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Politics

Brown Seeks To Chip Away At Calif’s ‘Wall Of Debt’

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California Governor Jerry Brown

California Governor Jerry Brown (Justin Sullivan/Getty Images)

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SACRAMENTO (CBS / AP) — In 1991, the Legislature slid a $168 million payment it owed to the state’s largest pension fund into the next budget year — a simple shuffle to help balance the annual spending plan.

It never repaid the money, leaving the state three months behind on its payments to the California Public Employees’ Retirement System for more than two decades and through three gubernatorial administrations, including that of former Gov. Arnold Schwarzenegger.

As the state kicked that debt forward through the years, the amount grew to more than $500 million. Each time the state uses such a cash shuffle to cover its deficit, it digs a deeper hole of debt for future budgets.

Gov. Jerry Brown said it’s time to pay up. He wants to start reducing the state’s debt and tens of billions more in accounting gimmicks, temporary loans and delayed payments. In all, the so-called “budgetary borrowing” equates to a $34.7 billion drag on the state.

That’s only part of what Brown referred to earlier this week as California’s “wall of debt” when he released his revised budget plan for the fiscal year that begins July 1.

California also must repay $81.1 billion in bonds already sold for public works projects such as road construction and levee improvements. An additional $48.2 billion in bonds have been authorized but not yet sold, including $10 billion approved by voters to finance high-speed rail and other transportation projects.

Not even included in the governor’s debt total is an estimated $181 billion worth of unfunded pension obligations and retiree health costs owed for decades into the future.

“I don’t want to continue the games and the gimmicks of the past,” Brown said Monday as he made his case for eliminating $29 billion of that overhanging debt by 2015.

Bond debt in California has grown from $34 billion as of July 1, 2003, to roughly $90 billion on May 1, 2011, most of it to be repaid from the state’s general fund. Voters next year are expected to consider authorizing another $11 billion in bonds for improvements to the state’s water system.

The budget for the 2011-12 fiscal year, which begins July 1, includes an estimated $7 billion in debt service paid from the general fund for bonds to build roads and other capital projects, as well as another $1.2 billion for bonds that Schwarzenegger pushed to close the budget deficit during his first full year in office. That’s more than 9 percent of the proposed $88.8 billion general fund, the state’s main account for basic state services.

The total general fund spending for all those bonds is projected to rise to about $9.6 billion by 2012-13.

The Brown administration expects the state will take in $6.6 billion more than expected in tax revenue through June of 2012 and wants to extend a series of expiring tax increases. The extra income would help close the state’s remaining budget deficit of roughly $10 billion and begin to pay down the debt.

Republicans say the additional tax revenue is reason enough not to extend the temporary increases in the sales, vehicle and personal income taxes. But Brown’s administration is using the state’s debt burden to make its point that they should be.

“We don’t criticize the governor for paying down debt; the Republicans support debt reduction,” said Jann Taber, spokeswoman for the Senate Republican caucus.

Their objection, she said, is to locking in five years of tax increases and increasing government spending by 27 percent in three years.

In tough economic times, it’s understandable that government uses short-term loans and accounting shifts to patch the budget, said Jim Mayer, executive director of the nonpartisan think tank California Forward. But he supports the governor’s call to begin addressing it seriously.

The group has pushed for fiscal and structural reforms to California government, including a multi-year approach to budgeting and limits on spending increases with any additional revenue going into reserves and to pay down debt.

State law allows short-term borrowing from schools, transportation and various special funds, with rules about repaying the money. The largest single piece of budgetary borrowing is $10.4 billion in deferred school funding.

But California’s structural budget problems — too little in annual tax revenue to cover the costs of ongoing programs — have made those cash-shuffling approaches routine at the Capitol, Mayer said, while giving the state reduced ability to repay.

“Wherever the line is, we probably crossed it a long time ago,” he said. “We’ve got to dig ourselves out of the hole before we start building again, and you know the political pressure will be to restore cuts rather than pay off debt.”

Brown’s administration does not want to get caught in the same trap that ensnared the administration of former Gov. Gray Davis after the dot-com bust when California’s volatile personal income tax plunged, setting off years of budget deficits, said H.D. Palmer, spokesman for the governor’s Department of Finance.

The $6.6 billion in unexpected revenue in Brown’s latest budget could be a temporary bump.

“The state has seen what happens when you take a one-time spike in revenue and you spend it on ongoing programs,” Palmer said.

Schwarzenegger promised to fix the state’s finances, famously declaring his intent to “tear up the credit cards” and balance the budget.

But the $15 billion in economic recovery bonds the former Republican governor championed in 2004 were used to pay short-term expenses with long-term debt. The state still owes $7.1 billion on them, one of the biggest pieces of the state’s borrowing, and is expected to pay $1.2 billion from dedicated sales taxes in the next year toward retiring them.

Long-term debt to build schools, repair highways or make other infrastructure investments is an important function of government, said Tom Dresslar, spokesman for the state treasurer’s office. But using a 20-year bond to pay operating expenses, as Schwarzenegger opted to do rather than make painful budget cuts, is like taking out a second mortgage to pay your phone bill and buy groceries.

The economic recovery bonds, he said, “were not a shining moment in California history.”

(Copyright 2011 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. Wire services may have contributed to this report.)

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