Explanations of Bond Issue Differ

Gov. Arnold Schwarzenegger told radio listeners across California on Monday that there would be no new borrowing under a $15-billion debt proposal on the March ballot -- just a consolidation of existing loans.

In reality, though, the ballot measure includes up to $4 billion in new debt.

Schwarzenegger relies on most of that new borrowing to avert higher taxes and limit the scope of spending cuts in his first state budget. The debt would take taxpayers up to 14 years to repay, with interest.

Despite the new borrowing, the Republican governor and Democratic state Controller Steve Westly have increasingly cast the bond proposal as nothing more than debt consolidation.

The theme is now the centerpiece of their campaign to overcome sharp voter resistance to the measure, Proposition 57. Polls last month found barely a third of likely voters in favor of it.

“It’s a tricky one, because people don’t like it instinctively,” said Democratic strategist Gale Kaufman. “They get it, and they don’t like it.”

If Schwarzenegger prevails in persuading Californians to pass the measure, it will be thanks to “his strength of personality and his articulation of why this is better than the alternative” of taxes and cuts, she said.

As the bond campaign unfolds, a key issue -- from both a political and policy standpoint -- is how much money California should borrow long-term to pay its immediate operating expenses. Finance experts generally frown upon long-term borrowing to cover deficits. But over the last three years, Sacramento has resorted to the highly unusual practice in order to break political deadlocks over the biggest budget shortfalls in California history.

“You’re asking your kids to pay your grocery bill,” said Diana Fortuna, president of the Citizens Budget Commission, a fiscal watchdog group in New York.

The scope of the new borrowing in Schwarzenegger’s proposal is laid out in the secretary of state’s voter guide for the March 2 election.

It says the $15 billion in bonds on the ballot would replace $10.7 billion in bonds approved last year by the Legislature, but now under court challenge.

The larger bond proposed by Schwarzenegger “would provide the state with up to $4 billion in additional one-time funds to address its budget shortfall,” according to the state legislative analyst’s summary of the measure in the voter guide.

Privately, state officials and financial experts familiar with the bond measure agreed that it would add new debt. But none would speak on the record, saying they did not want to upset Schwarzenegger.

The governor, however, stuck to his description of the proposed bond as a strict “refinancing” in Monday morning rush-hour interviews on radio stations in Los Angeles, San Diego, San Francisco, Fresno and Sacramento.

On KFBK-AM in Sacramento, he told listeners: “The more we educate people and let them know that this is not new borrowing, that this is just refinancing old debts, debts that I have inherited when I went into office, then they say, ‘Oh, I didn’t know that. In that case, I’ll vote yes.’ ”

“This is not new borrowing,” he said on KSFO-AM in San Francisco.

Westly and Schwarzenegger took turns making that point last week as they promoted Proposition 57. At a joint appearance in Walnut Creek with nearly 200 senior citizen voters, Westly acknowledged voter skepticism toward the bond proposal.

“Some people will say, ‘Gee, aren’t you just borrowing your way out of the problem, leveraging the future and so on?’ ” he said. “I just want you to know what the governor said: This is not new debt. It’s simply consolidating old debt.”

In an interview after the forum, Westly suggested that the question of whether there was any new borrowing in Proposition 57 was “a little bit of a semantic issue.”

“It is primarily a consolidation,” he said.

State Finance Director Donna Arduin stood by the contention that Proposition 57 includes no new borrowing. She also took issue with the voters guide statement about $4 billion in new debt.

“It’s not the way I would have worded it,” Arduin said.

Arduin offered an intricate explanation for why Proposition 57 would just consolidate old debts. At the core of her rationale is a loosely defined term that Schwarzenegger coined for his budget and bond campaign: “inherited debt.”

She said $11 billion of the bond proceeds would refinance a one-year loan that California must repay in June.

The state had planned to repay that loan with the $10.7 billion in bonds now under court challenge.

She described the rest of the bond proceeds under Proposition 57 as necessary to help pay down California’s “inherited debt.” But much of the “inherited debt” is not long-term borrowing from outside sources. Instead it consists of payment deferrals, the state’s loans to itself and other short-term accounting maneuvers used to keep California’s books balanced on paper, despite chronic deficits.

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Times staff writer Jeffrey L. Rabin contributed to this report