A Big Win for Taxpayers

Wednesday, October 29, 2003

Page 7

IN MY OPINION (Column)

A Big Win for Taxpayers

By JON COUPAL

(The writer is an attorney, president of the Howard Jarvis Taxpayers Association, and a member of Gov.-elect Arnold Schwarzenegger’s transition team.)

What does state deficit financing and a magic trick dating back to antiquity have in common?

The venerable trick requires intense scrutiny by the observer to follow the progress of a pea as the performer moves it back and forth between three walnut shells, while state financing requires equally intense attention to follow the money as it is moved, borrowed and securitized (the practice of selling anticipated revenue for cash now). Both the trick and state officials’ approach to funding the budget are known as shell games.

The California Constitution has a longstanding provision which enforces a balanced budget. It does this by unambiguously prohibiting state debt beyond $300,000 without voter approval. That is why Californians are used to voting for statewide school bonds, park bonds and water bonds. Most past administrations have made a good-faith effort to conform to the spirit, if not the letter, of the law.

However, as the full impact of the reckless spending by Gov. Davis and his legislative allies began to take shape as a $38 billion deficit for this fiscal year, the administration decided to deal with the problem through sleight-of-hand.

The problem, of course, is that it’s a lot easier to hide a pea than it is a mountain. But give them credit for trying. Among the techniques they chose was to borrow to fund existing spending obligations.

In order to relieve itself of nearly $2 billion in pension obligations, the state of California filed a lawsuit against all taxpayers of the state, seeking validation from the court for a $2 billion bond issuance that was never submitted to the voters for approval. Actually, the “plaintiff” was a state agency, recently created by the Legislature for the sole purpose of issuing bonds, called the Pension Obligation Bond Committee.

The state published notice of its lawsuit in five California newspapers while officials crossed their fingers hoping no one would notice. Too bad for them that one group was watching. Thus, the Howard Jarvis Taxpayers Association appeared in court on behalf of the state’s taxpayers.

Needless to say, state officials were disappointed to find taxpayers standing in the way of their “budget-balancing” strategy. The state wanted to borrow money at up to 15 percent interest by issuing bonds to make this year’s annual payment to the California Public Employees’ Retirement System (CalPERS) for state employee retirement benefits. That would free up money from the special fund that is earmarked for CalPERS, allowing the state to spend it on other things.

In court, the state argued that the Constitution should be construed to allow an exception for “obligations imposed by law,” that its obligation to CalPERS is imposed by law, and that financing that obligation through bonds is just substituting one debt for another.

Howard Jarvis Taxpayers Association attorneys argued that the Constitution is clear and cannot be read to allow the exception urged by the state, and, even if it could, the state was not simply substituting one debt for another. Testimony at trial proved that the state planned to use bond revenue not just to pay pension obligations, but to pay approximately $80 million in bank and lawyer costs. Moreover, the state was taking on a debt of hundreds of millions in future interest payments.

At the conclusion of the trial, Judge Thomas Cecil of the Sacramento County Superior Court ruled in favor of the taxpayers.

This victory is significant beyond the several billion dollars immediately at stake. It sets a precedent for a second suit just filed by the Pacific Legal Foundation on behalf of the Fullerton Association of Concerned Taxpayers to head off another scheme to borrow nearly $10 billion without voter approval. But most importantly, it sends a message to Sacramento that the proper way to balance the budget is by living within the state’s means, not shifting today’s expenses onto the backs of tomorrow’s taxpayers.

And in case anyone forgets, tomorrow’s taxpayers are today’s children. So when the tax-and-spend lobby complains about taxpayers unraveling their carefully crafted budget deal, we have a ready answer: It’s for the children.