Use This Fiscal Respite Well

Southern Californians shopping for home loans aren’t alone in worrying as interest rates creep upward. California Treasurer Phil Angelides last week cited rising rates when he accelerated the sale of $12.3 billion in bonds that voters authorized with passage of Propositions 57 and 58. Each upward tick in interest rates means higher costs to the taxpayers who have to repay the bonds, at about $1,700 per household.

States traditionally use bonds to build highways, water projects and schools, but the economic-recovery bonds that voters approved in March will do nothing except stretch short-term debt. The bonds finance a last-ditch gamble that Sacramento will finally end its ceaseless budget crises.

Those past budget antics have forced the state to use conservative tactics to sell anxious investors on the bonds. Sacramento is assuming relatively low annual growth in sales tax receipts -- some of which will be dedicated to bond repayment -- and stretching the planned payback over 18 years. Sales tax receipts are actually likely to grow more quickly, enabling the state to pay back the bonds in a decade and thus pay less interest.

The massive borrowing won’t restore California’s trashed credit rating, which is the lowest of all the states and hovers a few notches above junk bond status. The budget shortfall for the coming fiscal year already is estimated at $14 billion, and Gov. Arnold Schwarzenegger in late March acknowledged that extraordinary pressure to balance the state’s books might have reduced a bald anti-tax stance to “wishful thinking.”

Elected officials must make wise use of the time that voters are buying. That means quickly negotiating a blend of budget cuts and increased revenue. Legislators must vote to suspend the ill-advised Proposition 42, which requires the state to pour billions of dollars into transportation projects. Some Wall Street analysts argue that the state also must suspend Proposition 98, which mandates additional dollars for schools. The governor must conclude negotiations to determine how much Indian tribes with casinos will contribute to state coffers. Sacramento must come to grips with its mushrooming pension obligations.

The big investors that California is courting also shy away from Sacramento’s habit of balancing its budget with cuts in local government funds, which damage public health, law enforcement and other locally provided services. As a municipal credit analyst recently noted, “If you reduce benefits for someone who needs to see a doctor, they show up in the [costlier] emergency room.”

The wary Wall Street analysts are pushing California toward common-sense changes it should have made years ago. It’s not a big silver lining, but it’s worth noting.