Schwarzenegger Has No Backup Plan If Bond Fails

SACRAMENTO -- Gov. Arnold Schwarzenegger doesn't have a backup plan if the Legislature or voters reject his proposal to sell $15 billion worth of bonds to pay off the state's existing deficit.

"Failure is no option. It just doesn't exist," the Republican governor said Monday. Without a backup, he said, "That means it has to happen."

To push the plan, which must be approved by the Legislature by midnight Friday, the new governor said he's ready to take his budget proposal to the voters in recalcitrant lawmakers' districts and he will invite legislators to join him in pushing the bond deal.

He pledged to "make sure that everyone in this state knows that this is absolutely essential."

Schwarzenegger's bond plan would replace a $10.7 billion bond issuance by former Gov. Gray Davis that's being contested in court, and would shore up the state's spending plan through June 2005. His finance director, Donna Arduin, told state lawmakers last week that Schwarzenegger's $15 billion plan and the $10.7 billion in legally questionable debt back each other up: one or the other is necessary, but if both fail the state will run out of money by the end of the fiscal year in June.

The $15 billion deal is vital to Schwarzenegger's budget plans, which also includes $3.8 billion of cuts in the budgets for this and next year and a spending cap.

"If we don't have that, and the $10.7 billion bond falls through in court, then we have no money and then we have to make cuts that are disastrous," Schwarzenegger said.

Schwarzenegger said he wouldn't consider raising taxes to fill the current budget shortfall.

Just because he's visiting legislative districts to push the plan doesn't mean "I'm trying to put the squeeze on legislators," Schwarzenegger said Monday in a meeting with reporters. He said lawmakers were welcome to join him in talking to voters about the budget plans.

Senate President Pro Tem John Burton said he wanted to see a shorter bond period, and a temporary spending cap, not a permanent one, and that it was based on a fiscal year that didn't harm education and other programs.

"I think it makes sense to live within your means when you can, but sometimes when revenues are down, the necessity for programs go up," he said. "When there's high unemployment, when revenues go down ... that's when kids have to go on the Healthy Families programs."

While he proposed $3.8 billion in spending cuts, Schwarzenegger said he was willing to listen to lawmakers' and others' concerns about where those cuts are.

On Monday, children health advocates said a plan to freeze enrollment in the state's Healthy Families program could put tens of thousands of low-income children on a waiting list for health insurance.

That cap would save the state $77 million in the next two budgets, the Schwarzenegger administration estimated, but the cuts also seemingly contradict Schwarzenegger's statements during the campaign, in which he criticized Davis for not doing enough to enroll children in the low-cost health insurance program.

About 650,000 children are insured through the program, which provides low-cost medical, dental and vision health coverage to children in low-income families.

But, there are about 300,000 children who are eligible but aren't yet enrolled in Healthy Families, said advocates with the 100 Percent Campaign, a coalition of three children health groups.

Advocates from Children Now, the Children Partnership and the Children's Defense Fund said they were alarmed to hear that one of the new governor's first proposals targeted the low-cost health insurance program.

"We're very disappointed because during the governor's campaign, he shared our goal of making sure that all the children in the state have health insurance," said Deena Lahn of the Children's Defense Fund.

The enrollment level expected on Jan. 1, which would be the cap level, is 20,300 for immigrants and 712,000 for non-immigrants, said H.D. Palmer, spokesman for Schwarzenegger's Finance Department. "This is a cap on enrollment as opposed to a freeze," Palmer said, which means others can join the programs as vacancies occur. With a freeze, Palmer said, the openings would remain vacant.

In this situation, more than 17,000 children go off the rolls naturally each month because of change in age or income status, he said, so those vacancies would be filled by newcomers.

"This is one of the short-term decisions that the governor had to make in order to ensure the longevity of important programs like Healthy Families," Palmer said. He said Schwarzenegger's goal is to protect the core program while letting others join as openings become available.

During his only debate appearance before the Oct. 7 recall election, Schwarzenegger criticized Davis for not getting more children enrolled in Healthy Families.

The government, Schwarzenegger said during the debate, "not done a good job in reaching out and finding the people and letting them know to sign up and find easy ways for them to sign up, (so) two-thirds of the people that are eligible do not have the child care. It is really terrible.

"If I become governor I would immediately go out there ... and get it out so everyone knows about it and every one signs up because we must insure our families, the low-income families, especially the children," he said at the September debate.

