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Words are powerful - Thoughts shape - Ideas have consequences

David Stirling

Pacific Legal Foundation
Posted February 23, 2004

California in Need of a Miracle
To Stop the Bleeding

Governor Swarzenegger’s first State of the State speech allows for a few general conclusions: that California’s historic budget crisis is now complicated enough to warrant Rube Goldberg’s admiration; that California’s political machinations have become so bizarre that in book-form they would be considered fiction; that the bond-and-spending-cap-deal reached between the new governor and the liberal-Democrat controlled legislature in December marks only the beginning of a long, Byzantine journey; and finally, that salvaging the fiscal integrity of the Golden State will take a miracle.
The state constitution requires only that the governor propose a balanced budget; it does not require that the legislature enact, or that the governor or legislature operate within, a balanced budget. Because of this, the four year period, 1999-2002, saw the liberal-controlled legislature, with then-Governor Davis’ acquiescence, spend at a rate 10 percent greater than incoming revenues. Stated in monetary terms, after exhausting the $12 billion surplus in the state treasury when 1999 began, they continued spending above revenues until they had accumulated a debt of $38 billion by the end of 2002.

Annual deficits during that period were covered through short-term loans, repayable under the next year’s budget. Finally, last summer, Davis and the majority leadership decided that an infusion of new revenue was necessary to cover their overspending. When Republican legislators unanimously refused to go along with tax increases, Governor Davis and the majority members did two things: first, Davis unilaterally triggered a tripling of the car tax (annually, $4 billion in revenue), and second, the legislature enacted a $10.7 billion long-term deficit-reduction bond measure.

California’s Constitution, going back to the original document of 1849, prohibits the legislature from – "in any manner" – creating a state debt exceeding $300,000 without a two-thirds vote of each house, and approval by a majority of voters at a statewide general or primary election (Article XVI, section 1.) Either because they feared the "deficit-reduction" bond measure would highlight their reckless overspending, or because it might not garner voter approval, the liberal majority and Davis, despite warnings, refused to submit the bond measure to the voters.

In September, 2003, Pacific Legal Foundation filed suit, challenging the bond measure for violating the state constitution’s call for voter approval. This pending challenge received substantial media coverage during the recall campaign, with most legal analysts predicting its success. Immediately following the election, and several times during the transition period, Governor-elect Swarzenegger said he wanted to go forward with the bonds in the right way – submitting them to the statewide electorate.

Shortly after taking office on November 17th, the governor called the legislature into special session and announced his plan to keep California afloat in the short term. His plan consisted primarily of (1) a $15 billion, 30-year bond measure to go before the voters for approval at the March 2, 2004, Primary election, and (2) a constitutional cap on future state spending. Given the new governor’s election mandate to control excessive legislative spending, and because any kind of spending limit causes heartburn among spendthrift Legislative leaders, the spending cap immediately became the centerpiece of the special session negotiations.

The governor’s opening demand was a general fund base-year spending lid for next year’s budget of $72 billion (which would require a $14 billion spending reduction from current year spending), and unilateral authority to cut further if a mid-year deficit emerged. The majority leadership would accept nothing less than an $83 billion spending-cap. (For reference, Governor Pete Wilson’s last (‘98-‘99) general fund budget spent $57 billion.) Knowing the new governor desperately wanted his bond measure on the March, ‘04 ballot – and required a two-thirds legislative vote to put it there, legislative Democrats played hardball. They rejected the governor’s proposed spending cap, and went home. Within two hours, Moody’s dropped California’s bond rating to near the bottom of its investment grades – at the same level as the District of Columbia and Lithuania. The Secretary of State added pressure by repeatedly warning that state law would forbid accepting measures for the March 2nd after December 5th.

