Bonds. Arnold’s Bonds.

Atrios and Yglesias are piling on Gov. Ahnold’s fiscal plan. From TAPPED:

The only sentence from this article you really need to read is, “Well, not solved it, exactly” — because when you “solve” a fiscal mess by taking on additional debt, you’ve solved exactly nothing. Obviously, one way to resolve a mismatch between revenues and expenditures is to borrow the money to make up the gap, but next year the gap just comes back with an additional bill for the interest. Repeat this process long enough, however, and people aren’t going to lend you any more money, and then you’re still faced with the choice between raising taxes and cutting spending.

From Eschaton:

So, the Gropenfuhrer [AL note: I’d really like to use this opportunity to publicly bitch-slap Steve “$300K” Lopez for this contemptuous construct, as well as his overall mediocre coverage of pretty much everything in local and CA politics. Dear Jon Carroll; I can think of three bloggers who could do a better job for a whole lot less money. Email me at the address above if you’d like some suggestions.] is claiming that borrowing by issuing a 15 billion dollar bond is somehow different than other kinds of borrowing. I’m sure the media will do its job and explain this to the moron-Americans of California (hah).

But, there is an ad campaign which will hopefully do what the news media won’t. You can watch it at this website. Treasurer Angelides is sponsoring it.

ANGELIDES: Well, here’s what I’m saying. What he told the voters is that he was going to balance the budget, protect education, health care for kids, and he was going to balance the budget while doing it. And all I’m saying, Judy, is he ought to try to do that first.

And merely borrowing more and more money and putting the state further and further into debt, and sending the bill to our children, is not what he promised and not the right thing to do. So come January 10, he’s required to have a balanced budget plan. We ought to see it. Btu he ought not be asking to borrow $15 billion plus without a plan on how to balance the budget. He doesn’t have one.

Damn, this pisses me off.

Personally, I don’t yet know if Ahnold will be a good governor or not; I do continue to think, from my conversations with friends in Sacramento, that the shock of his election was a good thing.

But this attack is pure and simple B.S.

Let’s go through it quickly, from three perspectives.

First, I really do wish that someone with business experience would talk about why borrowing by a troubled entity – whether a household, company, or state – can sometimes be necessary. Since that apparently hasn’t happened, I’ll nominate myself.

A big part of my business is dealing with troubled projects; some of them are actual companies, and some are troubled real-estate deals.

The first thing you do is to assure sufficient liquidity to see through the time necessary to come up with an orderly plan.

A company has bills due, and needs to keep operations going while you figure out how to fix it or close it in an orderly fashion (thereby retaining as much value for the creditors and stakeholders as possible). To do that, one of the first things you do to a cash flow projection, and to sit down with the banks to figure out where the cash will come from.

It is often at this point that you wind up filing Chapter 11, because only in a post-11 environment will new loans be forthcoming (they get priority over the old loans).

Similarly, California’s budget isn’t going to be changed in 45 days. And to bust Ahnold for not having a new, balanced, and politically palatable budget in 60 or even 120 days is unrealistic. The test is whether the budget process is moving closer to reality, and we won’t know that for at least a year.

Meanwhile, we have bills to pay, and the reality is that we’re going to have to go to the bank to get the cash to do so. I’m not even sure this is the last bond issue that we’ll require for this purpose (note that tax revenues are improving, but it remains touch-and-go).

Second, in the specific context of the California budget; Davis and the Legislature sold about $10B in general-revenue bonds as a way of shuffling off the spending crisis. Those bonds are being challenged in court, and it is not unlikely that they will be found to have been illegally issued. This bond issue will cover (I believe) those bonds (retroactively legalizing them by getting authority from the voters) plus the additional car-tax-cut deficit, plus a little something in the kitty as noted above.

Finally, Atrios neglects to note (he’s not from here, so it may just be lack of knowledge) that Phil Angelides is the leading D candidate for Governor in the next cycle, and that he’s overtly begun the campaign with this attack.

I thought that he would have been a good candidate to run in Part 2 of the recall (along with Leon Panetta), and probably would have voted for him. A disclaimer – I knew him pretty well when I worked in Sacramento a long time ago, didn’t think much of him then, but thought he’d grown substantially in his role as Treasurer. The posturing he’s doing now may cause me to rethink my support. He blessed the bond issue Davis & Co. did (although he was critical), and his fiscal solution relies, unsurprisingly, on raising the taxes on well-off Californians.

