State Faces Hefty Bridge Loan Cost

The failure of state lawmakers to close California’s historic budget gap is about to exact a hefty price:

Taxpayers should expect to pay up to $271.6 million in interest and fees -- enough to build 35 elementary schools or pay 5,000 teachers for a year -- if officials succeed this week in getting the largest “bridge loan” in state history.

The $11-billion, short-term loan -- like using one credit card to pay off another -- is needed to keep the state solvent through summer. Because California’s credit rating is so poor, more than a third of the borrowing cost -- up to $100 million -- is expected to be paid to Wall Street firms just so the state can piggyback on their financial standing to obtain a lower interest rate.

“It’s outrageous,” said Senate Majority Leader Jim Brulte of Rancho Cucamonga. “It shows how the people who supported the last three budgets have bankrupted the state. We are now 50th in the nation in creditworthiness.”

The estimated borrowing costs would exceed what Gov. Gray Davis’ proposed budget plans to spend on coastal conservation, toxic waste cleanup and protection against pesticides combined. Or, it could cover the cost of incarcerating 10,000 criminals for a year.

Top state finance officials are in New York City this week seeking to secure what are technically called revenue anticipation warrants, which are sold to individual and institutional investors. Such a loan allows government to borrow across fiscal years to cover expenses when a budget is not in place.

The Legislature is continuing to debate the budget for 2003-04. But some of the state’s debt must be repaid by late June.

Last year, the state was forced to take out a bridge loan of $7.5 billion but paid less than $75 million in interest and fees. This year, the size of the loan has not even doubled, but its cost has nearly quadrupled. And it is all happening when interest rates are down, so the state would pay less for the loan if California’s finances had not fallen into disarray.

Although Brulte said the blame rests squarely on Democrats, who have had control of the Capitol as the state went from a multibillion-dollar surplus to a budget gap of as much as $38.2 billion, officials with the administration of Gov. Gray Davis said that is disingenuous. They argued that a sluggish economy, which has caused revenue to freefall, is the main contributor to the state’s problems.

And they said that the refusal of Republican lawmakers to consider supporting any new taxes has blocked substantive progress on the budget.

That lack of action to close the gap between what the state spends and what it collects in revenue has caused California’s credit rating to dive, driving up the cost of the bridge loan.

California, with the nation’s biggest budget gap, now has the lowest credit rating in the country. The rating is so poor that the state is paying a group of seven investment houses and commercial banks up to $100 million in so-called credit enhancement fees to back the $11-billion loan.

Without the credit enhancement, investors wary of investing in California would demand interest rates that would cost the state even more. State Department of Finance Director Steve Peace said Thursday that most money market funds would not be able to buy warrants without it, and California would not be able to borrow what it needs.

“There is no way to market them” without the enhancement, said Peace, who accompanied state Controller Steve Westly to New York to make a pitch to investment rating agencies that they hope will endorse the financing.

Peace said credit analysts with Standard & Poors and Moodys Investors Services were concerned about when the Legislature would act on the budget and whether it would approve the cuts and tax increases called for in the governor’s revised budget.

“They recognize what’s left to do is the more difficult stuff,” he said. “They, as well as the banking community, are obviously watching the Legislature very carefully.

“I don’t know that the significance of the situation is fully appreciated in the Legislature,” Peace said.

Bankers and financial consultants who do business with the state said they have grown impatient with California lawmakers, particularly after last year’s budget fell billions of dollars out of balance shortly after it was approved.

Yet lawmakers have so far made only marginal progress.

As finance officials sought to persuade bond raters that action was being taken to balance the budget, lawmakers in Sacramento were moving to restore more than $1 billion in spending that lawmakers cut only weeks ago.

So far, the state has been able to make only $6.9 billion in budget reductions. With the July 1 constitutional deadline for approving a spending plan looming, the Legislature still has a $30-billion problem on its hands.