by John M. Curtis
(310) 204-8700

Copyright May 7, 2003
All Rights Reserved.

crambling to pay the bills, California finds itself borrowing from Peter to pay Paul, creating a new financing agency designed raise interest taxes and float new bonds for a paltry $8.2 billion. California faces a $35 million budget deficit, causing panic among legislators forced to dramatically scale back state services. By creating a new office, Sacramento hopes to circumvent Proposition 98 that forces the state to allocate a portion of general fund revenue to education. Borrowing to pay off debts threatens to bankrupt the state, should golden state lose its current credit rating and ability to borrow more money. Proposing an automatic half-point jump in state sales tax risks sending an otherwise anemic economy into recession, further eroding government receipts. Just as supply-siders at the White House want more tax cuts to stimulate the economy, California plans whopping tax increases.

     Without massive spending cuts, California faces almost certain downgrading by Wall Street credit agencies. Raising taxes and floating bonds can only last so long before the money runs out. With a sluggish economy , tax revenues are expected to shrink, forcing the state either to slash spending or face almost certain liquidation by Wall Street. California Gov. Gray Davis has no plan other than cutting services and raising taxes. Creating a new bureaucracy only postpones the day of reckoning, brought about by years of extravagance during Wall Street's feeding frenzy when capital gains revenue temporarily soared. Faced now with paying the piper, more smoke and mirrors won't solve California's current crisis. "Without a timely solution, the state's credibility will suffer, and it will be very difficult to find anyone willing to make loans of size to the state," warned a letter from Lehman Bros.

     Growing concerns about the state's ability to make good on its obligations raises the specter of possible bankruptcy. Davis likes to blame the state's energy crisis for the current financial mess. Looking to balance the state's books on expected refunds from the Federal Energy Regulatory Commission won't get it done. FERC already signaled that it sees only a few billion coming back in refunds—not the $9 billion claimed by Davis. While fleeced by out-of-state power brokers, FERC views most of the problem caused by California's flawed 1996 deregulation law, not, as Davis insists, criminal activity. Lehman Bros. warned that a "worst case scenario would find the state out cash and out of cost-effective options within 12 months or sooner," suggesting that today's quick fix might not solve the crisis. Getting downgraded to junk, California could no longer borrow money at reasonable rates or float bonds.

     Today's fiscal crisis comes from years of runaway spending, leaving a bloated state bureaucracy top heavy with excessive salaries going to legislators, lobbyists and countless corporations closely tied to state government . The cost of government programs pale in comparison to the mammoth government bureaucracy, including the full-time California Senate and Assembly. Cutting one day per week—every other week or even one day a month—out of full-time elected officials or state bureaucrats would solve the current budget crisis in a heartbeat. Republicans like to blame Democrats, but both parties equally bleed state coffers. Many states—including Texas—have legislatures that go into session every other year. Surely the state can find ways to cut out fat without sacrificing vital programs for needy taxpayers. Elected officials must find more ways of balancing the budget than raising taxes and floating bonds.

     Creating a new Bond Authority only makes sense if the governor and legislature have the courage to cut spending across-the-board. Tax hikes and bond sales are shortsighted solutions to a long-term problem. Today's fiscal crisis painfully illustrates that the state simply spends more than it takes in. No one can live beyond his means without eventually paying the piper. Credit counselors warn about the risks of living on plastic. Why should the state be any different? All employees on the state's payroll—including elected officials—must bite the bullet and slash budgets. Simply shuffling paper or shifting desks won't deal with the basic reality that the state spends too much money. Even when the bull market generated hefty windfalls, the state should have looked ahead to the next rainy day. Now that bills have come due, it's time to stop passing the buck and do whatever it takes to balance the books.

     Like any business, Wall Street wants some reassurance that the state accepts full responsibility for the current financial mess. New gimmicks won't work without facing the reality that the state simply spends more than it makes. Creating new agencies and borrowing more money doesn't deal with the fundamental problem facing the state. "The markets and credit community are looking for the state to adopt a package of sound measures with this budget that will provide a final 'fix' to the state's structural deficit, and not continue to push the problems off into future years," said the letter from UBS/Paine Webber, begging the governor and legislature to face reality. There's nothing wrong with creative solutions, but Wall Street must see more than smoke. It's up to the governor and legislature to get the message, stop playing games and do whatever it takes to preserve California's credit worthiness. Anything less, won't do.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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