Governor’s Bond Plan Only a Band-Aid, Analysts Warn

While the administration of Gov. Arnold Schwarzenegger remained focused on passing a $15-billion borrowing plan that goes before voters March 2, financial analysts warned Thursday that the bond was merely a Band-Aid that by itself would not restore the state’s fiscal health.

During the California Municipal Finance Conference in San Francisco, analysts urged the administration and lawmakers to more quickly address the underlying imbalance between state spending and revenue -- an imbalance that has left California’s budget with a chronic deficit expected to reach $14 billion in the next fiscal year.

“We’re looking for some demonstration that the state can move toward structural balance,” said Steven Zimmerman, managing director of Standard & Poor’s bond rating agency, which gave California a BBB grade, the lowest of any state. “We’re in a wait-and-see position.”

As the analysts met, Democrats on the state Senate budget committee agreed to recommend that next year’s budget eliminate an emergency power that Gov. Arnold Schwarzenegger invoked earlier this year. He used that power to bypass the Legislature and give cities and counties money they lost when he cut the state vehicle license fee.

That car-tax cut -- which rolled back $4 billion in annual revenue -- was cited as one reason that some representatives from credit rating agencies and major investment houses were concerned about the direction the administration appeared to be heading with California’s finances.

Zimmerman and other analysts said passage of the bond measure would help the state avoid only a cash crisis and a further credit-rating decline, perhaps to junk bond status.

“This state should look at the reasons why it has BBB credit in a AAA economy,” said Mark Stockwell, director of municipal research for PNC Advisors, who added that he was discouraged by the direction of state finances since Schwarzenegger won a recall election in October to replace Gov. Gray Davis.

“We haven’t seen where they have removed uncertainty regarding repayment” of billions of dollars in short-term loans that are coming due in June, Stockwell said. The analyst said he was also disheartened at the “careless use by the governor of the term ‘bankruptcy’ ” in pushing his budget agenda on the ballot campaign trail.

“These types of headlines don’t help,” Stockwell said.

Although many of the analysts applauded the governor’s ability to cross party lines to work on the budget, they also advocated policy changes in Sacramento that the governor has fought.

Most agreed that the state would need to change its formula, which is dictated by Proposition 13, for calculating property taxes.

When billionaire investor and Schwarzenegger advisor Warren E. Buffett suggested as much during the recall campaign, the future governor distanced himself from the comment and jokingly ordered Buffett to do sit-ups as punishment.

The analysts also expressed support for a measure on the March ballot to lower from two-thirds to 55% the threshold of legislative votes needed to approve a budget or tax increase. Schwarzenegger opposes that initiative, Proposition 56.

Speakers at the conference warned lawmakers to stop ignoring the state’s July 1 deadline to approve a budget, something that they said had shaken investor confidence. The governor has said several times that he plans to have a spending plan in place by May.

State Controller Steve Westly and administration Finance Director Donna Arduin also spoke at the conference. They assured investors that the state was working on backup plans should the $15-billion bond issue be rejected. One plan is to try to secure an alternative bond that is now being challenged in court and that Zimmerman predicts has a “50-50” chance of surviving. The other is trying to extend the date of repayment on the loans due in June.

Arduin warned that if voters rejected the governor’s bond measure and if the courts rejected the alternative bond, the state would need to reduce spending by an additional $11 billion, doubling the cuts proposed by the governor.

For his part, Schwarzenegger, who appeared Thursday with Westly at a summit of Silicon Valley chief executives in San Jose, maintained that if Proposition 57 and 58 passed, “Wall Street, let me tell you, will look at us and say, ‘California is back on track.’ ”

The governor met privately with business leaders at the headquarters of software developer Adobe Systems and afterward received four high-tech industry groups’ endorsement of Propositions 57 and 58.

In Sacramento, Deputy Finance Director Mike Genest urged lawmakers to move forward with approval of the midyear budget cuts sought by Schwarzenegger.

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Times staff writer Joe Mathews contributed to this report from San Jose. Rabin contributed from Sacramento.