Bonds. State Bonds.

Back from Chicago last night; cold, sad, alien to me in a lot of ways (I’m not someone who’s used to saying grace at every meal, much less an involved, actual prayer as opposed to a “thanks for the grub, yay God” type grace) but a fitting conclusion to a life and another bolt in the scaffolding I will spend a lifetime to erect tying me to TG and her family.

And now back to blogging.

Kevin (Calpundit) Drum has a post on the California propositions, specifically the proposition issuing $15 Billion (with a B) in bonds to cover the overspending and undertaxing of the last three years of the Davis Administration.

He links to a great (technical) explanation (pdf file) of the various debt instruments floating around out there.

Then he sets out his position on the bond issue:

Rather, California has $14 billion in short term debt that we have to pay off in June. That’s what the bonds are for.

But if the bond measure doesn’t pass (and if the legislature’s bonds get overturned in court), what can we do? Answer: we can issue more short term debt.

Now, there are indeed problems with this. The short term debt would be issued at a higher interest rate, it would put a pretty tight straitjacket on state spending, and it would have to be paid back fairly quickly.

However, it wouldn’t be fiscal Armageddon. What it would be is a firm order to the legislature to raise taxes and cut spending in order to pay off the short term debt. This is what should have happened years ago, and painful as it may be, it’s now obvious to me that this is still an option.

Arnold wants to have it both ways: he wants to have a tax cut and he wants a bond measure to help finance it. This is almost Kafka-esque irresponsibility and I think it’s time to cut the crap. The only way to get ourselves out of the mess we’re in is via both spending cuts and tax increases.

So despite the undoubted problems it’s going to cause, I think Californians ought to vote No on 57. Combined with a Yes vote on 56, which allows the legislature to raise taxes, and the line item veto, which allows every California governor to cut spending to his heart’s content, we have all the tools we need to bring the budget into balance.

It’s time for everyone to grow up. If the credit card is a bad idea next year, it’s a bad idea this year too. Let’s go ahead and tear it up.

It’s kind of an appealing position, and I’m tempted, but won’t bite.

Really, for two reasons:

First, because I know too many people at the local government level who will get slaughtered by this; as I noted a while ago, the common pattern is to shove the problem downstream by hammering the budget crisis down one level – federal to state, state to local – and the reality is that the crisis will hit hardest at the lowest levels of government, where the rubber meets the road. The crisis might be short-term, but it still will be hard as hell.

Second, because there is nothing in his mix of Yes on Prop 56 and No on Prop 57 that will convince me that spending will really be capped; Kevin convieniently ignores 58, which mandates a balanced budget and reserve, and sets some Draconian penalties for failure to enact the balanced budget or respond to a declaration of financial emergency by the Governor (note: Kevin did endorse it earlier).

I’m dubious about 56; I may support it, but I’d be more interested if it (a reduction in the 2/3 supermajority California requires to pass a budget) was tied to something improving our horribly gerrymandered legislative districts. I’ll make up my mind on this one in the next few days.

I will vote Yes on 58, and I also will vote Yes on 57.

Maybe I’ve had too much experience doing workouts in business, where the first issue is to establish liquidity and get out of the short-term debt crisis-to-crisis lending cycle.

Kevin is right about managing household finances (something I ought be better at); but he’s wrong about corporate ones. And I’ll argue with some conviction that the finances involved in running the state are closer to that – to complex corporate finance – than to homilies about individual fiscal responsibility.

I wish we didn’t have to mandate a balanced budget. I wish we segregated capital expenditures and amortized them over their lifetime in the budget, instead of paying for them up front.

Hell, I wish for lots of things.

But since I picked up our wedding rings today, I’m sure that at least some of them are going to come true.

21 thoughts on “Bonds. State Bonds.”

  1. Well, I’d love to have an amendment on gerrymandering too, but you have to play the cards you’re dealt. We don’t have one to vote on.

    As you note, I posted on 58 earlier. I’m for it, although frankly, from what I’ve read, it doesn’t sound like it really has any teeth.

    I think taxes and spending cuts have to be part of any solution, and the only reason our crisis is so bad is that we’ve only had cuts on the table. I don’t especially want to pay more taxes, but it’s my state and my deficit and there’s just no other way. I think we all know that Arnold’s budget is about half smoke and mirrors already, and it only gets worse in the out years. It’s just not a serious solution.

    So I’ll vote Yes on 56. (Plus, it’s just good public policy. A two-thirds majority for the routine annual job of passing a budget is just crazy.)

