Shaping the State’s Fiscal Future

California voters will decide Tuesday whether to ratify the borrow-now, pay-later approach to managing the state’s fiscal crisis taken by two governors and most lawmakers.

Unwilling to balance the state budget by raising taxes or slashing spending, former Gov. Gray Davis and most legislators agreed last summer to borrow $12.6 billion to help close a substantial budget deficit.

But after a Sacramento court ruled that one element of that borrowing plan was unconstitutional, Gov. Arnold Schwarzenegger and state lawmakers agreed on an alternative to deal with the deficit. That plan is embodied in a pair of measures they placed on the Tuesday ballot.

Proposition 57 would authorize the state to borrow as much as $15 billion by issuing bonds. The money raised would be used to pay off the budget deficit that accumulated during the last three years as state government kept spending more than it received in tax revenue.

After subtracting the cost of issuing the bonds, some of the money also would be available to help balance the next fiscal year’s budget.

The measure calls for the borrowing to be repaid with interest over nine to 14 years, using a quarter-cent of existing sales tax. But even if that measure passes, the bonds cannot be sold unless voters also approve Proposition 58.

The companion measure would amend the California Constitution to require that the Legislature and governor enact a budget each year that balances revenues and spending -- at least on paper. The budget would have to include a rainy-day reserve, beginning in the fall of 2006. Over time, that reserve could grow to a maximum of 5% of the state general fund or $8 billion, whichever is greater.

Since early January, Schwarzenegger has been telling Californians that passage of both measures is crucial to the state’s economic recovery. He says the ballot measures would help the state put its financial house in order by outlawing borrowing for deficit purposes.

At campaign stops, Schwarzenegger likes to say that the state would “never again” be allowed to borrow money to pay its operating expenses.

But the language of Proposition 58 is not airtight. It would not prevent other types of borrowing, such as Schwarzenegger’s own plan to sell $950 million in pension obligation bonds to pay the state’s contribution to employee pension funds during the next fiscal year.

Proposition 58 would allow, but not require, the governor to declare a fiscal emergency if spending ran substantially above projections or revenues came in substantially below estimates.

In the event of a fiscal emergency, the governor would have to call the Legislature into special session and propose a plan to get spending and revenues back into balance. Lawmakers would have 45 days to approve the governor’s plan or adopt their own bill to balance the budget. If they failed to act, they would be barred from passing any other legislation and could not recess.

Schwarzenegger has warned that failure to pass the deficit bonds and balanced-budget measure could lead to higher taxes and what he calls “Armageddon” cuts in state education, health and public safety. Without the deficit financing, the governor has said, the state could run out of cash and be unable to pay off short-term debt when it comes due in June.

Concerned about the potential consequences, a broad bipartisan coalition of Republican and Democratic officeholders has lined up behind both measures. So have interest groups as diverse as the Howard Jarvis Taxpayers Assn. and the state AFL-CIO.

The Republican governor, state Controller Steve Westly and U.S. Sen. Dianne Feinstein, both Democrats, appear in TV commercials pushing for a “yes” vote. Schwarzenegger plans to raise at least $8.5 million to sell the measures to voters. There is no organized campaign against the propositions.

But state Treasurer Phil Angelides, a liberal Democrat, and state Sen. Tom McClintock of Thousand Oaks, a conservative Republican, have been telling their respective followers to vote down the measures.

Angelides said selling $15 billion in deficit bonds would make future generations pay for yesterday’s spending. He said the borrowing probably would cost taxpayers $4.1 billion in interest and increase the state’s outstanding general obligation bond debt by 46%.

The treasurer said the governor’s approach runs counter to “the time-honored belief that says that debt should be incurred for investment, not consumption.”

Instead, Angelides wants to raise income taxes on the wealthiest Californians for three years and use short-term borrowing backed by a quarter-cent of existing sales tax for the same period to pay off the accumulated deficit.

McClintock takes a different tack, saying the state should slash spending by 13.4% across the board rather than borrow to pay off the deficit. He is particularly concerned about changing the state Constitution to allow general obligation bonds -- normally reserved for construction of schools, parks, roads and government buildings -- to be used for one-time operating expenses.

“This doesn’t buy a single school, road or park. It doesn’t put a single cop on the street or relieve any traffic congestion,” McClintock and Sen. Bill Morrow (R-Oceanside) said in the official ballot pamphlet.

“It simply papers over the gigantic deficit that Sacramento’s politicians created in the first place.”