I’ve discussed earlier why that isn’t necessarily a good idea.

11 thoughts on “Bonds. Arnold’s Bonds.”

  1. Your generosity towards Schwarzenegger is touching (and echoes similar toleration of GW Bush).

    Nothing in the state finances are any worse than they were during the recall campaign, except for the exacerbation of the deficit caused by the car tax “repeal”. (Actually, this was cancellation of a contingent reduction in the long-standing rate predicated on the state financial condition.)

    Arnold doesn’t seem to have bothered to read up on the crisis, since [LINK] one of his first proposed cuts is to programs to insure poor and sick children that he criticized Gray Davis for not supporting enough!

    Now Arnold is out there blaming the Democrats and insisting on a spending cap. But nobody is stopping him from presenting his own balanced budget RIGHT NOW, except for the realization that the cuts (five times as large at least as those to date) are politically dangerous. Hell, his proposed cuts haven’t even balanced out the car tax rebate. Not only that, he’s had to cut programs with Federal matching funds, so the budgetary losses to state agencies are almost twice as large as the deficit reduction.

    Treasurer Angelides is rightly worried that whatever “liquidity” improvements we’ll see from the bond issue will swamped by the increased difficulties of (1) lowering the state’s already poor credit rating and (2) the low credit rating means the state has to pay high interest, which in turn means that the cuts necessary in the very near future—that is, next year, since California is a pay-as-you-go state—will be even more painful.

    Californians are going to have to choose between higher taxes, drastically reduced services, or (most likely) a compromise of some of both. Arnold suggested, risibly, that his auditor was magically going to reverse this. Feh! When the bonds come up for referendum, I’m voting NO! Let’s get his specific financial solution on the table first, and then, if it needs a little more liquidity, we can consider short-term borrowing. Until then, I say Arnold has borrowed his economics from Popeye’s friend Wimpy, big muscles or no.

  2. Andrew, you’re smarter than this. Budgeting is a process, not an act. The reality is that painful choices in cuts – and ‘revenue enhancements’ – will have to be made, and it takes time to build the consensus to do those things.

    The Gov. was relatively smart not to get boxed into a ‘show us your specific budget’ dialog, which would have been suicide for any budget consensus; what should be (and to some extent is, I’m told) happening is an effort to reach agreement around principles which can be used to make budget decisions.

    Voting ‘no’ on the bonds is the same kind of grandstanding that Burton did by moving to revoke the weak Worker’s Comp reforms that were passes last session.

    I think more of you than that.


  3. A.L.
    Good replies. Unfortunately, Arnold will never get a fair shake from the Left (excluding yourself). Assuming two-three years from now CA’s budget crisis is over/ end in sight, and the Left will ignore that and concentrate on the scandal du jour.

  4. “Obviously, one way to resolve a mismatch between revenues and expenditures is to borrow the money to make up the gap, but next year the gap just comes back with an additional bill for the interest.”

    Gosh I wish Matthew would apply this standard to Social Security ‘surpluses’.

  5. I thought Burton was right. Arnold did a lot of electoral grandstanding about how bad the workers’ comp reform was, and Burton called his bluff threatening to repeal it.

    Why don’t I think Arnold is aiming at a “consensus”? I think he’s working out a way for the Democrats to be left holding most of the bag! (Maybe, the Dems having gotten us into the mess, that’s understandable, but it certainly isn’t the program he ran on.) He’s presenting the Legislature with a demand for bonds and a generic spending cap, and he hasn’t offered (at least in public) the slightest details of how to bring the budget into balance. And as best as I can tell, he hasn’t been able to keep the GOP members behind him, so they’ll have something to run on next election while the Dems bit the bullet.

    The Gov. was relatively smart not to get boxed into a ‘show us your specific budget’ dialog, which would have been suicide for any budget consensus

    As I see it, with his mystery program, Arnold is merely inviting the Democrats to commit suicide first, after which he won’t have to worry. I don’t think either the Leg or the people by referendum should sign on to a plan we don’t even know. The problem, I dare say, is that there is no consensus how to fix the budget, and there is no consensus how much if at all should come from the tax increases Arnold promised we wouldn’t have. (You don’t think he’s maneuvering to make sure it’s the Democrats who have to bring that up, do you?)

