Posted on 01/24/2004 7:13:59 AM PST by John Jorsett
SACRAMENTO – Gov. Arnold Schwarzenegger may have a problem as he launches a full-scale campaign to overcome voter skepticism about a $15 billion fiscal-recovery bond measure on the March 2 ballot.
It's not entirely clear that voter rejection of Proposition 57 will, as the governor has warned, result in "economic chaos," "Armageddon cuts" in services, or leave no choice but to "drastically increase taxes."
If the governor's bond is rejected, the state simply would continue with the budget signed by former Democratic Gov. Gray Davis before he was replaced by Schwarzenegger, a Republican, in an historic recall election last fall.
The current budget authorizes a $10.7 billion fiscal-recovery bond, which is being challenged by a lawsuit contending that it violates a provision in the state constitution requiring voter approval of long-term debt.
The governor's $15 billion bond proposal would avoid the risk that the courts could block the $10.7 billion bond issue, punching a huge hole in the budget. Schwarzenegger's bonds also would provide an additional $4 billion to ease the need for cuts or tax increases.
As he launched the campaign for the $15 billion bond measure at an event in Fresno this week, the governor was asked if it is accurate to warn of "Armageddon cuts" when some believe the $10.7 billion bond will withstand the legal challenge.
"But the court also hasn't declared it legal," Schwarzenegger said. "So we don't want to count on that. It is absolutely important that we don't count on magic. There is no magic."
Schwarzenegger said the only way to fix the "financial mess" he inherited is voter approval of the $15 billion bond measure and a companion balanced-budget measure, Proposition 58. Neither takes effect unless both pass.
"We've got to have this restructuring of a bond for inherited debt, refinancing it and then have this never-again spending limit so that the politicians will never again spend more money than they have," he said.
When Schwarzenegger took office last November, he inherited a budget signed three months earlier based on the unprecedented use of long-term bonds to close part of a huge budget gap.
After a deadlock in which Republicans blocked a tax increase and Democrats rejected deep spending cuts, the Legislature authorized two long-term bonds last year totaling $12.6 billion.
Both bonds were challenged by lawsuits contending that they violate a provision placed in the state constitution more than a century ago that requires voter approval of any long-term debt over $300,000.
A court blocked a $1.9 billion pension bond, and the state is appealing. But the larger $10.7 billion in deficit bonds has a different financing mechanism that some legal experts contend does not require voter approval.
The $10.7 billion in bonds would be paid off over five years by a half-cent of the existing sales tax. Because bond payments would be appropriated each year by the Legislature, the argument is that it's not long-term debt.
State Attorney General Bill Lockyer and a law firm specializing in bonds have issued opinions that the $10.7 billion in bonds are legally valid. Wall Street rating agency Moody's has a similar view.
"In our view, there remains a good chance of completing the legal hurdles and issuing the bonds by June 2004," Moody's said as it downgraded the state's bond rating last month.
Two polls released last week found that only a third of voters favor the governor's $15 billion bond measure. The campaign for Propositions 57 and 58 has five weeks to build support before the March 2 election.
As a fallback in case the ballot measures are rejected, the Schwarzenegger administration is seeking a court ruling that the $10.7 billion bond authorized by the state budget is legally valid.
The court validation of the $10.7 billion bond is opposed by the Pacific Legal Foundation on behalf of a Fullerton taxpayer group. Opponents have until the end of the month to file with the court.
A decision by the court can be appealed directly to the state Supreme Court. But no final decision on whether the $10.7 billion in bonds are legally valid is expected until after the March election.
"We want to see this get resolved sooner rather than later," said Arthur Mark, a Pacific Legal Foundation attorney. "That's our goal. We are not out here to delay things."
The Davis administration sought court validation for the $1.9 billion pension bond but not for the $10.7 billion fiscal-recovery bond, as if to show confidence in the legality of the special financing mechanism for the latter proposal.
Still, the Davis administration had a backup plan of its own in case the $10.7 billion bond was blocked when $14 billion worth of short-term loans come due in June.
The state purchased an expensive guarantee that would allow the largest of the short-term loans, $11 billion, to be extended if the state is unable to pay it off before the new fiscal year begins on July 1.
If neither the FRBs nor the ERBs can be issued, the State will try to redeem the maturing RANs and RAWs in June by issuing new RAWs. Unless the State enacts a budget by mid-June (which is unlikely based on historical experience), the RAWs will be issued before there is a 2004-05 budget. Even though there may not be a budget, the State will have to demonstrate to investors how the RAWs will be repaid in June 2005.
In issuing last year’s RAWs, the State pointed to the Governor’s May Revision of the budget which included the FRBs. This was the basis for repayment. But if the RAWs have to be issued again this year, it will be because the State’s long-term bond solutions (the FRBs and ERBs) are no longer options. The State will face a nearly $30 billion accumulated deficit through the end of fiscal year 2004-05, made up about equally of the deficit accumulated through the end of 2003-04 and the structural deficit of 2004-05. Potential investors in the 2004 RAWs will look to the May Revision to be released in May 2004 to judge if they believe there is a credible budget plan that can ensure repayment of the RAWs in June 2005.
The need for a credible plan is required by two parties. First, the State Controller, by law, must certify prior to the issuance of RAWs that the RAWs can be repaid. Second, the capital markets will require a plan. This year’s RAWs were credit-enhanced (see below) to provide a strong enough rating to ensure that they would qualify for purchase by money market funds. This was a necessity given the sheer size of the RAWs and the need to market them as widely as possible. If some type of credit enhancement is not available in 2004, that could be a significant obstacle to the sale of a new issue of RAWs. Registered Warrants If the State is unable to issu.
Let the fun begin.
Did you catch this?
Still, the Davis administration had a backup plan of its own in case the $10.7 billion bond was blocked when $14 billion worth of short-term loans come due in June.
The state purchased an expensive guarantee that would allow the largest of the short-term loans, $11 billion, to be extended if the state is unable to pay it off before the new fiscal year begins on July 1.
No bankruptcy. No chaos. Just continued short term borrowing.
What a crock the Prop 57 Campaign is.... True Lies!
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