Posted on 02/14/2004 2:54:17 PM PST by calcowgirl
VOTERS ON MARCH 2 may think they're simply deciding whether the deficit-ridden state should obtain an unprecedented $15 billion loan, but the stakes are far higher -- for key government services, for taxpayers' pocketbooks and for the new governor.
Republican Gov. Arnold Schwarzenegger is gambling that voters will accept his plan for California to borrow much of its way out of fiscal woes and then for him to persuade a Democrat-dominated Legislature to join him in paring the rest from programs.
Schwarzenegger is portraying his bond initiative as a choice between empowering the public or allowing overspending politicians alone to chart the state's future, and he's warning that if voters reject Proposition 57 it would mean severe, across-the-board slashes in state spending. "We would have to make drastic cuts, deep cuts. I call them Armageddon cuts. Cuts in services that we don't want to make," he said at a recent pro-Proposition 57 event. "It would be devastating."
Some political players and analysts say voter rejection of Schwarzenegger's proposal -- a very real possibility despite a lack of organized opposition -- also might force the governor to embrace major tax hikes as part of the fiscal solution.
Such a move would be viewed by much of Schwarzenegger's political base as an unforgivable betrayal of his most important campaign promise.
"This is not just about the bond issue -- it's a test of Arnold's ability to lead," said Sherry Bebitch Jeffe, a political scientist at the University of Southern California.
The governor says he needs the $15 billion bond to pay off by June short-term loans that California took out to help close the fiscal gap opened by overspending Democrats. But the plan also incorporates billions of dollars in new borrowing to ease the deficit.
Schwarzenegger's streamlined version of the story also leaves out the part about the recent economic downturn and a badly divided Legislature failing to agree on either spending cuts or tax hikes to balance the state budget. Instead, lawmakers adopted a number of temporary solutions that relied heavily on short-term loans.
The governor says the state faces bankruptcy without the bond, which would be paid back by diverting a quarter-cent portion of sales tax over a period of up to 14 years, with an extra burden of $4 billion in interest.
Moody's bond rating agency has warned of serious consequences if voters reject the borrowing plan, saying the state could "tumble into a liquidity crisis" soon after.
Bond supporters have even hinted that failure at the ballot box could trigger international financial uncertainty, given the state's status as the world's sixth-largest economy.
But with the bond proposal looming as a major test of his leadership, some experts say Schwarzenegger may be exaggerating what will happen if voters reject Proposition 57 or its companion measure on the March ballot.
Proposition 58, which would mandate balanced budgets in the future and ban deficit financing, is linked with the $15 billion bond so that if either measure is rejected, both fail.
If the measures go down, some experts say, California could proceed under the budget signed by Democratic Gov. Gray Davis before he was replaced by Schwarzenegger in an unprecedented recall election in October. The backup borrowing plan in the existing budget is tied up in court, but the state would still be able to acquire loans through other higher-interest avenues.
Sticker shock
One of the biggest threats to Proposition 57 is potential "sticker shock" as voters face not only the $15 billion deficit bond but also a $12.3 billion school bond on the same ballot, according to analysts.
The two bond proposals, which total a stunning $27.3 billion, would be by far the largest amount ever put forward on any statewide ballot in the nation. Critics say the combined debt load, together with existing bond payments, will eat into funds for government operations and capital improvements.
Initial polls showed the deficit bond was unpopular last month, particularly in the Bay Area. Only about a third of voters statewide favored Proposition 57. One survey indicated just 31 percent of likely voters supported the measure in the liberal, Democratic-leaning Bay Area.
But the same polls indicated voters statewide were generally happy with Schwarzenegger. And the governor has been cashing in on that political capital by campaigning on radio talk shows and at numerous town-hall appearances before handpicked audiences, in front of lots of TV news cameras. Bigger events are planned before the election.
Pro-Proposition 57 operatives, meanwhile, have been struggling to raise millions of dollars for advertising while shunning donations from unions, as Schwarzenegger did during his own political campaign.
Top contributors are many of the same businesses and individuals who helped him unseat Davis, according to state campaign finance records.
Those who have each made $250,000 donations include Univision owner Jerry Perenchio of Los Angeles, American Sterling Corp. of Irvine, Emulex Chief Executive Officer Paul Folino of Costa Mesa and Schwarzenegger's Total Recall Committee of Santa Monica.
In addition, Schwarzenegger will appear at a New York City fund-raiser later this month to ask political heavyweights in the nation's banking and finance capital to donate as much as $500,000 each to the campaign.
The plan has drawn criticism from campaign finance watchdogs, who recall Schwarzenegger's insistence during last year's gubernatorial recall campaign that he would not rely on special-interest donors.
There's no active, organized opposition to the deficit bond, due in large measure to Democrats being so divided over the issue.
"It's a huge plus for the governor not to have anyone spending money on the other side," said Bruce Cain, a political science professor at the University of California, Berkeley. "I think any opposition would be very bad news.
"Schwarzenegger has to do something that is very rare in initiative politics -- build up the 'yes' side," Cain said. "Most measures start off high and come down -- he's got to do the opposite. It's a tough chore under the best circumstance. The last thing he wants is anyone opposing him."