  6. Andrew,
    you don’t want Democrats to “commit suicide first”, which is understandable. But then you want Arnold to do exactly what you think is unfair for Democrats to do. If he presents a complete balanced budget without going through the negotiating process, I see four things: 1) it’ll have cuts in areas that are politically unpopular, 2) most of those cuts won’t make it to the actual budget, because the actual budget will look completely different from Arnold’s, 3) the Democrats in 2006 can run on “Arnold wanted to cut X/Y/Z but we Dems stopped him from doing it”, and 4) it might have tax increases that would turn off fiscal conservatives because then it’d be undeniable that it was Arnold who “proposed” them. In any negotiation process, no one presents what they actually would be happy with in their first offer, so I don’t think you should expect Arnold to do that.

  7. Well, in reality, all this “show me your budget” stuff is pretty moot. Around January 10, the Gov *must* present a balanced budget to the legislature, albeit for the following fiscal year.

    What boggles my mind, is a tax cut followed by a request for a bail-out. Why don’t we stop subsidizing motorists by putting the motor vehicle license fee back at the 2% of value rate (which it is supposed to be at during times of fiscal crisis and will cost local governments approximately $4 billion) and ask for an $11 billion deficit bond (instead a $15 billion one)? Think about it: if your neighbor voluntarily quit working for two months and then came over with hat in hand, would you give him money to get by?

    Anyone remember Davis’ comment to the Legislature that it was their job “to implement [his] vision,” and how he was derided for it by all sides? Well, that’s what Arnold is saying to the Legislature by constantly threatening to “go to the people.”

    And let’s be clear one more time: the only reason that the current budget passed is because some legislative *Republicans* received $300 million in extra *spending.* There were also Democrats who voted against the plan as fiscally irresponsible. So for those who think fiscal discipline resides on only one side of the aisle, you may wish to investigate further.

    I would strongly encourage people to look at the proposals closely and not to just listen to sound bites. As the saying goes, the Devil is in the details.

  8. I voted for the recall and for Tom McClintock. Not because I like his social positions, but because he was the only honest one in the bunch. In yesterday’s San Jose Mercury News, he is quoted as saying the budget can be balanced with a 15.3 percent cut this year. Unfortunately, this is the strong medicine needed: hard times for a year and then back to a semblance of normality. Arnold will not do it and the state will continue to flounder. He will fail.

    Burton, Angelides and company have absolutely no credibility with me. They drove the train.

    Californians have to grow up. Arnold will not get us there. I, too, will vote against the bond issue.

  9. If he presents a complete balanced budget without going through the negotiating process, I see four things: 1) it’ll have cuts in areas that are politically unpopular, [snip] 4) it might have tax increases that would turn off fiscal conservatives because then it’d be undeniable that it was Arnold who “proposed” them.

    Yes, that’s exactly my point, and if he wasn’t prepared to do these things, he should have stuck to making movies with happy endings. Instead, he campaigned on a program to repeal the car tax and now we have to borrow the money instead. I guess that’s good demagoguery—he won the election, after all—but it doesn’t make much economic sense, does it? Not what I’d call leadership. And as for his plan to go to the people?! That worked so well last time: one of the reasons for the budget crisis is the minimum set-aside for K-14 education, passed by an initiative championed by (pause) Arnold Schwarzenegger.

    Not only JT, but I think most of the conservative Republicans who voted for McClintock will be opposing the bond issue. I’m not unconscious of the irony in joining them.

  10. I was born in Pomona Valley Hospital, but boy am I glad I got out of Dodge shortly thereafter.

    You Californians are nuts–proof that too much democracy is a very bad thing.

    Why don’t you stop wasting your time and money on all these idiotic ballot initiatives, pay full price for your water, get your act together on property taxes, raise gas taxes to the appropriate levels, and implement congestion pricing in LA and CA?

  11. I’m with praktike (gone) — cut, cut, cut spending. The bond issue only buys time — but with a CA heavily in recession, national econ recovery time might well be worth it.

    Note no Dems are saying what they would do instead (except keep higher car reg taxes). Why not increase GAS taxes, so the SUVs that drive more pay more, those that look cool in driveway can look cool.

    I also support Tax Loans, like for education, so the people who get the loans pay them back from their tax dollars, plus pay a surtax until they are paid back. (See Tax Loans )

    The real issue is that all pigs at the gov’t trough want other people’s money. Tax loans are a way to use their own, future money, today — as an investment, with higher repayment (less % disposable) later. Just like real loans.

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