Climbing Out of the Hole

Wednesday, November 19, 2003

Page 7

IN MY OPINION (Column)

Climbing Out of the Hole

By JON COUPAL

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

As Arnold takes office this week and the celebratory atmosphere winds down, the stark realities of the California’s budget crisis will quickly take center stage. Any speculation that the new Governor didn’t know what he was getting into is probably unfounded. After all, he spent most of the campaign reminding Californians how badly the state has been managed.

But the scope of the problem is breathtaking. No adjective can adequately describe the size of the budgetary hole dug by Gray Davis & Co. Huge. Massive. Monstrous. By far and away the largest deficit by any state in the history of America.

Just prior to being sworn in, his Director of Finance painted the bleakest picture yet of California’s financial landscape—a landscape awash in red ink. According to Donna Arduin, our new Governor inherits a debt of $25 billion. If that is not bad enough, if spending were to continue at the current pace, that debt would grow $12-13 billion every year. Thus, if the Terminator were to maintain a “Gray Davis autopilot,” at the end of his term, we would have a $63 billion debt. Because total state spending from all sources is now at around $100 billion annually, it is easy to see that a debt load of well over half of total spending would make California the undisputed champion in the economic basket case category.

Are the new Governor’s numbers real? Remember, Gray Davis was a master at fudging the figures for political gain. But Ms. Arduin’s assessment is certainly defendable and is not that much different from the report of California’s respected Legislative Analyst, Elizabeth Hill.

Will the gravity of the crisis cause Schwarzenegger to break his no tax pledge? Not likely. First, he has all the indicia of a person who keeps his word. As promised, he rolled back the dreaded car tax, also known as the VLF. Second, he is fully aware of how much damage even a small tax increase would inflict on the fragile psychological balance that is the California economy. Many businesses poised to leave the state have put their moves on hold to see what happens in this new political environment. Even if a modest tax increase didn’t affect their businesses directly, such a move would send the horrible message of “business as usual” which is decidedly anti-taxpayer.

In Conan the Barbarian, Arnold wielded a very large sword. Hopefully, he is bringing it to Sacramento, because his remaining options are cut spending, cut spending and cut spending. The good news is that there are dozens of credible studies out there full of great ideas to eliminate unneeded programs and make those that are worthwhile more efficient. The bad news is this can’t happen overnight. Sure, we can cut as much as a few hundred million by going after the low-hanging fruit, like hiring freezes, but the real savings are going to come about only through long term structural reform.

That raises the issue of borrowing. But it is important to understand that when the new administration talks about debt, it is not new debt. The budget deal last year—crafted by Governor Davis and the Democrat controlled Legislature—contained well over $12 billion in new debt that was never approved by the voters. This illegal debt ($2 billion of which has already been stricken because of an HJTA lawsuit) might be put to the voters as early as this March.

If the new Governor asks for voter approval to restructure the existing debt, what should voters do?

After the recall, voters are still in a powerful position. They must use their clout to demand significant reforms in how Sacramento handles our finances.

First, they must require confirmation that the debt on which they are being asked to sign off is for no more than the existing obligations already committed to by the state. In other words, there must be a clear demarcation between the mistakes of the past and the responsible policies of the future.

Second, voters must make clear that if they say “yes” they are not extending a new line of credit to the incoming administration and lawmakers. Approval of a debt restructuring is a one time action. If this message is not understood, officials should be reminded of the successful recall of the governor who got California into this mess in the first place.

Third, debt reorganization should not even be considered unless a plan is in place to immediately reduce current expenditures so as not to exceed available revenues. In other words, stop the bleeding. If ongoing expenditures are not brought into line with existing revenues very quickly, don’t bet on any bond issue measure passing. Finally, voters must insist that debt approval be accompanied by commitment to a meaningful, ongoing spending limit combined with the establishment of a permanent and reasonable “rainy day” fund to help the state fund vital services without raising taxes during inevitable economic downturns.