In the Interest of Full Disclosure, Don’t Forget Proposition 57
On June 17, Gov. Arnold Schwarzenegger invoked Proposition 58, approved by voters in March 2004, saying it prohibited the sort of borrowing contemplated in the budget plan of Assembly Democrats.
His comments came in response to an opinion, sought by the GOP governor, from Attorney General Jerry Brown saying the Assembly Democrats’ plan could be “suspect” under Proposition 58’s provisions.
The centerpiece of the lower house’s majority is to borrow up to $9 billion from the fund containing the nickels and dimes Californians pay to recycle cans and bottles.
That borrowing – “securitization” is the precise term – would be paid off through a tax on oil companies that has yet to be enacted.
Schwarzenegger was quoted saying this about the opinion and the Democratic budget plan:
“Under Proposition 58 we cannot borrow. So the great thing, what we did when I first came into office is, we tightened the noose so that California cannot go out and continue borrowing, because that’s what did California in, in the first place. “That’s why we are in this sad situation, because in the old days we were borrowing and borrowing and borrowing. So now we have cut that down and we also tightened the noose so we can’t do that anymore. So not only am I against borrowing but also the law forbids you from borrowing.”
Schwarzenegger was the chief proponent of Proposition 58. It would “tear up California’s credit card,” he said.
There was a companion measure to Proposition 58, also backed by Schwarzenegger. It was called the “Economic Recovery Bond Act.”
Its ballot summary (See Pages 4 – 7) said this:
“One time bond of up to $15 billion to retire deficit. Fiscal Impact: One-time increase, compared to previously authorized bond, of up to $4 billion to reduce the state’s budget shortfall and annual debt-service savings over the next few years. These effects would be offset by higher annual debt-service costs in subsequent years due to this bond’s longer term and larger size.”
The $15 billion bonds were larger than $10.7 billion in deficit-closing bonds approved under Schwarzenegger’s predecessor, Democrat Gray Davis.
Davis’ bonds were to be retired within five years. The Proposition 57 bonds were to be paid back over a longer period of time – nine to 14 years, costing the state more in debt service.
“The California Economic Recovery Bond Act will consolidate the deficit and allow California to get its financial house in order – without raising taxes,” Schwarzenegger wrote in the measure’s ballot arguments (Page 8).
“The California Economic Recovery Bond Act will keep the state from running out of money and prevent drastic cuts in spending on vital programs like education and health care.”
The GOP governor noted that Proposition 57’s passage was contingent on that of Proposition 58 and that the latter provided $5 billion to pay the bonds off early, reducing the debt service costs.
Since Proposition 57 and 58’s passage, all $15 billion of the bonds have been sold.
Schwarzenegger tried to expedite repayment of them starting in his 2004 budget but the state’s fiscal woes have prevented the swift repayment promised.
State Treasurer Bill Lockyer, testifying at a joint hearing of the Legislature’s select committees on improving state government, asked lawmakers to never again approve using long-term debt to try to erase short-term revenue imbalances.
“A bad idea,” he said.
In December 2008 and January 2009 the three rating agencies downgraded their ratings of the bonds, citing the state’s $40 billion budget hole.
In July 2009, when California faced a $60 billion budget shortfall, the state ran out of money and issued IOUs.
A current shortfall of $17.9 billion this year has yet to be closed.
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