San Francisco Chronicle: Governor working legislative Dems to pay off debt

Jerry Brown must win Dems' support to pay off debt

Wyatt Buchanan, Chronicle Sacramento Bureau

San Francisco Chronicle January 22, 2012 04:00 AM

 

This article appeared on page A - 1 of the San Francisco Chronicle

 

Copyright San Francisco Chronicle. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

Gov. Jerry Brown is trying to eliminate California's "wall of debt," billions of dollars of borrowing through years of budget balancing gimmicks, but first he must gain the support of fellow Democrats.

Photo: Michael Macor

 

Sacramento --
Gov. Jerry Brown's plan to finally fix California's finances relies on several dubious assumptions, including that voters approve his proposal to raise taxes in November and that the revenue from those come in at the level the administration projects.

But even if those assumptions prove true, the governor faces perhaps an even greater challenge: winning support from his fellow Democrats to pay off billions in debt accumulated through years of budget balancing gimmicks.

Brown has put a big target on what he has deemed "the wall of debt," which amounts to $33.5 billion from skipped payments, internal loans and traditional borrowing used to balance the budget since 1985 with the bulk of that debt accumulated in the past decade, according to the Department of Finance.

The practices are the quintessential smoke-and-mirrors, kick-the-can-down-the-road tactics that have become staples of budgets and of public disdain in California. Under Brown's budget plan, the state would take aggressive action, paying all of that debt back by 2016.

Doing so would mean forgoing immediate restoration of funding for social services, public health and other programs that lawmakers have slashed since the economy tanked in 2008. In this next budget year, the governor proposes repaying almost $6.9 billion of the debt even as he proposes cutting almost $1 billion from the state's welfare program.

Democratic lawmakers, who hold large majorities in both houses of the Legislature, already are pushing back.

The budget 'cliff'

Assemblywoman Holly Mitchell, D-Los Angeles, is chairwoman of the Assembly budget subcommittee overseeing funding for health and human services and said she understands the need to pay off debt.

"But that same commitment (the governor) has to the wall of debt I have to not creating a cliff that poor women and children are going to fall off of," Mitchell said. "He has created a cliff in this budget."

At a Senate budget hearing last week, the first legislative hearing on the governor's budget proposal, several Democratic lawmakers questioned administration officials on the pace of paying back the debt in light of recent and proposed spending cuts.

"It seems to me that while paying down debt is extremely prudent, if we ... pay off debt rather than provide services we are exacerbating our unemployment rate," said state Sen. Noreen Evans, D-Santa Rosa.

At the hearing, Michael Cohen, chief deputy director of the Department of Finance, told lawmakers that eliminating the wall of debt creates stability in state finances, which will help the economy and employment.
The goal is to "get to a path where we're not having to propose and take drastic actions from one year to the next," Cohen said.

Accumulated debt

Brown first used the "wall of debt" term last year in describing the accumulated borrowing that allowed lawmakers and past governors to claim they had balanced the budget. The largest piece of the wall is $10.4 billion in deferred payments to K-12 schools and community colleges.

Deferred payments are those promised in one year but then paid in the next, even as schools are told to spend as if they actually had the money. The deferrals have continued year after year, and today schools are receiving about 20 percent less than they should, forcing districts to borrow, dip into reserves or spend even less.

California also still owes more than $6 billion from traditional borrowing used to balance the budget under former Gov. Arnold Schwarzenegger, along with other billions in internal borrowing and delayed payments to Medi-Cal, CalPERS and local governments for unpaid mandates, among other things.

The wall of debt does not include items such as unfunded future pension obligations, which are not borrowing used to balance the budget.

If the $33.5 billion is not paid off, lawmakers will have between $8 billion and $10 billion a year for the next four years to spend on other expenses, provided voters approve the governor's tax plan, according to the Department of Finance.

Windfall spending

When state revenues jump, as they would with both the new taxes and projected growth in the economy, the nature of the Legislature is to spend, said Mike Genest, who was director of the Department of Finance under Schwarzenegger. Soon after he took the job in 2005, revenues unexpectedly jumped $10 billion, which he called the "worst thing." The Legislature and governor agreed to spend it instead of paying off debt.

"If you're really strapped ... and you get a windfall like that, what's human nature?" he said.

Fluctuating revenues

State financial officials say tax revenues, which rely heavily on capital gains income, have increasingly become unstable and can fluctuate widely year to year. Such uncertainty can make it difficult to project revenues, as was made apparent recently: The administration's revenue projections were rosier - $5 billion higher - than those of the Legislative Analyst's Office, which reviewed the governor's proposed spending plan.

Genest said Brown will have a big challenge on his hands trying to persuade lawmakers to stick to his debt repayment plan in the budget.

"I think he's mature enough and wise enough to lay out the right general direction," Genest said. "But is he strong enough to get the Legislature to go along with it? That's the question."

Republicans in the Legislature said they do not expect their Democratic counterparts to use extra money to pay off accumulated debt. The only way that would happen is if the new money came with a required spending limit, they said.

Senate Republican Leader Bob Huff of Diamond Bar (Los Angeles County) said he thinks Democrats would agree to pay off a small amount of the debt, "but absent a cap in spending, this government will spend it all and then go back to the people once more and ask for more revenue."

Holding the line on spending until the debt is paid off is wise - and will ultimately free more money for services, said Fred Silva, senior fiscal policy adviser for California Forward, a government reform organization.

Silva was a senior fiscal adviser in the Senate for almost two decades and said not paying off the debt "simply means you pushed that obligation out another year and you won't get to use that money. At some point, you have to get rid of that overhang or you'll have to continue to cut."

'Finding the balance'

Still, making cuts like those proposed to the state's welfare program, which would reduce the amount of time most people receive aid from four years to two years, along with the proposed elimination of 71,000 subsidies for child care, would have a negative economic impact, said Jean Ross, executive director of the California Budget Project. The nonpartisan group advocates for low-income Californians.

"It really is about finding the balance," Ross said. "Yes, in the long term we need to address the debt, but in the short term we need to make sure the recovery moves forward and that families can make ends meet."