Everyone understood this deadline was somewhat flexible, but the governor knew that insisting on his $72-billion base-year spending cap could keep his bond proposal from making the March 2nd ballot. Staring at his diminishing choices, the governor compromised. By the end of the following week, both houses had voted to place a $15-billion, nine-year pay-off bond measure on the March ballot (Proposition 57.) In return, the governor agreed to the legislature’s watered-down spending cap, requiring only that future annual spending not exceed annual revenues, and including a rainy-day fund for unexpected emergencies (Proposition 58.) Sacramento Bee political commentator, Daniel Weintraub observed that "all three elements ( of the deficit-fix compromise) are flawed, perhaps fatally so." The spending cap, he pointed out, contains "a loophole large enough to let future legislators and governors drive a California-sized mortgage through."

Convincing voters to approve the historic measure will be no slam dunk. Financial analysts at Bloomberg News characterize the measure as "the biggest-ever U.S. sale of a corporate or municipal bond." The State Treasurer, Phil Angelides, whose job it is to sell the bonds if voter approved, warns against using such a large bond to address the state’s accumulating debt, calling it "reckless" and a "huge mistake." Also, respected, nonpartisan Legislative Analyst, Elizabeth Hill, the legislature’s top budget adviser, cautioned that, with bonds, "future taxpayers will be paying for past spending." "Borrowing," she warned, "fails to address the underlying problem the state of California is facing." Hill urged the painful, but only true solution to that problem: "Bring current law expenditures and current revenues into line." Several Republican legislators have indicated their firm opposition to the use of bonds for the same reasons.

In addition, voters will be confronted March 2 – perhaps to the point of confused inaction – with two other significant measures. Proposition 55, the Kindergarten–University Public Education Facilities Bond Act of 2004, asks the voters to approve $12.3 billion in general obligation bonds. "General obligation" bonds are those where the annual principal and interest payments to bond holders come from the state’s general fund, the same fund from which the governor’s $15 billion bonds would be repaid. Even without considering the billions in outstanding "G.O." bonds that already are being repaid from the state’s general fund annually, payments on the Prop. 55 bonds, together with the governor’s $15 billion bonds, would make for an enormous and priority hit on the state’s general fund for the next several years.

Second, Proposition 56, the so-called Budget Accountability Act. This proposition would significantly modify one of Prop. 13's primary achievements, by reducing the number of legislative votes necessary to raise taxes, and pass the annual state budget, from a "super-majority" of 66 percent to 55 percent. Prop 56 is heavily supported by the same legislative big-spending Democrats responsible for the state’s current fiscal mess, and would allow them to raise taxes solely within their own caucus. With $60 billion of tax-increase proposals currently pending in the legislature, Prop 56's passage would wreak havoc on any economic recovery the governor hopes to generate.

With all the competing measures and messages, voter approval of the $15 billion bond measure is far from certain. Recognizing that possibility, the governor has asked the Attorney General to seek court approval of the earlier-enacted $10.7 billion bond measure that Governor Davis and the Legislature failed to submit to the voters. Pacific Legal Foundation has again challenged those bonds as unconstitutional. The California Supreme Court will have the final word on this issue.

If it rules these bonds invalid without a statewide vote, the earliest the legislature could put them on the ballot is the November, 2004 – far too late to rescue the state from the fiscal abyss. But if the Court somehow upholds the bonds, it will be the first time in history such indebtedness has been allowed without approval of the people who would bear the burden of paying it. Even worse, such a ruling would consign to the scrap-heap the invaluable safeguard the old ‘49er-constitution’s drafters wisely provided for the people – the opportunity, by vote, to protect themselves and their children from politicians lacking fiscal integrity and discipline.

Perhaps, California really will need a miracle.

Reprinted by permission by David Stirling

David Stirling is Vice-President of Pacific Legal Foundation, a Sacramento-based public interest legal organization that defends balanced environmentalism in the nation’s courts. David is former California Chief Duputy Attorney General, a former Superior Court Judge, a three term Member of the California State Assembly, and served as General Counsel of the Agricultural Labor Relations Board for six years under Governor George Deukmejian. (www.pacificlegal.org; e- mail: mds@pacificlegal.org)