Jewish World Review Jan. 29, 2004 / 6 Shevat, 5764
Debra J. Saunders
The Name is Bond, Recovery Bond
It's natural for California voters to oppose Proposition 57, the $15 billion recovery bond measure
proposed by Gov. Arnold Schwarzenegger. Bonds are supposed to pay for capital expenditures like building
bridges and schools. Governments aren't supposed to sell bonds in order to pay for operating expenses.
Thus, Republicans, such as Sen. Tom McClintock of Thousand Oaks (Ventura County), oppose
Proposition 57 because they believe in implementing across-the-board cuts to balance the budget. But it's
nearly impossible to imagine the Democratic Legislature approving McClintock's suggested 13.4 percent
across-the-board cut or voters accepting big reductions in public school funding.
I've spoken to Democrats who are angry at Schwarzenegger's Day One executive order rescinding the
car-tax increase that the Davis administration allowed to go into effect. They don't want to do any favors for the
recall-elected governor. So, in a fit of pique, state Dems refused to endorse Proposition 57 during their
convention this month.
There's just one little problem: If Proposition 57 doesn't pass, California could go bust. Broke. Bankrupt.
All but closed for business. And begging.
Voters have to approve both Proposition 57 and its companion measure Proposition 58, which would
require the Legislature to balance budgets with prescribed reserves, in order for Proposition 57 to become
State Finance Director Donna Arduin has told reporters that if Proposition 57 fails, her back-up plan is
to borrow $10.7 billion in accordance with a measure passed by the Legislature last year and signed by Gov.
Gray Davis. (Note to Schwarzenegger critics: The bulk of Proposition 57 borrowing would finance pre-Arnold
debt red ink attributable to the California Legislature.)
Of course, borrowing $10.7 billion also would be problematic first, because the voters will have
rejected issuing bonds to pay current bills but also because the Pacific Legal Foundation has a pending lawsuit
to kill the Davis measure. If the court agrees that it is illegal to sell bonds of more than $300,000 without a vote
of the people, the state would be broke and fast.
Finance Department spokesman H.D. Palmer noted that if the voters or the courts kill the bonds, the
state still would need to borrow money. The money guys probably would rely on a mechanism called stand-by
agreements "the financial equivalent of mortgage insurance." Thus, a penniless state would be paying top
dollar to borrow money to pay the bills.
"Forget partisan politics, and forget all the rhetoric and personalities. This is about mathematics. It's
about numbers," the Proposition 57 campaign's in-house Democratic sage Darry Sragow explained.
Actually, it's about this number: some $30 billion in a worst-case scenario. That's how much the state
would have to borrow through June 2005 if Proposition 57 fails. It's close to $1,000 for every man, woman and
child in the state. It's a big chunk of change for a $97.2 billion annual budget.
"You can't raise taxes that much," Sragow noted. The Legislature could raise the top tax bracket for rich
Californians and risk chasing some out of the state then raise the sales tax by more than 2 cents per $1,
and still not close the gap.
And you can't cut spending that much. Sure, there are bureaucracies that could survive big cuts, but few
Californians would accept that the state should slash classroom spending by 15 percent or benefits for the
disabled because the Legislature couldn't control spending.
Last year, the Field Poll found that more voters opposed than supported a big bond issue to balance the
budget, noted Field Poll Director Mark DiCamillo.
Voters thought a big bond was "like taking out a second mortgage to pay off your credit-card debt," said
It's a good analogy but one best understood in the context that it involves borrowing to pay off old debt,
not current expenditures. "A credit adviser would probably tell you that if you're facing bankruptcy, you should
consolidate your debts in some low-interest instrument, and that's what Schwarzenegger's trying to do,"
I'm not saying Schwarzenegger is doing everything right. The Legislative Analyst, while generally
approving of his budget proposal, still found a $6 billion gap in 2005-2006, (and possibly larger if some
projected savings do not materialize).
This is clear: If Californians reject this measure, they will have cut off their noses to spite their face.
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© 2003, Creators Syndicate