal policy?

Isn't that simply compounding the existing problem?

Yes, say critics, who are urging voters to reject Prop 57.

According to an analysis of the plan by Schwarzenegger, indeed Proposition 57 means the state will have to borrow again. But, he explains, it's a better deal in the long run because rates will be cheaper and the subsequent Prop 58 would eliminate future borrowing: "Proposition 57 will refinance past deficit borrowing at low interest rates, and Proposition 58 tears up the credit card for good. It requires a balanced budget every year without borrowing, so we never get in this mess again."

Also, the 'Governator' is counting on federal tax money to help him erase the state's red ink.

In Washington on Monday for the National Governor's Conference, Schwarzenegger insisted his dogged persuasiveness would help him land the cash.

"How much money can I expect when I come here because so many other governors are asking for money?" he said, following a meeting with Senate Appropriations Committee chairman Ted Stevens, R-Alaska "I expect to get a lot of it, simply because I'm very persuasive. I am like a tick that hangs on and will not let go until I get what I want."

Other well-known financiers agree. Investment magnate and billionaire Warren Buffett has signed on to Schwarzenegger's approach; on Wednesday, he pitched the idea to some of the nation's largest bond underwriters in New York City.

Comparing Schwarzenegger's plan to President Franklin Delano Roosevelt's approach to rescuing the Depression-ravaged nation upon taking office in 1933, the liberal Democrat Buffett sounded upbeat: "It was one of the great turnaround stories of all time. Arnold has just finished 100 days [in office], and he has replicated in Sacramento what Franklin D. Roosevelt did in Washington.

"People in California started to believe in themselves again and believe in their state again. The most important thing he has done is he has brought people together. He's got people working together that were trying to cause each other trouble six months ago, three months ago," said the billionaire.

Despite Schwarzenegger's confidence and the endorsement of some big-name backers, there are still many doubts about his two-pronged proposition plan.

For one, the California public isn't convinced. According to recent opinion polls cited by The Economist, only 35 percent of "likely voters" say they'll back Prop 57 though, ironically, about 57 percent said they'd vote for prop. 58.

Also, says Fresno Mayor Alan Autry, an editorial in the San Francisco Chronicle, the bond issue idea goes against the promise Schwarzenegger made to voters last fall.

"First, deficit borrowing is bad public policy," Autry writes in his Feb. 26 commentary. "Second, financing a state deficit bond through a grab of city taxes is even worse public policy. Third, there is a better way."

Autry, who says he considers himself a friend of the governor who supported his candidacy, would rather see state lawmakers "make structural changes to their spending habits."

"That, in fact, is what Schwarzenegger advocated during his campaign when he spoke of doing performance reviews and a comprehensive audit of the state's spending practices," Autry said. "To the governor's credit, that work has begun, but we should await its outcome before needlessly burdening future generations with debt that can be avoided."

Republican State Senator Tom McClintock, who opposes Schwarzenegger in the recent recall election, believes the proposals are also going to unfairly burden future generations.

"A multi-million dollar campaign has been launched to convince Californians to pass on $15 billion of debt - plus another $6 billion in interest - to pay for our own generation's mistakes," he says on his Web site.

"But the First Law of Holes is, "When your in one, stop digging."

He says the $15 billion bond will cost each California family $2,000 apiece to repay, "without a penny going to build a single new school or road.

"[Two thousand dollars] for nothing more than papering over the state's deficit."

In a piece originally written for the Wall Street Journal, McClintock argues the best fiscal medicine for California is cutting spending and wasteful programs.

"If the current rate of state spending were reduced 13.4 percent on January 1st and frozen through Gov. Schwarzenegger's first budget, the state would be back in the black, free and clear of external debt, and able to start the Governor's second year in 2005 with a clean slate," he wrote.

That kind of reduction means cutting $5.2 billion from the current year's budget, and setting next year's budget limit at $66.6 billion. "That's a big cut – and it means giving up billions of dollars of programmed spending increases next year. But it's still 15.2 percent more than California was spending when Gray Davis took office," he said.

McClintock estimates if the bond issue passes, which would be stretched out over a period of nine to 14 years, it would eventually require 8 percent of the state's budget to service that additional debt.

During Schwarzenegger's campaign, Buffet – an early supporter – caused a stir when he hinted the Republican actor could make up much of the state's deficit by adjusting Proposition 13, the state's historic effort to limit property tax increases.

Schwarzenegger moved to quell the controversy quickly, joking he would make Buffett do 500 sit-ups if he ever mentioned Prop 13 again.

That seemed to be the end of it, but according to Autry, property taxes may be hiked anyway.

"The $15 billion bond is secured by one-quarter cent of local sales tax revenues, the very revenues that Fresno and other cities depend on to provide critical local services such as police, fire, parks and street maintenance," he says. "Through a complex manipulation, known as 'the triple flip,' Proposition 57 relies on local resources for both collateral and debt repayment, including another raid on our local property taxes.

"To decimate local economies to pay off debt that should never be incurred does not build stability, but it could very well end up being a fast track to bankruptcy," he said.

Nevertheless Schwarzenegger remains confident, both of the plan's eventual passage and its ability to solve the most populous state's fiscal crisis.

"For the rest of the country, March 2 means Super Tuesday," Schwarzenegger said in New York last week. "For us, of course, it means Super Comeback Tuesday because we know we're going to win this even though it's been a big struggle."

Sensible California taxpayers, however, can respectfully disagree with their new and popular governor and vote “no” on Proposition 57. By doing so they will force Sacramento to once and for all make stiff budget cuts and make their state solvent.


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Voters agreed with the action star that, at tens of billions of dollars in the hole, the debt-ridden administration of Gov. Gray Davis seemed poised to lead the state over a financial cliff. Now, just after his first 100 days in office, Schwarzenegger is pushing a plan he...
Thursday, 26 February 2004 12:00 AM
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