State Debt May Be Refinanced

Gov. Gray Davis is ditching his plan to whittle away at the state’s $12.5-billion budget shortfall by delaying pension payments to state employees and teachers.

The Davis administration has decided instead to embrace a strategy by Treasurer Phil Angelides to free up $1 billion by taking advantage of low interest rates to refinance the state’s debt.

The move allows Davis to pare the budget deficit, but without requiring the approval of Republican lawmakers.

GOP legislators vehemently opposed the governor’s plan to skip $1.9 billion in pension payments over three years to the California Public Employees’ Retirement System and California State Teachers Retirement System. By one estimate, the plan could have cost taxpayers $10 billion over 30 years.

Davis’ finance officials had signaled they would shelve the proposal if they could come up with a cheaper plan, which, they said, they found in Angelides’ idea.

“The criticism that some of the borrowing was expensive wasn’t unfair,” said Tim Gage, director of the state Department of Finance.

Under Angelides’ proposal, the state’s bond payments would be minimized by deferring principal payments for four years and by switching from fixed-rate to variable-rate bonds, which have proved cheaper in recent years.

Gage estimated the plan would free up $1.1 billion during this fiscal year and the next when California is expected to face at least a $12.5-billion shortfall.

So far, Davis and lawmakers have reduced state expenses by $2.2 billion through current-year spending cuts.

Gage said the refinancing plan, which will require approval from a variety of state finance committees established to authorize bonds, would provide about $200 million more than the pension proposal would have over two fiscal years.

GOP lawmakers welcomed word of Davis’ decision to drop the pension proposal.

“The good news is they’re not going to borrow money for 30 years at 81/2% interest,” Senate GOP leader Jim Brulte of Rancho Cucamonga said. “The bad news is it sounds like they’re going to refinance the state bond package and then declare a holiday from making payments.”

“I think it’s a step in the right direction,” added Assemblyman John Campbell, the Irvine Republican who handles budget matters for his caucus.

“The other plan had many bad attributes. I think now the big question is how much is prudent to borrow?”