Suit to Block Bond Sale May Add to State Deficit

A lawsuit filed Thursday by a conservative legal group stands a strong chance of adding $800 million to California’s budget shortfall, experts say.

The Pacific Legal Foundation lawsuit seeks to keep Gov. Arnold Schwarzenegger from selling bonds to cover a scheduled payment into the pension fund for government employees. The sale of the bonds, which taxpayers would have to pay back over 20 years, was part of the governor’s plan to balance the budget.

A Sacramento County Superior Court judge blocked the state from doing much the same thing under former Gov. Gray Davis. This latest challenge is rooted in the same premise: Any long-term borrowing of that size -- without voter approval -- violates the state Constitution.

“This is a borrowing without approval of the voters,” said Harold Johnson, an attorney with the foundation, which filed the lawsuit on behalf of the Fullerton Assn. of Concerned Taxpayers in Orange County. “The lawmakers of this state are getting into a credit card habit. It is time for a constitutional reality check for these reckless spenders.”

The constitutional debt clause on which Johnson is building his case says the state cannot borrow more than $300,000 to pay day-to-day expenses without voter approval.

Some budget analysts were surprised to see Schwarzenegger propose the borrowing after having ridiculed the similar plan by his predecessor while campaigning for election. But administration officials say their proposal is different because it is coupled with changes to the state pension system that will generate enough savings to more than pay back the cost of the bond. Those savings would come by allowing workers to take money out of their pension funds before retirement in return for giving back some of the state’s contribution to their account.

“We think we are on solid legal footing,” said finance spokesman H.D. Palmer.

But Fred Silva, a budget analyst at the Public Policy Institute of California, said the administration is in a tough spot.

“The debt clause in the Constitution is pretty clear,” he said. “It says the state can’t sell bonds of this amount for operational expenses. What they want to use this money for is clearly an operational expense.”

Daniel J. B. Mitchell, a professor of public affairs at UCLA and an expert on the state budget, called the bond plan a budget “gimmick.”

He said despite the administration’s efforts to cast it as something else, the proposal is merely more deficit borrowing.

“The last one didn’t work, so there is every reason to think this one is questionable,” he said.

Even if the courts ultimately side with the administration, it would have to happen quickly for the bond sale to take place. Officials from the state treasurer’s office say if a court victory is not achieved by February, it would be too late to sell the bonds in time to meet the pension fund payment deadline.

“We are going to have to make an assessment of how long this litigation will take,” Palmer said. “It could change the assumptions we have in the [next] budget the governor proposes in January.”

The governor is already grappling with projected deficits totaling nearly $17 billion over the next year. Piling on an additional $800 million would add to the challenge of getting the state’s books balanced -- especially after voters approved a Schwarzenegger-backed measure in March that bans the state from further deficit borrowing. As the deficit grows, so does the pressure on the governor to either cut programs he has vowed to protect or to rethink his pledge not to raise taxes.