Californians who want to breathe a sigh of relief in thinking
that the state’s financial worries are over may have to hold
their breath.
Though the state Legislature passed a budget last week ““ a
month after the fiscal deadline ““ economic analysts warn that
the loosely bundled collection of borrowing, financial assumptions
and tax hikes will only prolong the state’s troubles ““
and perhaps exacerbate them.
The compromise budget left neither Republicans nor Democrats
fully satisfied. The two sides were deadlocked over how to close a
staggering $38.2 billion deficit, with Democrats pushing for
increased taxes and Republicans for deeper expenditure cuts.
Resolution on the budget was only reached after a record 29-and
a-half-hour session during which Assembly Speaker Herb Wesson,
D-Los Angeles/Culver City, locked the Assembly members into the
building. The budget was finally passed around 3 p.m., July 29 by a
vote of 56-22, two more votes than the required two-thirds
majority.
Though having a budget in place will pump some lifeblood back
into flatlining state programs such as day care centers and
community colleges, it could also bleed the state’s financial
future, according to economic experts at UCLA.
“The big thing is that our revenue problem isn’t for
one year. It’s a permanent issue,” said Christopher
Thornberg, a senior economist for the Anderson Forecast.
One feature of the budget that could make revenue problems a
recurring theme in the state is the budget’s heavy reliance
on borrowing. Starting in the new fiscal year, the state will float
$10.7 billion in deficit bonds and $1.5 billion in tobacco bonds on
Wall Street.
However, the fiscal soundness of these two bonds is anything but
assured, said UCLA professor of management Dan Mitchell. Wall
Street investors may not be willing to invest in them given the
state’s dismal credit rating, which credit-rating firm
Standard and Poor’s downgraded to two ratings above junk
bonds.
In addition, it is unclear how the state will back up its bonds.
The state settled a multi-billion-dollar lawsuit with tobacco
companies in 1998, but those companies may not be able to make
payments next year, Mitchell said.
Meanwhile, the $10.7 billion deficit bond is being funded by
borrowing money from local governments, which will be repaid
through a complex series of financial transactions and taxes.
“(The budget) is not what one could describe as fiscally
responsible simply because of the large amount of deficit financing
involved,” Mitchell said.
The $10.7 billion deficit bond has also come under fire from
some legal organizations, which have threatened to sue the state
over what they perceive to be an illegal borrowing procedure.
According to the California Constitution, the government can
only borrow money for “a single object or work,” such
as building a park or fire department, and not to fund its own
operations, said Harold Johnson, an attorney for the Pacific Legal
Foundation.
Johnson added it was “highly likely” that the
Pacific Legal Foundation would sue the state and said a lawsuit
would come “sooner rather than later.”
Any lawsuit involving the deficit bonds could greatly hamper the
state’s plans, as it would scare off potential investors even
if the lawsuit is thrown out, Mitchell said.
If the PLF wins the lawsuit ““ a very real possibility,
some experts warn ““ the government would have to refund all
the borrowed money, which would punch a giant hole through the
state’s funds.
“(The PLF) has won some major decisions in the past, and
they have some pretty good resources on their side,” said Tom
Lieser, a director with the Anderson Forecast.
Some analysts have also been critical of the Legislature’s
decision to roll a structural deficit into next year rather than
making the necessary expenditure cuts and tax increases to close
the budget shortfall.
“(The Legislature) is mortgaging the future to avoid
answering tough questions,” Thornberg said.
Mitchell predicted that having a structural deficit of at least
$7.9 billion next year could result in not just a similar fiscal
situation, but also a similar political situation.
“By putting it off for a year, we may well see the same
sort of paralysis we saw in the Legislature this year,” he
said.
With reports from Robert Salonga, Bruin Senior
Staff.