Medi-Cal provides free or low-cost health services to children in low-income families. Healthy Families offers low-cost insurance to children in families that make too much to qualify for Medi-Cal, but less than 250 percent of the federal poverty level -- currently approximately $38,000 for a family of three.

For every dollar California spends on Healthy Families, the federal government pays two. This year, California's share is about $294 million.

Enrollees pay a monthly premium and $5 copayments for prescriptions and doctor visits.

Florida, where Arduin was budget director before she was hired by Schwarzenegger, adopted caps on a similar program in July. By the end of September, the waiting list had grown to almost 60,000 children.

Also Monday, Democratic state Treasurer Phil Angelides, a possible Schwarzenegger challenger in 2006, said he will launch a statewide drive opposing the new governor's $15 billion borrowing plan. Angelides plans a formal announcement Tuesday at a Sacramento school yard, with school children, college students and teachers who fear a school bond measure also on the March ballot will be imperiled by Schwarzenegger's proposal.

"Schwarzenegger's bond plan would replace a $10.7 billion bond issuance by former Gov. Gray Davis that's being contested in court, and would shore up the state's spending plan through June 2005. His finance director, Donna Arduin, told state lawmakers last week that Schwarzenegger's $15 billion plan and the $10.7 billion in legally questionable debt back each other up: one or the other is necessary, but if both fail the state will run out of money by the end of the fiscal year in June.

The $15 billion deal is vital to Schwarzenegger's budget plans, which also includes $3.8 billion of cuts in the budgets for this and next year and a spending cap.

"If we don't have that, and the $10.7 billion bond falls through in court, then we have no money and then we have to make cuts that are disastrous," Schwarzenegger said.

Schwarzenegger said he wouldn't consider raising taxes to fill the current budget shortfall."

Gov. Schwarzenegger says bonds are only option

Here's the backup plan. In fact this is the real answer to the budget woes.

"Have you ever had to make serious cuts -- 15% or more -- in your family budget because of an unexpected job -- loss or unforeseen expense? It's not pleasant, but it's not impossible. And it's also not permanent. As long as you're willing to face your financial problems squarely, you can be sure that the hard times won't last forever and things will improve.

But if you're not willing to face those problems -- if you paper over your debt by borrowing and continue to spend as if that debt didn't exist -- those hard times will follow you far into the future.

State government is no different. And as the new administration decides which road it will take, it is important to understand the simple math of the state's finances.

California's current budget deficit is caused by two actions Gray Davis took last year to paper over his mismanagement: He illegally tripled the car tax and he attempted to borrow $12.6 billion unconstitutionally.

Gov. Schwarzenegger rescinded the illegal tax increase on his first day in office. It's important to note the word "illegal." Not one of the conditions required to raise the car tax had been met, and it was only a matter of time before the courts ordered the money to be returned to taxpayers with interest. By acting now, he saved California from having a multi-billion dollar hole blown in a future budget by court order.

But repairing this problem requires that local governments be reimbursed for their losses. In addition, the courts have already invalidated $1.9 billion of Mr. Davis' borrowing plan, further deepening the deficit. According to the Legislative Analyst's Office, these developments mean that the state will end up spending $76.9 billion this year, with only $74.2 billion in revenue.

It gets worse. The courts are also poised to strike down the additional $10.7 billion of borrowing in Mr. Davis' last budget. It is not a pleasant financial situation. But it is also not impossible. If the current rate of state spending were reduced 13.4% on Jan. 1 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.

A 13.4% reduction would mean cutting $5.2 billion from this year's budget before Jan. 1 and setting next year's budget 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% more than California was spending when Mr. Davis took office. And after 18 months of austerity, Gov. Schwarzenegger would be able to plan his second budget with $12 billion of breathing room in 2005 when revenues are projected to reach $78.6 billion. Like a family that has faced its finances squarely and tightened its belt, California would be solidly back on its feet and looking toward a sunny future.

The alternative is to borrow the difference at heavy rates of interest over the next generation. Like a family that can't bear to change its ways, it would end up dragging its financial difficulties into future years as it struggles to meet its current expenses and pay down a crushing credit-card debt as well.

These are the two roads diverging in the budget woods and the choice that is made in coming weeks may well determine whether California has the fresh financial start it deserves, or whether the ghost of Mr. Davis' excesses stalks a generation to come."

Tom McClintock
12/1/2003 Wall Street Journal

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