State Sells Bonds to Stay Solvent

SACRAMENTO -- California sold $11 billion worth of short-term bonds Wednesday, just to keep the state solvent through August, and Democrats and Republicans quickly seized on the results of the sale to advance their arguments about whether tax hikes are needed to close the state budget shortfall.

Controller Steve Westly, a Democrat, warned that the sale is the last major borrowing the state will be able to make until lawmakers agree on a plan to close California’s $38-billion budget hole.

“This does give us only a couple of months of additional cash flow,” Westly said. “This will take us through late summer. But, without a budget, we will run out of money.”

“The pressure is on to get a balanced budget on time,” he added. The constitutional deadline for legislators to approve a spending plan is Sunday, but lawmakers remain deadlocked over taxes, and no end is in sight for their negotiations.

The state’s weakened financial condition -- and its prolonged political standoff -- has driven up the cost of the loan significantly. On the bonds sold Wednesday, California will pay $210 million in borrowing costs -- which would be enough money to build about 27 elementary schools but which, in this case, largely goes to shoring up the state’s shaky credit. More than a third of that money comes in the form of “credit enhancements” to large banks that are backing the loan. The state uses that device to piggyback on the credit of the banks because California’s credit is so poor, effectively raising the bond’s rating by linking its security to that of the banks that are helping to back it.

But while Democrats highlighted their warnings about the state’s ability to keep borrowing, Republicans pointed to another aspect of the bond sale: Only $11 billion in bonds were for sale Wednesday, but investors submitted $38 billion in bids.

Republicans said the excess of bids disproves the argument by Democrats that banks are unwilling to deal with California. As a result, Republicans argued that California can still turn to investors for the more than $10 billion in additional borrowing that both parties are calling for to roll the deficit over into the next five years without a new half-cent sales tax.

“There were a whole lot of people today who wanted to buy California debt and didn’t get a chance to because it got sold out,” Assembly Budget Committee Vice Chairman John Campbell (R-Irvine) said Wednesday. “That says there will be plenty of people to buy ... without a new tax.”

Several major banks have written letters to the Department of Finance to warn that they would be unlikely to lend the state the money it needs to roll over the deficit unless a new tax was imposed. A bank representative pointed out recently that, despite GOP assurances that banks would be there to lend money without a new tax, the Republicans have been unable to produce any such guarantee in writing.

The director of the Department of Finance, Steve Peace, a Democrat and former legislator, said the Republican claims are misleading. He said the short-term bonds got a good rate because they were based on the assumption that a new tax would be approved by the Legislature. And he noted they were also backed with the credit of the very banks who promise not to invest in any rolling over of the debt that they see as too risky.

Peace called the comments of Assembly Republicans “reflective of the kind of thinking that leads to the profligate use of credit card debt by folks who do not understand the true cost of money.”

Lawmakers, meanwhile, appeared prepared to let Sunday’s deadline come and go. There were no major budget talks Wednesday as Standard & Poor’s reminded investors that California has the lowest bond rating in the country with a budget gap “equal to more than half the states’ annual revenues.”

No major budget action was on the calendar for today, either. Events scheduled in Sacramento include an appearance by Senate President Pro Tem John Burton and State Treasurer Phil Angelides with actress Julia Louis-Dreyfus to discuss gas-guzzling automobiles.

Gov. Gray Davis, meanwhile, appeared before the Los Angeles Area Chamber of Commerce to press for tax hikes, which he said were preferable to the alternative, given California’s precarious economic position.

“While no one likes taxes,” he said, “I like less the possibility of giving up on public education, health insurance for children or public safety. If I have to choose between maintaining our progress on public education, continuing to buy health insurance for children and to continue to protect you against crime and terror, or raising taxes, I am going to raise taxes.”

The Democratic governor pointed to tax hikes proposed by his two Republican predecessors, Govs. Pete Wilson and George Deukmejian. Noting that legislators voted for tax measures in the 1980s and ‘90s, Davis said: “History is on our side.”

Yet as he delivered the speech, several Assembly Democrats complained that the governor is not taking enough of a leadership role in solving the budget crisis.

Assemblywoman Sarah Reyes (D-Fresno) said Davis needs to work harder to bring legislative leaders to the table and broker a budget agreement.

“They need to meet every day,” she said, echoing the views of several colleagues. “You cannot negotiate in a vacuum.”

Although Reyes and others agreed that the point had come for daily negotiations, the sessions of the state’s top leadership have not yielded much so far.

At the last such meeting, held Tuesday, Burton began arguing with Davis, and the state Senate leader stormed out of the room after about 15 minutes.

Times staff writers Dan Morain and Nancy Vogel contributed to this report.