California debt default ‘increasingly likely,’ Cal Lutheran economist says

Payments on bond borrowing are becoming uncomfortably high, crowding out funds for universities, healthcare, parks — and all the other government services being slashed these days.

By George Skelton Capitol Journal

December 17, 2009

From Sacramento

State Treasurer Bill Lockyer is playing Scrooge, admonishing Capitol politicians that they can’t have everything they want — or even think they need.

It’s a sound message not just for the politicians, but also for the California public.

The state’s credit card is about maxed out, the veteran Democratic office-holder warns. Payments on bond borrowing are becoming uncomfortably high, crowding out funds for universities, healthcare, parks — and all the other government services being slashed these days.

Or, as Assembly budget chairwoman Noreen Evans (D-Santa Rosa) told a committee hearing Monday, bond payments are “the Pac-Man eating up the general fund” — the state’s main checking account that again is running a deficit. The latest projection is a $21-billion hole for the next 18 months.

Lockyer’s lecture has broad implications for rebuilding California’s crumbling infrastructure.

One example: It could give many voters pause about an $11.1-billion water bond issue that Gov. Arnold Schwarzenegger and the Legislature recently placed on next November’s ballot — especially if the politicians don’t strip out the pork, such as bike trails and “watershed education centers.”

Some of the bond’s goodies “seem only remotely water-related,” notes Lockyer, who hasn’t taken a position on the measure.

But the treasurer’s biggest concern about the water bond is that much of it would be financed by taxpayers. He’d rather that more of it be paid off by water users through higher fees, as the original state water project was financed. Then the bond wouldn’t be gnawing away so much at the general fund.

“Farmers essentially want subsidized water — subsidized by the rest of the state,” says Lockyer, a longtime legislator from the east side of San Francisco Bay before being elected attorney general and then treasurer. “Guess I don’t blame them for asking, but shouldn’t users pay, then add it to the cost of their products?”

The agriculture lobby argues that much of the bond money would be spent for “public benefits,” such as Delta environmental restoration. Even so, under the bond provisions, taxpayers could wind up paying for up to half the cost of building new dams that would store water mostly for farmers.

Water also must compete with other public works needs.

State Supt. of Public Instruction Jack O’Connell on Tuesday proposed a $9.9-billion bond for school facilities.

“We cannot afford to wait,” O’Connell asserted. “A school facilities bond would do much to further our long-term goal of creating a competitive workforce in California, as well as achieving the short-term goal of creating jobs.”

Meanwhile, a Washington-based transportation think tank called TRIP reported Wednesday that annual spending on major roads, bridges and transit in California is running $11 billion short of what’s needed. California has the second-worst roads in the nation, falling only behind New Jersey, the report said.

And Los Angeles’ roads “are the roughest” in the country, the report continued, with L.A. drivers also enduring “the worst congestion.”

The think tank warned: “California must improve its [transportation] system . . . to foster economic growth, create jobs, avoid business relocations and ensure the safe, reliable mobility needed to improve the quality of life.”

No argument here. But how?

Nonpartisan Legislative Analyst Mac Taylor has suggested raising the state gas tax by 10 cents per gallon — it’s now 18 cents — to pay for road maintenance and repair. The tax hike also could finance repayment of highway construction bonds and relieve pressure on the general fund, he notes.

Voters approved a $19.9-billion transportation bond issue in 2006, but Lockyer has sold only $4.5 billion worth. Basically, he doesn’t feel it’s currently wise to borrow.

California has the lowest bond rating of any state, requiring it to pay relatively high interest. Anyway, it needs to cling to cash to pay ordinary bills without resorting to IOUs. Every $1 billion in bonds requires $70 million annually for debt service.

“We’re paying substantially more than Third World countries, er, emerging markets,” Lockyer told the Assembly Budget Committee. “We could benefit from a reasonably balanced budget — an old-fashioned balanced budget. It really is affecting our credit rating.”

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