Borrowing Plan Would Fix Some Problems With Current Budget

The borrowing of up to $15 billion proposed Tuesday by Gov. Arnold Schwarzenegger would fix two major problems with the budget passed by lawmakers and signed by former Gov. Gray Davis last summer.

That spending plan counted on proceeds from $10.7 billion in deficit bonds and $1.9 billion in additional borrowing to cover the state’s annual contribution to employee pension funds.

A Sacramento Superior Court judge recently ruled that the pension bond plan violated the state Constitution because it had not been approved by voters. The deficit bond has also been challenged in court on the same grounds.

If state lawmakers agree to place Schwarzenegger’s proposal on the March ballot, the constitutional concerns will be satisfied.

Last summer’s budget also assumed that Sacramento would receive $680 million in revenue-sharing from Indian casinos, but only $50 million is now expected to materialize. The Davis administration also failed to get all it sought in salary reductions from state employee unions. Add to that the cost of fighting the Southern California wildfires, overspending in the prison system and Medi-Cal, and the current budget’s deficit quickly swells.

The proposed borrowing would fall slightly short of satisfying all of those obligations.

Schwarzenegger plans to seek general obligation bonds, which require voter approval because they are repaid from general state funds rather than a specific revenue source.

They are typically used to build infrastructure such as schools and colleges, acquire parkland, and construct transportation and water projects. Schwarzenegger said the bond issue would be far preferable to increasing taxes.

H.D. Palmer, a spokesman for the governor’s finance department, said that the length of Schwarzenegger’s proposed borrowing could be up to 30 years, but that a final decision would be based on market conditions and interest rates.

If California sold $15 billion in bonds and the debt were repaid over 15 years, state Treasurer Phil Angelides said, the total cost to taxpayers would be $20.76 billion when $5.76 billion in interest is added. That amounts to $1.38 billion per year, or $1,805 per household.

If the borrowing were stretched over a longer period -- such as a typical 30-year home mortgage -- the required annual payment would drop to $1 billion, but the overall cost would rise to $30.32 billion. Interest charges would double the original borrowing, Angelides said. Such an approach would cost $2,637 per California household.

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Budget borrowing

Gov. Arnold Schwarzenegger has proposed asking voters to approve borrowing up to $15 billion to help eliminate the budget deficit he inherited. Such an amount would cover the gap in this year’s budget, but would not address projected deficits, revenue losses or higher costs in next year’s budget.

This year’s budget problem (in billions)

*--* Accumulated deficits $10.7 Pension bonds ruled unconstitutional $1.90 Unrealized Indian gaming revenue $0.63 Unrealized salary reductions $0.20 Corrections overspending $0.50 Partial-year car tax repeal $3.20 Subtotal $17.13 Minus new revenue Higher tax revenues received $0.813 Total shortfall $16.31 billion

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Next year’s projected shortfall

*--* Projected year-end deficit $10.20 Loss of full year of car tax $4.20 Interest on $15 billion bond $1.0 Total $15.40 billion

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Cost of Schwarzenegger borrowing

*--* Total Term Annual cost interest Amount 15 years $1.4 billion $5.76 billion $15 billion general obligation bond* 30 years $1 billion $15.32 billion

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*Debt repayment tied to general fund

Sources: Legislative analyst and state treasurer’s office