    I’m torn on 57. I agree with you that it would help us work out of our problems more easily. But frankly, I’m at the point where I just don’t think that will work. The only thing that’s going to get anyone’s attention in Sacramento is a sustained crisis. It’s horrible, but nothing else seems to work. I think Angelides is convincing when he says we can work out of this without the bonds, and if we vote them down we start forcing some action. It’s been too long, and I don’t want to give them yet another year to screw around.

  2. BTW, I agree, of course, that state finances are similar to corporate ones. If this were the first year of a crisis, I’d agree with you about restoring liquidity first and then moving forward. But this is year 3. It’s time for Chapter 11.

  3. Kevin, one question: Why now? Seriously, this budget issue has been hacked around by smart people for the last four years (one of the major reasons I was so PO’ed at Davis); why is this the right year to pull the plug and see if we can get a reboot?


  4. Uuuuummmmmm, prop 56 says something about law makers not getting paid until they pass a budget. This sounds great until you realize that the incentive here is all wrong. First of all, many of these folks aren’t nearly as dependant on each paycheck as I am and secondly, those that are will be encouraged to go along with the majority which has been taxing me to death to support programs that I find abhorrent and instead of cutting spending in pet social programs will compromise public safety by making cuts in Police and Fire budgets. There is no extra left there and many are concerned about layoffs in the next round of cuts. Also, I am not nearly as learned as many who frequent this site, so could someone please explain to me how our schools are in such trouble, but everytime we agree to a bond or tax or lottery to aid education, there seems to be no improvement in this condition?

  5. Kevin and I seem to be in sync here.

    Why I think I’m voting “No” on 57 is I can’t imagine any reason that the structural imbalance between revenues and expenses (which, I regret, should mostly but not entirely be discredited to the Democratic Party) will be easier to handle after the billions of dollars of interest payments on the Prop 57 bonds are added in. I smell a gamble, that just maybe the economy will have recovered enough that the necessary cuts/taxes won’t be any worse, might even be better, than if imposed now. But what’s behind the gamble isn’t economics (even if the propositions pass and we do in fact get lucky). What’s behind the gamble is shoring up the political viability of the new Governor, who has so far made the situation $4 Billion worse with the car tax, and for that matter most of the Democrats in Sacto except Angelides.

  6. Oh, a gerrymandering point. I think we should change our system one week after Texas changes its. Let Arnold shop his reapportionment initiative there first.

    Unilateral Democratic disarmament isn’t my scene.

    (BTW, one of Gerry’s direct descendants is a professor at the Univ of California, Davis.)

  7. I do know there’s absolutely no way I’m voting Yes on 56. Gridlock, courtesy of Jim Brulte, has been the only thing keeping the business community from getting even more hammered by our beloved legislature. The People’s Republic of California is overtaxed as it is–I’d be more interested in seeing some of those deep program cuts that have been “threatened.”

    I’m tempted to vote No on Arnold’s 57 and 58, but I helped vote him into office. It strikes me as somewhat unfair to vote a guy into a huge mess and then cut him off at the knees when he tries to fix it. If this doesn’t work, he gets to try again next year. If that doesn’t work, he’d better come up with a darn spiffy reason to get reelected, and star power won’t cut it.

    Oh, and Andrew, I do think that suggesting unilateral Democratic disarmament would be silly, so I won’t. Of course, if I thought asking nicely would have any chance of working, I’d certainly be tempted…. =)

  8. I am in total agreement that California taxes need to be much higher to cover all the government spending. Raising taxes is essential.

    Illinois needs youer businesses.

  9. You know, one point that doesn’t get mentioned is that Prop. 13 is bad for new businesses, because it locks in cheap property taxes for older competitors.

    The last time we had any serious mutterings about repealing/modifying 13 for commercial property, it was because one of the department store chains (I think it was Macy’s) had come out of BK with such a different structure the state ruled its property had undergone a change of ownership and could be re-assessed upward. Macy’s was so upset about incurring this expense (that of course Nordstrom’s and so on didn’t) that it planned to bankroll an initiative, but they folded under threat of a foolish consumer boycott. (I wonder who the real interests behind Prop. 13 were?)

  10. Dear A. L.:

    I couple of random thoughts. First, check out the state’s credit rating. It’s especially interesting to compare it with the ratings of other states. Increasing indebtedness (especially in the absence of signicant spending cuts or tax increases) is unlikely to improve the state’s credit rating and will have a cost. As the risk goes up, so will the rates.

    Second, when people say “spending cuts” what they mean is state payroll. I find it hard to imagine the Democrat-dominated state legislature doing much in this area. After all, their biggest supporters are the government employees unions. And is it any wonder?

