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Sacramento Bee Columnist Daniel Weintraub

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November 11, 2003

The budget fix

Gov.-elect Arnold Schwarzenegger seems to be creeping closer toward a plan to restructure the state’s accumulated debt and borrow some more to ease the way to a balanced budget. As we reported here Oct. 9, such a bond -- possibly as large as $20 billion -- is the only plausible way for him to fulfill all of his campaign promises on the fiscal front, given the budget and political realities he confronts.The Times today reports that this approach is drawing protests from some Democrats while getting support, or at least acquiescence, from Republicans and anti-tax activists. Critics say it’s a cop-out, and are especially skeptical of the plan to cut the car tax and then put the first-year bill for that move on a credit card.

Count me among the skeptics. I see nothing wrong with Schwarzenegger's plan to restructure the Davis debt and present it to the voters to protect the state from a legal challenge now pending. I would argue that it is prudent to get voter approval, as the constitution requires, rather than risk a court ruling that would strike down the deficit bonds adopted last summer and send the state into yet another crisis. I could even imagine adding a few other elements of existing, internal borrowing to the new debt measure in order to wipe the slate clean. But I think it would be folly to cut taxes and cover the difference with borrowing.

Here is the problem, though. Schwarzenegger was just elected, convincingly, after a campaign during which he pledged to do pretty much this. He said over and over that he would cut the car tax. He said he would restructure the debt. And he said he would rein in state spending with a new constitutional spending limit that would prevent California from ever again getting itself into this kind of fix. I don’t think people who lost the election, or whose party lost the election, have the standing now to demand that the winner renege on his promises.

That doesn’t mean the Democrats have the obligation to support him. But soon we will see that it is in their interest to do so. If they don’t, the programs they value will be devastated. Because the alternative to new borrowing is not a tax increase, as the Democrats would prefer. It is deeper cuts. Having held out last summer against higher taxes and then seen their position vindicated in the recall, Republicans in the Legislature are not now going to reverse that position and support a tax increase. They might not have the nerve to cut their way to a balanced budget, but they would cut more than the Democrats would. And a fiscal train wreck that comes about because the Democrats blocked the new governor’s plan is not likely to leave the majority party in good standing with the voters.

As an aside, I think the critics at this point are wrong to assume that Schwarzenegger will not push for serious budget cuts, that he simply wants to borrow his way out of the problem. I expect him to put some very tough cuts on the table, perhaps as soon as his first or second day in office. In the end, the Democrats will be the ones pushing for more borrowing, as a way to close the gap with minimum pain. I would predict that the final bond issue will be at least a little bit larger than whatever Schwarzenegger proposes next week.

The key for me in evaluating all of this is to look at where the state is likely to end up after the first year. If, after restructuring the debt and adding some new borrowing to ease the transition and build Democratic support, Schwarzenegger can get a spending cap or reserve requirement adopted that plausibly prevents a relapse, and he shows a credible plan for a budget that is balanced not only in 2004-05 but in the years beyond that, I think that not only works, but it keeps faith with what the voters demanded on Oct. 7. If the spending cap includes a provision to dedicate some of the new revenue generated by economic growth to paying off the debt ahead of schedule, so much the better.

You’re going to hear a lot of screaming and yelling about a $20 billion deficit bond. But remember, at least $13 billion of that is already on the books. Probably $16 billion if you count all the other shifts and gimmicks in the current budget. About $4 billion of the total, if indeed the total is that large, would represent the distasteful element of financing the first year of the cut in the car tax.

Remember these elements:

Rescind the car tax increase.
Restructure the debt.
Protect education.
Adopt a “never again” spending cap.

That’s what Schwarzenegger promised. Let’s see if he delivers.