Posted on 03/04/2004 12:33:13 PM PST by calcowgirl
SACRAMENTO – While Gov. Arnold Schwarzenegger declared that voter approval of his fiscal ballot propositions means "California is back on track," Wall Street analysts yesterday said it's a mixed blessing that may allow lawmakers to go back to their bad habits.
Standard & Poor's, a major credit-rating agency, said the $15 billion bond measure passed Tuesday provides enough additional money to allow lawmakers to postpone painful decisions about spending cuts and tax increases needed to bring the state budget back into balance.
Meanwhile, the state's financial picture may become more complicated by a lawsuit to be filed today by 38 cities challenging the repayment plan for Proposition 57 bonds. The cities claim the bonds will be financed by taking part of the sales tax revenue that currently goes to local government, about $1.3 billion a year.
In his celebration speech Tuesday night, the Republican governor said his ballot propositions will bring stability to state finances.
"We have sent a strong signal to Wall Street to let them know we are putting our problems behind us and that we are getting our act together," Schwarzenegger said. "So Wall Street, come on back to California and do business with us."
The Wall Street ratings agencies, which have given California the lowest credit rating of any state, gave the state a modest reward for Tuesday's results. Standard & Poor's did not change its rating, but placed California on "credit watch with positive implications." Similarly, Moody's changed the state's outlook from negative to stable, but did not change its rating. Fitch's made no immediate change.
The three agencies said that voter approval of the bonds means the state should be able to pay off $14 billion in short-term loans coming due in June, avoiding a possible cash crisis.
But the agencies warned that passage of Proposition 57 and its companion measure, Proposition 58, the balanced-budget amendment, was merely a start.
Now the agencies want to see progress toward closing a "structural" budget gap between revenue and spending, which lawmakers have papered over with massive borrowing in recent years.
"The state's increased ability to sell bonds to fund current operations merely postpones difficult taxation or expenditure-reduction decisions," the Standard & Poor's report said yesterday.
David Hitchcock, a Standard & Poor's credit analyst, said the bonds give California some breathing room, but that action must be taken.
"Standard & Poor's general obligation debt rating on California will improve to the extent the state uses the time provided by the new bond proceeds to reduce its structural deficit," he said.
Standard & Poor's estimates that the $15 billion bond issue, after paying off the debt through the end of last fiscal year, will give the state an additional $6.4 billion to close a budget gap in this or future years.
The budget proposed by the governor for the fiscal year beginning in July includes major spending reductions and no tax increases. The nonpartisan legislative analyst, Liz Hill, believes that under the governor's budget plan a $7 billion gap would open the following year.
The governor's Department of Finance has made no firm estimate of the budget gap in the fiscal year beginning in July 2005, but predicted it would be less than that in the analyst's forecast.
In addition, Finance Director Donna Arduin said, some of the Proposition 57 bond money could be available to help close the budget gap that year.
Arduin said that the bonds can only be used to pay off inherited debt. And the finance department calculates that some of the current debt does not come due until two years from now, allowing the bonds to be used then.
The cities challenging the bond-repayment plan expect to file suit in Alameda County today.
State Treasurer Phil Angelides said a lawsuit might not block issuance of the bonds because of a "backstop" provision pledging the "full faith and credit" of the state to repay them. The legal challenge could cause delays and other problems.
The Proposition 57 bonds would be repaid with a quarter-cent of the sales tax revenue currently distributed to local government.
The cities are suing because they fear the state will not repay them for the lost revenue. One of the leaders in the lawsuit, the city of Cerritos, is heavily dependent on sales tax revenue.
"The cities have to have a balanced budget," Cerritos Mayor Gloria Alvarez Kappe said. "The state doesn't do that. The state basically dips into our piggy bank, which is a big objection."
San Marcos City Manager Rick Gittings said the state has a long history of failed promises to local governments.
"Local government in general is just fed up with the state tapping into traditional local government sources to cover their fiscal mismanagement," he said.
The main fear of cities, said Bart Miesfeld, Chula Vista assistant city attorney, is that the state's use of local sales tax revenue will set a precedent.
"If the state is allowed to take our sales tax revenue, next year they will take something else," he said.
Who cares if prop 57 passes or not? Cities can do what they want no matter what the law says...
Prop 57/58 increases taxes or reduces services take your pick.
The resultant reduction in services does not save California one thin dime.
Local governments generally failed to recover their lost revenue yesterday
They'll be back with a vengeance in November.
Consumption taxes, either state or local, will be raised by about 1% by Dec 30
Schwarzenegger has done little to improve the business climate in California
Confidence ratings affecting loan rates will not rise until this climate improves
Schwarzenegger has done nothing to reduce state spending
Schwarzenegger's only concrete proposal is an increase in state spending
Prop 57/58 allows the governance to avoid difficult issues until December
Until then,California's electorate and Wall Street are guiding the state
California must actually reduce spending to get a favorable bond rate
If the bonds are floated before July 1 (before cuts) the rate will be frightening
The litigation filed yesterday by local governments will be successful.
Wall Street and the courts will make it so.
Schwarzenegger, thus far, has been a better actor than a governor...but its early.
Most of Schwarzenegger's investments are in property.
Whatever happens will protect property values in California
People knew and got exactly what they wanted when electing Schwarzenegger
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