Reality Bites California’s Budget Deficit : State finances: Bonds must be linked to spending cuts.

The state’s budget is out of balance by more than $6 billion. The voters have turned down the earthquake-bond initiative, adding $2 billion to our shortfall. If we lose a pending lawsuit in the U.S. Supreme Court, the deficit will exceed $10 billion.

The California Constitution requires that borrowing of the size necessary to cover this deficit be approved by the voters. Smaller amounts of borrowing, reasonably related only to the cash-flow problems of state finance, can be handled by revenue-anticipation notes. In recent years, however, reliance on these notes has gone far beyond their legitimate purpose. To rely on them to finance a deficit of this size is contrary to our Constitution.

Revenue-anticipation notes also carry higher interest rates than long-run debt. If we must borrow to finance our deficit, therefore, it would be more economical to borrow in the long-term market. That is particularly true if the Federal Reserve continues its present policy of raising rates in the short-term debt market, where revenue-anticipation notes must compete.

I agree with the governor that the federal government should fund our state’s costs caused by immigration, both legal and illegal. We should keep maximum pressure on the federal government to comply with their obligation.

Prudence, however, requires planning for undesired alternatives. This budget makes no such contingency plans. It was based on assumptions that California would receive federal immigration assistance, win the pending Barclays litigation (multistate and foreign corporations are challenging California’s unitary tax; $2.7 billion is at stake) and pass the earthquake bonds. The bond measure is gone, and the President and Congress have shown reluctance to provide the immigration funding. The total from all three assumptions is almost$8 billion.

This failure to provide for adverse contingencies will hurt California’s credibility in the debt markets when it eventually becomes necessary to borrow again. Even more important, it is untrue to our state constitutional obligation to make the difficult decisions to balance our budget or ask the people for permission not to do so through more long-term bonds.

In the eventual compromise, there will be those calling for cuts in spending, increases in sales or gasoline taxes and more bonds. The bonds should be coupled with spending cuts and presented as an alternative to tax increases. Tuesday’s bonds weren’t; they were seen as additional spending, and that’s what the people rejected.

California’s economic crisis was not created in a day. It is a result of massive cuts in federal defense spending, the collapse of our nation’s financial institutions and the resulting glut of commercial and residential property. We Californians will work our way out of these difficulties. The rest of the country is recuperating, and we are the best-positioned state to take advantage of the North American Free Trade Agreement by selling in Mexico. But these positive trends will take some time to offset the negative trends that brought us to where we are.

If we make a case to the long-term lending community that our state’s economic recovery is certain if not imminent, if we continue to show an actual decrease in the amount of state spending--as we have each of the last three years under Gov. Pete Wilson--the lending community will extend the credit to California to make the transition we need. It will not do to increase spending and go to the lending institutions; that’s what New York City tried in the 1970s with disastrous results. But if we present a budget with actual spending cuts below current levels, we will present a credible case for long-term debt.

We should present the same case to the voters of California, because it is only they who can say yes to such a plan. I believe they and the lending institutions will say yes, if we present in our budget a sincere attempt to provide for the undesirable contingencies and continue to cut spending. If our budget only assumes the happy outcome of these contingencies, we risk losing the confidence of the electorate and of the institutions whose financial assistance we’ll need.