State piling up debt to deal with deficit: Nonpartisan analyst calls the strategy ‘poor fiscal policy’

San Francisco Chronicle, May 6, 2003

Sacramento — California has traditionally borrowed billions of dollars, usually with voter approval, to pay for new schools, highways, prisons, water projects and other big-ticket items.

But as the state grapples with a $34.6 billion budget deficit, lawmakers and the governor are planning an unprecedented short-term and long-term borrowing binge to pay for basic government operations.

On Monday, Gov. Gray Davis signed a package of budget fixes that includes issuing bonds to cover the annual payment to pension funds for retired teachers and other state workers.

The state will repay $2.2 billion in bonds over five years, incurring interest payments of $485 million. Davis signed the legislation despite warnings from the nonpartisan legislative analyst, who said incurring years of debt to avoid an annual operating expense was “poor fiscal policy.”

California is also looking to advance itself $3.2 billion from future payments from a landmark tobacco settlement lawsuit by issuing bonds, and Assembly Republican leaders last week suggested issuing $10 billion in “deficit bonds” to spread out the state’s red ink over five years so taxes wouldn’t have to be raised.

But just as with consumers who borrow to make ends meet, critics warn, the state could end up paying higher interest rates and find itself unable to continue borrowing.

“I’ve seen a lot of commercials for credit counselors, where if you use one credit card to pay off another, you have a serious need for credit counseling, ” said Sen. Tom McClintock, R-Thousand Oaks, who has broken with others in his party and opposed rolling over any of the deficit. “That is exactly what the state government is now doing.”

The cost of repaying general obligation bonds is already a significant portion of the state’s $99 billion general fund at about $1.7 billion this year, according to the state treasurer.

When other borrowing is added in, the Legislative Analyst’s office said, the state is paying $2.6 billion this year in debt service. By fiscal year 2007-08, the cost to repay all debt will be nearly $5.6 billion, about what it now costs to run the entire community college system.

“The state is over-extended,” said Ted Gibson, former chief economist at the California Finance Department. “There is too much short-term debt, and the state cannot show a credible means of repaying.”

Certified financial planner Joyce Franklin said lawmakers might have a different perspective when it comes to managing debt than heads of households.

“There are many more emotions involved for individuals than for the state,” said Franklin, who has her own company in Larkspur. “They are dealing with other people’s money. Since they may not be making decisions that would personally affect them, they may have more of a short-term focus.”

So far, California’s debt is not unreasonable because it was previously quite low, said David Hitchcock, who rates California bonds for Standard & Poor’s.

“The debt is $948 per capita, which is in the moderate range,” he said, but that compares with a debt ratio of $634 in 1995. “If all the debt comes due at once, then there may be problems.”

In addition to long-term financing, the state will also be taking out $11 billion in short-term loans to tide itself over from this fiscal year to the one that begins July 1.

That is the largest amount ever borrowed by a state, but it still is just a short-term fix. Controller Steve Westly has said the state still may run out of cash this summer if a budget is not passed.

California regularly borrows money to pay for transportation, education and other construction projects. Next year, there is a $12.3 billion education bond on the March ballot and a $9 billion high-speed rail bond on the November ballot.

Treasurer Phil Angelides said so far the amount of borrowing the state had done was tolerable, but he warned that much more might cause credit problems.

“The more the state begins to do borrowing that is beyond the reasonable norm is the minute lenders start perking up and wonder why it is we are borrowing and whether they should back us up,” he said.

©2003 San Francisco Chronicle.