Cashing in a break

NOTHING BRIGHTENS A GLOOMY DAY quite like finding an unexpected check for about $5 billion in the mail. That’s what happened to the state of California this month, and Gov. Arnold Schwarzenegger’s plans for the windfall are so sensible that even his political foes can’t help but crack a wisp of a smile.

Schwarzenegger is scheduled to announce today his plans to use most of the money to get the state out of debt. It’s a one-time payment, used for a one-time expense, and it pulls California out of a nasty jam about six years in the making. The governor is reportedly using $1 billion to make an early payoff of a looming bond debt, clearing the obligation from the books and freeing up millions of dollars for other things. Just as important, he’s adding $1.6 billion to the state’s reserve, which had become dangerously thin.

That’s the right way to do it. There’s a wrong way, too, and Sacramento went down that road during the last windfall, in the waning days of the dot-com bubble. Then-Gov. Gray Davis and the Legislature believed the hype that the tech boom would go on forever, so they spent the surplus cash on new programs and cut taxes to boot.

When the bubble burst and the cash stopped flowing, however, the bills for the programs kept coming. Davis tried to rescind the tax cut, a move that helped Schwarzenegger oust him in the 2003 gubernatorial recall. Once in the governor’s mansion, Schwarzenegger persuaded voters to go deeper into debt by approving bonds to refinance the deficit, but all that did was delay trouble.

Even then, there wasn’t enough money to pay the state’s bills. Schwarzenegger squeezed some out of the schools, and he averted a fight with education advocates and teachers unions by agreeing to pay back the money when revenue picked up. Revenue did pick up -- but so did expenses, and the governor used the money for other needs. Teachers cried foul, demanded the $2 billion they said Schwarzenegger owed and launched a full-scale political war.

There was really no way out of the mess except for irresponsible new debts, crippling cuts in spending, politically untenable tax hikes -- or an extra few billion dollars that no one was counting on.

Thankfully, the state got the billions. Credit goes to the still-hot real estate market, high gasoline prices (which produce high gas-tax revenues) and healthy investment returns. Now Schwarzenegger has made a deal with the teachers and education advocates to pay back the schools. Meanwhile, his plan to pay off the 2004 deficit-finance bonds frees up money to make new payments, this time on bonds (if voters approve in November) that will actually buy something, such as better roads and bridges.

The governor must be feeling pretty smart. In fact, he got lucky. But he deserves credit for using his lucky break to help pull California out of debt instead of pushing the state deeper into it.