  11. Back from Chicago last night; cold, sad, alien

    You call this cold? It’s been in the 40’s for the last two weeks! Luxury!

  12. AL: Why this year? No special reason except that this should have been done in every previous year too. I haven’t had a personal say in it before this, and now that I do I just don’t think I’m willing to let it extend yet another year.

    Anyone who’s taken an objective look at our state finances knows that we have a structural imbalance that just won’t get fixed without raising taxes. Nobody likes it, but the math doesn’t lie. We need to act like adults and take our medicine and fix things, not paper them over once again.

    Both the Dems and the Republicans have a lot of blame for the mess we’re in, though I’m perfectly willing to place the majority of the blame on the Dems since they’ve owned the government for the past five years. Still, I give the Dems some credit for being willing to face up to spending cuts for the past couple of years, even if perhaps they haven’t gone far enough. But we have to do something about the revenue side too.

    Let’s not ease up on these guys. It’s obvious they won’t do anything unless the pressure is enormous. The only responsible thing is for us to pay higher taxes to fix it, not make our kids pay higher taxes 20 years from now to fix it. That’s just wrong.

  13. Kevin:

    I talked about tax issues a while ago over at *Armed Liberal*; I still like the notion I pushed there, which is to raise the sales tax and use a chunk of it to rebate payroll taxes for low-and moderate income workers, as well as tighten the interpretation of ‘change of ownership’ for commercial property. The sales tax increases would disproportionally hit low-income families who are in the cash economy, and reduce the incentive on them not to declare their income – i.e. illegal immigrants and those working in the grey economy would pay more, which I think is good.

    I think that Angelides’ basic response (raise the top-tier income taxes) is a good part, sturucturally, of what got us here because that income in highly volitile (both in reality and in ‘collectability’).


  14. Illinoisan Simon is right: raise tax rates, see more businesses flee, see tax revenues fall.

    You might be able to get blood from a stone, but you won’t: the stone is moving to Illinois.

  15. Second, when people say “spending cuts” what they mean is state payroll.

    I don’t think so. Teachers? Cops? I think the public is even worried that surly DMV clerks will be even worse when half are laid off and the queue doubles.

    I think what people mean with “spending cuts” are MediCal, General Assistance, and other cash transfer welfare programs. Unfortunately, speaking of turnips, I don’t think we are willing to cut enough in these programs to close the deficit, and absolutely not if we confine ourselves, as Arnold suggested in his campaign, to eliminating “waste, fraud, and abuse”. I believe his import from Florida found something on the scale of ten million of so-called waste. Even if this were true, it hardly addresses the structural issues 500× greater.

  16. You know California might save a whole lot of money by ending prohibition enforcement.

    Prisons, courts, judges, guards etc.

    Plus if it was easier to export it’s product there would be a huge gain.

    I used to live in Humboldt County. It is people who live there that have given home grown a good name.

  17. Andrew J. Lazarus:

    You write:

    I think what people mean with “spending cuts” are MediCal, General Assistance, and other cash transfer welfare programs

    I don’t doubt that what people would like to believe is that the state’s problems are programs like this but what the figures from
    here say is that more than 50% of the states budget goes to education. Another roughly 25% goes to what is referred to as “state operations”, mostly payroll. Less than 20% of the total state budget is what they refer to as “human services” and most of that budget is administrative i.e. payroll rather than transfer payments.

    Bottom line: to make meaningful budget cuts the state will either have to cut jobs or wages and benefits or all three.

  18. Dave Schuler, I agree with you completely. I think it was Reagan who started us off on the idea that finding “waste, fraud, and abuse” would make for truly significant budget savings without reductions in programs. Now, I can think of other excellent reasons for cracking down on waste, fraud, and abuse, but as a budgeting maneuver it came from the same part of the brain that thinks pollution was caused by trees.

    (One nice thing about getting rid of Gray Davis, much as I opposed the recall, is we replaced the Correctional Officers Union’s whore with their mistress. That might save us some money.)

  19. Had an interestingtalk with a state employee friend the other evening; she & I were talking about the exact issue of state wages and she was aggressively (surprise!!) defending hers (an entirely legitimate exercise, in my view). One point that came to me was that state wages and burden haven’t tracked the wage decline in the private sector; the theory was once that for the average worker you’d make 75 – 85% of what the private sector would pay, but you got great working conditions, perqs and job security.

    As the COLA has kept going at the state level (we played catchup during the late 90’s after years of essentially flat wages), and the private wages have flattened or even declined (my bill rate is still about 75% of what it was five years ago), suddenly the state employees are at parity, plus conditions, perqs, and some measure of security.


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