Borrowing to Balance the Budget Isn’t So Bad

When Gov. Arnold Schwarzenegger announced his plan to close the state’s budget deficit by issuing $15 billion in bonds, he came under immediate fire from critics across the state. But although borrowing may not be the best way to handle a budget deficit, it’s better than what we’ve been doing until now, which is nothing.

Critics -- including some in the state Legislature, which must approve the plan by midnight Friday -- oppose the bonds as a financially cowardly move, saying that Schwarzenegger lacks the strength to make the tough taxing and spending decisions that are necessary. State Treasurer Phil Angelides, for example, instead calls for “a budget that truly balances revenues and expenditures” and “more cuts and new, fair revenues.” But the fact is that we can’t just cut and/or tax our way out of the enormous hole we’ve dug over the last several years.

We need to attract and retain jobs and workers in California or we risk choking off our growth altogether. To attract jobs, you have to attract a labor force. And workers need housing and other services that California must continue to pay for. We can’t cut spending to schools, which are crucial to the development of an educated workforce. Nor can we cut spending for transportation; workers need a way to get to their jobs.

A second argument made against Schwarzenegger’s proposal is that we shouldn’t “mortgage our future,” leaving our children to pay our debts (even though this is exactly what California has been doing for 10 of the last 11 years). The problem is, if we don’t mortgage our future now, we won’t have a future worth mortgaging.

The Chicken Littles among us should not be alarmed about the proposed bonds, which could be issued with maturity dates of as little as 10 years. That’s not a long time in the world of finance, but it will give us what we need to work out our problems. On July 1, California sold $1.7 billion of general obligation bonds. The biggest -- a $265-million 30-year bond -- will pay only 5% interest. The current low interest rates make even the weaker BBB-rated bonds cheap by historical standards. If I was planning to have a fiscal disaster that forced me to borrow money to finance my future, I would plan to have one at this time, when interest rates are at historical lows.

What worries a lot of critics is that Standard & Poor’s attached a “credit watch” to the state’s stronger single-A rating the day after the July bond was issued. At the time, as politicians argued over whether they could balance the state’s budget, the California bond price began a steady decline -- a sign of a lack of faith in California’s financial condition. Between the issuance date and the day before Schwarzenegger announced his candidacy, the price of a July 1 bond fell nearly 10%.

But then there was what Bloomberg News calls the “Schwarzenegger bounce.”

The first bounce showed up the day after a report that 70% of California voters said they would vote for Schwarzenegger over Gray Davis in a head-to-head race: a quick 3.1% gain in the price of the bond after three weeks of declines. In the days between his announcement and the election, we regained 3.5% on the price. Since the election, there has been a gain of 2.7% on top of that.

If market prices reflect market sentiment, and they usually do, then there doesn’t seem to be much concern in the markets about new bonds being issued by California.

All of this is not to say that Sacramento doesn’t have to put its house in order. Any time you have to borrow to make ends meet, you know you’re in trouble. This new debt will be a heavy burden, one that we’ll have to struggle to carry and sacrifice to pay off.

Paying off the debt will limit California’s ability to purchase things we might want. But if borrowing is the only way to get what we need, then it’s a burden we’ll have to carry.