Massive State Bond Possible

Coming off a losing campaign to curb state spending, Gov. Arnold Schwarzenegger is promoting a statewide public works program that may be financed by a bond sale so large it would dwarf previous state borrowings.

The governor hopes to join with Democratic leaders and businesses to address Californians’ growing frustration with clogged roadways, polluted water, hospital shortages, overcrowded schools and, in the wake of the devastation in New Orleans, inadequate disaster preparedness.

Schwarzenegger is seizing an issue with wide bipartisan support in an effort to restore his image as a moderate, although his plan threatens to cause tension with some conservative allies who have long warned against more government borrowing.

If he succeeds, Schwarzenegger could reposition himself in the model of former Gov. Pat Brown, who by the time he left office in 1967 had created a legacy of roads, waterways and universities that continue to help drive the state economy today.

“What I’ve said to my team is ... give me the whole package: highways, freeways, bridges, ports, the levees -- everything that has to do with infrastructure that will upgrade the state,” Schwarzenegger said in a recent interview.

“Give me the whole plan and all the options of how to finance that.... Let’s not Mickey Mouse around here and try to introduce a $5-billion bond to fix transportation. It’s bogus. Or $10 billion. It’s bigger than that.”

The governor has not decided on an amount. But groups that have been working closely with the administration say the price tag could be $50 billion or more.

“Fifty [billion dollars] to $100 billion wouldn’t be out of the question if we could show voters this would help solve our state’s problems,” said Jim Earp, executive director of the California Alliance for Jobs, an umbrella group for the state’s heavy construction industry.

Business groups acknowledge that the state may not be able to sell such a large bond issue unless lawmakers and voters alike go along with a tax increase to back it up -- perhaps a quarter-cent or half-cent sales tax or billions of dollars in new user fees that could affect businesses.

“It is possible he [Schwarzenegger] will bite a lot of bullets to do this,” said Tony Quinn, co-editor of the California Target Book, a nonpartisan election guide. “Don’t be surprised if the governor says, ‘Yes, this costs money, but it is something we have to do.’ He’ll say that otherwise we cannot have the state we envisioned for our children and grandchildren.”

“The governor is aware that we remember Pat Brown with nostalgia,” Quinn said. “This will dominate what goes on at the Capitol for the next several months.”

It is a challenging time for the state to make large-scale investments. Though the budget gap has narrowed significantly in recent years, a shortfall of several billion dollars persists. The state has the lowest credit rating in the country and is so indebted that the share of the budget devoted to repayment is uncomfortably high for some on Wall Street.

Californians approved a $15-billion bond issue in March 2004 to help balance the budget. That measure, which the Legislature put on the ballot at Schwarzenegger’s request, was the biggest single bond issue ever authorized in the state.

California has room on its credit card for an infrastructure bond, said David Hitchcock, director of public ratings at Standard & Poor’s, but needs to weigh its priorities.

“There are also other pressing needs, like the need to pay for corrections and [to] fund education,” Hitchcock said. “The concern would be whether the state should use its borrowing capacity for this or on other things.”

Even some Democrats, who have been pushing for a large infrastructure bond issue, are blanching. Though Democrats have proposed $40 billion of borrowing in recent months for projects including court facilities, freeways and schools, they were never planning to do it all at once.

“We have to put this in the context of everything else we need,” said Assembly Speaker Fabian Nunez (D-Los Angeles), who championed a $10-billion transportation bond issue this year that failed in the Legislature.

Nunez said that with the state still facing a deficit, the Legislature may need to cut social services.

“You can’t go around talking about a $50-billion bond while you are taking away cost-of-living increases for the disabled and elderly” on public assistance, he said.

Further complicating matters for the governor, Republican legislative leaders have declared flatly that they will not support new taxes next year. They have been able to hold the line against them throughout the state’s budget crisis; now, with revenues up and the budget closer to being balanced than it has been in years, they are declaring victory.

That leaves the governor walking a tightrope, especially after his failed bid to go over the heads of lawmakers with parts of his agenda in last week’s special election. Many in the Capitol expect Schwarzenegger to unveil the framework of a bond proposal in January in his State of the State address, which he promised to draft in concert with legislators. In last year’s speech, the governor set out on the confrontational path with the Legislature that culminated in the special election rout.

“This is the idea,” Schwarzenegger said. “Look at it in a very open-minded way and just say, ‘Hey, here are the problems that we have, and let’s build.’ ”

Buzz regarding the governor’s intentions has set off a frenzy in the Capitol. Building and transportation interests are lobbying the administration to get their projects considered. Business and local government organizations are about to launch a major polling and marketing effort to gauge voter support.

“We’re going to, in effect, be doing market research to see what the voters are open to,” said Bill Hauck, president of the California Business Roundtable. “It would be a mistake to go to the ballot with a bond you don’t have a chance to persuade people on.”

Times staff writers Peter Nicholas and Jordan Rau contributed to this report.