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Sacramento Bee Columnist Daniel Weintraub

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October 09, 2003

Schwarzenology

Trying to divine Gov.-elect Schwarzenegger’s likely moves on fiscal policy is a little bit like the old practice of Kremlinology, where analysts had to parse vague statements, watch personnel shifts and consider history to figure out what might happen next. One of the major stories of the campaign was that Schwarzenegger was being vague about his ideas on the budget. I said so many times myself. But now that he has been elected governor and I am trying to assess where he is going from here, I find myself coming back to his many statements during the campaign that gave us broad hints about the direction he intended to take. It turns out that he was more specific than we sometimes gave him credit for, if only you had time to use a careful ear and a bit of imagination. Stitched together and filled in by informed speculation, his fragmentary statements can be used to make some educated guesses about the near future. Would I prefer a candidate, or a governor-elect, who speaks more clearly, directly and specifically about his plans? Absolutely. But this is what we’ve got at the moment, so let’s make the best of it.

I’ve already written at some length about his hopes for federal money, which he mentioned several times during the campaign, even if it was largely ignored by the political press corps. I also think he has a decent chance of cutting a deal with the gaming tribes to contribute something to the state’s general fund.

Now I want to address something else he said over and over during the race: restructuring the state’s debt. What might that mean?

The current state budget rests upon billions of dollars in borrowing, shifts, accounting gimmicks and the like. The famous “audit” that Schwarzenegger mentioned repeatedly during the campaign is probably going to amount to a definitive statement of all of those smoke-and-mirror tactics and what they mean for the state’s fiscal condition. I don’t take literally Schwarzenegger’s comment that this audit will uncover the waste in government. That’s a project that will take months or years to complete. But unlike skeptics who laugh off the audit as a meaningless delaying tactic, I think it would be useful to have in one place at one time a comprehensive analysis of all the shifts and diversions in the budget -- legal and illegal -- to give us a complete sense of the state’s fiscal condition. The Legislative Analyst has done some of this kind of work, but I have seen nothing yet that lays out the entire picture in context.

Next, consider the two major pieces of the budget plan that are most at risk. A scheme to borrow money to pay the state’s obligation to its employee pension fund has already been struck down by a court on grounds that it violates a constitutional provision against borrowing more than $300,000 without a vote of the people. Another, much larger deficit bond is vulnerable to the same kind of legal attack and might yet fall as well. Together the two measures total $13 billion. If they are both struck down, the state will be essentially insolvent, with no ability to borrow to get the money it needs to pay its bills.

Suppose Gov. Schwarzenegger gets an audit which makes this clear and also lays out the looming $8 billion gap between projected spending and revenues in the fiscal year that begins July 1. Now let’s remember several other things he said during the campaign:

The accumulated deficit might be as large as “$20 billion.”
He wants to “restructure the debt.”
He wants to start over fiscally with “a clean slate.”
He wants to adopt a spending cap.
He wants to prohibit future deficit spending.

That’s actually quite a bit of specificity for a guy who supposedly never told us where he was headed. What he didn’t do was tie it all together for us. Now I will try to do that.

What if he does the audit, concludes that we have a $20 billion problem, says Davis tried to circumvent the will of the people by bonding without a vote, and asks the Legislature to put the following on the March ballot:

--A $20 billion bond to finance the accumulated debt and help cover the gap emerging in next year’s budget. (“Restructure the debt.”)
--A constitutional amendment to clearly prohibit future deficit spending without a vote of the people.
--A spending cap or reserve requirement to prevent this from happening again.

He could sell this plan as the only way to avoid big tax increases or devastating spending cuts, the only politically palatable way to get the state out of the fix left for him by his predecessor. It would find favor with Republican legislators who oppose tax increases (and were the first to propose the deficit bond this year) and Democrats who don’t want to vote for spending cuts. It would give the state time to grow out of its problem. And while it could be criticized as more deficit spending, if it were coupled with a spending cap and a clear ban on future borrowing without a vote of the people it could be described as short-term relief combined with long-term reform. It would probably get the support of every major interest group in the state, from labor to business to the anti-tax crowd that started the recall.

And it would be entirely consistent with everything Schwarzenegger said as a candidate.

One last thing: what got Davis in trouble was his lack of boldness, his refusal to attack problems before they became crises. The looming legal challenge to the deficit bonds is one more such disaster-in-waiting. A timid governor would wait and see if the courts strike it down, then be forced to react in a panic to pick up the pieces. A bold, forward-thinking governor would say, what can we do to avoid that kind of situation? The answer: go to the people proactively for the authority that only they can provide, settle the lawsuit, wipe the slate clean and then balance the operating budget going forward.