CA: Views differ on how size of Prop. 57 was decided

San Diego Union Tribune ^ | February 7, 2004 | Ed Mendel

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SACRAMENTO – People may wonder how Gov. Arnold Schwarzenegger decided on $15 billion for the amount of his proposed fiscal-recovery bond measure on the March 2 ballot.

The Republican governor routinely says the bond proposal, Proposition 57, is needed to consolidate and refinance the "inherited debt" created by years of overspending under his Democratic predecessor, former Gov. Gray Davis.

"So, it's not new borrowing," Schwarzenegger said in an interview on a Los Angles radio station this week. "It's just taking what is already inherited debt, which is $22 billion. We take this bond to refinance it."

Voters who have struggled with their own refinancing, whether a home mortgage or out-of-control credit cards, might question why the refinancing only covers about two-thirds of the $22 billion state budget debt.

There are different views as to how the governor arrived at $15 billion.

State Controller Steve Westly, a Democrat who has been campaigning with the governor for the bond measure, gave an answer last month as he appeared at their first town-hall rally in Fresno.

"I want to give the governor credit on one thing," Westly said. "He started out talking about a $25 billion borrowing. He came down. You know, the Democrats were at $12 billion. We came up."

Reports last fall suggested that the governor would propose borrowing $25 billion, or enough to cover all of the inherited debt.

Westly later told a legislative committee that he believed the bond issue should be smaller, about $15 billion, and paid off in about a decade, not over several decades as some lawmakers were suggesting.

What the governor formally proposed the day after he was sworn in last November was a $15 billion bond issue – enough to cover the debt through the current budget but not the total debt in subsequent years.

Assembly Speaker Herb Wesson said the main issue in negotiations over the bonds was getting the governor to agree to a shorter payment period, even though that would mean larger annual payments.

"In my mind, it was always at or around $15 billion," said Wesson, D-Culver City. "There was speculation it would be $20 billion. He had never said that. It was just in the press."

The governor's top budget aide, Finance Director Donna Arduin, said she thinks the speculation was triggered by her audit last fall that concluded the inherited debt was $25 billion, an amount since recalculated at $22 billion.

"Technically, we had never recommended $25 billion," Arduin said, "nor were we contemplating doing that."

She said the governor proposed a $15 billion bond issue to cover the inherited debt through the current fiscal year – and to help pay off $14 billion worth of short-term loans coming due in June.

At first, it appeared the governor's bond measure did not go much beyond proposals by Davis and the Legislature to use bonds to temporarily close a budget gap. Those unprecedented borrowing proposals resulted because Democrats opposed deep spending cuts and Republicans blocked tax increases.

Schwarzenegger's bond issue would replace two bonds totaling $12.6 billion authorized in the current state budget signed by Davis. But that one-time source of revenue would not prevent the budget gap from reopening next year when spending would again outpace revenue.

The two bond issues authorized in the budget have been challenged in court as violating a state constitution provision requiring voter approval of long-term debt. One, a $1.9 billion pension bond, already has been blocked, but the ruling is being appealed.

Some experts believe the larger bond issue, originally $10.7 billion, might survive a court challenge because it is structured differently. It has a dedicated stream of revenue, a half-cent of the existing sales tax.

And bond payments would have to be approved each year, which the backers say means that the bonds should not be legally regarded as long-term debt.

The nonpartisan legislative analyst says in the ballot pamphlet analysis of Proposition 57 that the governor's plan would provide $4 billion more than the bonds authorized by the budget.

But things have changed since the ballot pamphlet analysis was written.

Finance Director Arduin recently told legislators that the $10.7 billion budget bond would be reduced to $8.6 billion because of a recalculation of the deficit. In the budget, the size of the shortfall determines the amount of the bond.

The governor's bond issue on the ballot is $6 billion larger than the readjusted bond and would be paid off by a quarter-cent of the sales tax rather than a half-cent, reducing payments by $2 billion over the next two years.

Still, the governor says his plan is only a first step toward solving his inherited problem. The legislative analyst estimates that the proposed budget, assuming passage of Proposition 57, leaves a $6 billion gap the next year.

Schwarzenegger's main argument for his proposal is that it avoids the risk that the bond authorized by the budget will be blocked by the courts.

If voters reject Proposition 57 and the courts block the bond authorized by the budget, the state could try to get another short-term loan to pay off $14 billion in short-term loans due in June.

But that would be difficult because the bulk of those loans were obtained with the prospect of repayment from long-term bonds.

Regardless, the governor has said a rejection of Proposition 57 would create an Armageddon scenario that could force devastating spending cuts and drastic tax increases. The state's bond rating, already on the brink, might plunge into junk-bond status.

Two public polls last month found that only a third of likely voters in March supported Proposition 57. The governor said private polls taken since he began his campaign show support has increased to as much as 48 percent of voters.

He is scrambling to raise money for the Proposition 57 campaign, attending a fund-raiser in Sacramento last night and scheduling one in New York City on Feb. 24, with tickets ranging from $50,000 to an eye-popping $500,000.

No organized opposition has surfaced to Proposition 57, which can take effect only if voters also approve a companion balanced-budget amendment, Proposition 58.

Leading opponents, Democratic state Treasurer Phil Angelides and Republican state Sen. Tom McClintock of Northridge, say that borrowing does not close the ongoing gap in the state budget between revenue and spending.

"So their answer is to borrow an unprecedented $15 billion – plus interest – and keep right on spending," McClintock and state Sen. Bill Morrow, R-Oceanside, say in a ballot pamphlet argument. "That's more than $2,000 for every family in California."

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