Democratic State Treasurer Phil Angelides, who is eyeing a gubernatorial run in 2006, is the deficit bond's leading critic but is not pursuing a monied campaign against the measure.
"This notion of just borrowing more and then cutting, without trying to do a fair balance of revenues, is not the right thing," Angelides said at a recent appearance. "It'll leave us in debt and it'll eviscerate our key investments."
At the same time, though, Democratic state Controller Steve Westly is co-chairing the effort to pass the bond and has been appearing with Schwarzenegger at Proposition 57 campaign stops.
"Without its passage, the cuts and tax increases that will be required to balance the budget will be astounding," Westly said at one event. "It's the first step in getting our fiscal house in order."
The very different paths taken by Westly and Angelides -- both high-ranking Democrats -- have led to confrontations between the two.
In one case, Angelides, in a thinly veiled reference to Westly, criticized "star-struck Democrats" for acting more like Republicans as they attempt to gain favor with the governor.
In response, Westly said he has "been out front and opposing Schwarzenegger from day one, but that doesn't mean I oppose every one of his policies.
"Some of his policies, like the bond, are in this party's best interests and that's why I've stood up," Westly said. "It doesn't serve the Democratic Party to have a state in fiscal insolvency."
Most majority Democrats in the Legislature are critical of Schwarzenegger's budget plans and would prefer to see tax hikes added to the mix of borrowing and cuts. But they have remained on the sidelines of the Proposition 57 debate because many voted to place the governor's bond on the March ballot.
Even so, Assembly Majority Leader Wilma Chan, D-Oakland, is spearheading an alternative plan to temporarily boost the personal income taxes of California's wealthiest wage earners.
The state Democratic Party itself has been divided by the Proposition 57 debate.
Delegates to the party convention last month in San Jose chose not to take a position on it, though a minority argued for an immediate stance in opposition. The dissenters said Schwarzenegger's solutions skirt tax hikes and rely too heavily on cuts and borrowing.
Upset with the party's lack of endorsement, the governor summoned top legislative Democrats and began applying pressure. Lawmakers said Schwarzenegger offered, among other things, to skip actively campaigning against a labor-backed initiative in exchange for the party's backing of his bond plan.
The labor-supported measure on the March ballot, Proposition 56, would make it easier for the Democrat-dominated Legislature to raise taxes and pass a budget and is strongly opposed by the California Chamber of Commerce.
Key support
Finally, on Tuesday, officials representing the California Democratic Party announced their endorsement of Proposition 57. At the same time, U.S. Sens. Dianne Feinstein and Barbara Boxer broke their long silence on the matter and announced their support.
Many local government officials also are torn over the Proposition 57 deficit bond, fearing the outcome no matter what happens.
Oakland Mayor Jerry Brown is among the city officials who have staked out positions in support of the measure, fearing its defeat would further foster cuts in funds for cities and counties.
"Deficit spending is what you do in the middle of a recession," Brown says. 'When you're in a soft economy, the borrowing of money to stimulate jobs, and that kind of activity, makes a lot of sense."
But some of Oakland's officials, such as Vice Mayor Henry Chang Jr., have voiced a different opinion. He and others are worried about Schwarzenegger's overall budget plan and additional state and local budget cuts.
Even some high-profile Republicans oppose Schwarzenegger's deficit bond.
State Sen. Tom McClintock, a conservative Northridge Republican who ran against Schwarzenegger in the recall campaign and may run again in 2006, signed the ballot argument against Proposition 57.
"Instead of cutting the waste from government bureaucracy and targeting fraud for elimination, they (politicians) have decided to use the biggest bond in California history to cover their spending addiction," McClintock said.
Pundits expect Schwarzenegger to have trouble getting a Proposition 57 endorsement from the conservative-leaning delegates to the state Republican Party convention next weekend in the Bay Area.
At the same time, though, Proposition 57 has picked up important endorsements, such as one from the state's largest teachers union.
"If this recovery package does not pass in March, the prospect of brutal cuts to education, health care and local police and firefighting is real and too painful to imagine," said Barbara Kerr, president of the California Teachers Association.
The CTA is among the education groups that hammered out a controversial pact with Schwarzenegger to preserve much of schools' share of the budget.
Business groups, such as the California Chamber of Commerce, also have backed the measure.
Proposition 57 is "essential to bringing stability and reliability back to California's economy and to the state's business climate," said Bill Hauck of the California Business Roundtable.
Ironically, amid the crossfire over the deficit bond, analysts say the major players and public are losing sight of the true bottom line politically.
Even though Schwarzenegger portrays bipartisan support for the deficit bond as a major departure from political gridlock at the Capitol, pundits say the proposal really represents nothing more than business-as-usual in Sacramento.
Officeholders on both sides of the aisle aren't willing to confront the politically tough choice of draconian spending cuts or higher taxes. So, as in previous years, they are resorting to borrowing to cover the persistent deficit.
Only this time, they are asking voters to decide the matter in a move that takes even more pressure off them.
Contact Sacramento Bureau Chief Steve Geissinger at sgeissinger@angnewspapers.com
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