Feb 26, 2004

Can Propositions 57 and 58 heal the State's budget woes?

By Kymberli W. Brady
Staff Writer

As Governor Arnold Schwarzenegger celebrates his first 100 days in office, the battle to restore California to financial stability ensues and the upcoming March 2 election finds him touring the state in an effort to gain approval for Propositions 57 and 58—the centerpiece for his California Recovery Plan.

The road to financial healing in California will undoubtedly be a long and painful one as the state struggles to convalesce from the throws of fiscal irresponsibility and near bankruptcy.

Such “irrational” behavior is not at all uncommon. People every day shop for things they want with money they don't have—racking up credit card debt that can easily get out of control before the brakes are applied.

Now, Sacramento finds itself encumbered with a $22 billion debt—incurred over the past five years simply by spending more than they had. While revenues increased 25 percent, spending almost doubled to 43 percent. Do the math. With the fiscal year coming to a close, California is now facing the very real risk of being out of cash by June.

Joined at the collective hip, approval of Propositions 57 and 58 must pass together in order to establish a $15 billion bond measure and a balanced budget “insurance policy” in an effort to allow the state to crawl out of its financial quagmire.

“This is the first time that our politicians' credit cards are being torn up and thrown away so they'll never ever spend more money than the state takes in,” said Schwarzenegger during an interview on Meet the Press last Sunday.

Far from perfect, the measures seek to pay off existing debt caused in part by economic and stock market downturns as well as the legislature and ousted Governor Gray Davis' four-year spending spree. The plan is to get the deficit under control and stabilize state spending habits in an effort to prevent heavy tax increases and additional cuts in critical education, public safety and social services programs.

“If this does not pass, the consequences are serious,” added Schwarzenegger. “It will mean more cuts. It will be a disastrous situation.”

Although Schwarzenegger apparently has [most of] the future deficit factored into his proposed budget, California must still pay back its accumulated debt. Proposition 57, The Economic Recovery Bond Act will enable the state to take out a $15 billion bond at record low interest rates and extend the payments over a longer period of time. In a nutshell, it's debt consolidation and refinancing—only on a much grander scale.

The bond would replace a $10.7 billion bond authorized by the legislature last year, whose legality is still being challenged in the courts because the voters did not approve it.

However, this bond act will not go into effect unless Proposition 58, the California Balanced Budget Act passes. According to the Voter Information Pamphlet, passage of Proposition 58 would require the enactment, not just the submission of a balanced budget and establish a reserve fund to pay off the bonds early during more robust times and steer the state through any future economic downturns.

Yet, according to George Skelton's column in the Los Angeles Times, if Schwarzenegger gets his budget approved and both measures pass, the state will still spend $7 billion more than it earned in the fiscal year starting 2005. This raises the question of further cuts and tax increases to offset the shortfall.

“Passing Proposition 57 and 58 will give us a big boost forward,” said Schwarzenegger. “But it doesn't solve all the problems. Then we have to go on to the budget of 2004-2005, where we're still over and must fix that.”

Unique to California's political history, these measures have found the broad support of elected officials, businesses, organizations, and labor leaders who have put their party disparity aside to support what they feel is the best foot forward in putting the state's fiscal house in order, including California Taxpayer's Association President Larry McCarthy, Democratic Senator Dianne Feinstein, California Chamber of Commerce President Allan Zaremberg, Silicon Valley Manufacturing Group President Carl Guardino, and Democratic Controller Steve Westly.

“The California Balanced Budget Package does exactly what it says,” explained Westly. “It gets the budget balanced and keeps it balanced. Passing Propositions 57 and 58 is the single best thing that California voters can do to restore our state's fiscal health and start us down the road to economic recovery.”

Recent polls suggest that Schwarzenegger, along with his bipartisan counterparts, is winning the fight, with 55 percent of voters in favor of the propositions so far—and support is growing.

“These two propositions will help California's economic recovery, keep businesses and jobs from fleeing our state and avoid devastating cuts to public safety, education and other critical programs,” said Senator Dianne Feinstein, who joined the effort Feb. 19.

However, once the bonds authorized in Proposition 57 are issued, 58 would prohibit most [not all] future borrowing to cover budget deficits. This restriction does not apply to short-term borrowing in an effort to cover cash shortfalls in the General Fund or borrowing between state funds. Therein lies the rub.

Opponents, including Senators Tom McClintock and Bill Morrow, as well as San Diego Tax Fighters Chairman Richard Rider and Democratic State Treasurer Phil Angelides say Proposition 57 will serve only to plunge the state further into debt, citing the California Constitution that prohibits the use of bonds for over deficit spending. They also argue that Proposition 58 does not protect California from loopholes, accounting “tricks” and short-term borrowing to balance the budget.

Angelides instead feels confident that raising taxes on the state's wealthiest people would go a lot further in solving California's budget woes—saying that voters deserved a “fair set of alternatives.”

Schwarzenegger however, strictly opposes raising taxes to fix the deficit problem. “You cannot punish the people for the mistakes that the politicians make ,” he said. “To me, this is an absolute no.”

“This is not about Democrats or Republicans,” he concluded. “It's about doing what is right for California. If we pass 57 and 58, never again will the politicians drive our state to the verge of bankruptcy. Never again will our politicians spend more than the state takes in and never again will the politicians deficit-finance their spending habits. It will be a whole new ballgame.”