More comments and articles on the California May Revise Budget:
Of the $8.3 billion in new taxes, Only $1.56 billion is to come from the increased income tax on singles above $150 thousand income or couples above $300,000, and that tax is raised only 1% to 10.3%.
The rest of the tax increase falls on the working class, including vehicle license fees ($3.9 billion), sales tax ($1.74 billion), and cigarette tax ($267 million). California already has one of the highest sales tax rates in the country.
The $10.7 billion 5-year bond issue to pay off the current fiscal year's shortfall will cost some $2 billion in interest, to be paid to Wall Street banks and investment houses. Some have already expressed interest (see below) though they call for wider and deeper cuts ("structural change") to avoid a new $8 million shortfall next year. They also want assurance of on-time payment in case the $2.3 billion/year half-cent sales tax fails to generate sufficient revenue. New York City is still paying back its bond issues from the mid-70s. (See below.)
To see how assuring on-time payment can work out in practice, let us go back to the fiscal crisis of Summer 1994, which most people remember when state workers were paid with IOUs for several weeks.
An international consortium of banks, lead by Bank of America, had arranged to lend California $7 billion over the next fiscal year, which was needed to help the state meet its expenses. During the budget debate in Sacramento, the spokesman for the bank consortium, a B-o-A managing director of municipal securities, told the legislators that for the state to qualify for the loan, its new budget must contain an automatic loan repayment law.
Under that law, if revenues ever fell below what was needed to repay the loan in two years, state spending cuts would automatically kick in. In other words, the banks would directly make decisions on service cuts. Anthony Taddey, the bank's spokesman, told the legislators that failure to enact the bank's program "would be ... viewed negatively by the financial markets and would further jeopardize the state's ongoing access to the credit markets at a reasonable cost.
In the words of the SF Chronicle, 7-1-94, "The emergence of the stern-faced Taddey as a key figure has led some lawmakers to call him 'Governor Taddey' and compare California to a developing nation seeking loans from the International Monetary Fund."
It's only a matter of degree. No budgetary
magic can assure us stable services while the corporate share of
taxes has fallen from 33 percent in the 1940's to 15 percent in the
1990's, or where the richest 1 percent of Americans own 40 percent
of the nation's household wealth.
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Sacramento Bee, May 16, 2003
Lenders support budget
But experts say the state's real solution is structural change.
By Alexa H. Bluth -- Bee Capitol Bureau
The lenders and Wall Street analysts who will play a key role in helping fill California's giant deficit called the governor's newly revised budget plan credible, but warned it lacks insurance that the state won't burrow deeper into a budget hole in future years.
California officials will meet with bankers over the next several days to try to sell the $100 billion plan. But analysts say, at first blush, it appears to lack the necessary structural reforms to bring the state's income and spending into balance.
"If you go out and borrow $10 billion and you didn't fix the problem, all you did was dig your hole even deeper," said Claire Cohen, vice chairwoman of Fitch Investors Services. "You only get the $10 billion once."
Gov. Gray Davis and his financial advisers have stressed the importance of pleasing Wall Street as lawmakers negotiate a final state budget designed to fill a deficit estimated to reach $38.2 billion.
Steve Peace, Davis' finance director, said lawmakers must approve a budget on time this year -- by the July 1 beginning of the fiscal year -- to convince bankers that the state has a grip on its financial problems.
He also has said that the governor's entire budget relies on Wall Street's approval of a plan to pay off deficit bonds with a sales tax increase -- a strategy that Republican lawmakers would have to accept despite vows against supporting tax hikes.
Also, Controller Steve Westly has said an on-time budget is vital for California to engage in billions of dollars in short-term borrowing to keep the state operating.
The revamped budget plan that Davis unveiled Wednesday consists of $18.8 billion in spending cuts, a menu of tax increases and significant borrowing to fill a budget shortfall expected to reach $38.2 billion by next fiscal year.
He is calling for a boost in the state's cigarette tax -- 63 cents a pack phased in over two years -- and for individuals making more than $150,000 annually and married couples making more than $300,000 to pay a higher percentage of state income taxes than they now do. The Democratic governor's plans also call for drivers to pay an average of $124 more a year for car license fees.
A key part of the budget is a plan to spread $10.7 billion of the deficit out over about a half-decade by selling deficit bonds -- which would be repaid by revenue from a new half-penny sales tax increase.
Analysts offered generally positive reviews of the borrowing plan -- saying that it has worked for other large governments in fiscal trouble, including New York City in the 1970s.
"It's kind of understandable at this point that they have to take extraordinary steps," said John Hallacy, managing director of municipal bond research at Merrill Lynch.
In an initial analysis of the Davis budget, Hallacy called it a "well-thought- out plan" with reasonable assumptions.
But he and other analysts warned that the new budget proposal still leaves the state strapped with billions in debt and hundreds of millions in interest payments and with a fragile outlook for the long term.
"It's not the panacea, it doesn't absolve everybody of taking other difficult steps," Hallacy said. "What it does is it provides some breathing room."
At the heart of the issue is overhauling the way that California fills its state treasury. The state is highly dependent on personal income taxes, and its fiscal fortunes are tied directly to the volatile stock market.
During the high-tech boom in the midst of Davis' first term, lawmakers and the governor poured money into social service and health care programs, education and tax breaks. But the ensuing market bust left the state billions short, and revenues have yet to recover.
"A compromise where you have high services and low taxes is not sustainable," said David Hitchcock, a director in the state and local government group of Standard & Poor's. "The state has to make a choice here."
Davis in January vowed that he would not sign a budget that did not include significant reforms to the state's volatile revenue-collecting structure. His revised budget lacks any major structural changes, though he urged lawmakers to quickly take up the task.
"If it doesn't get done this summer, then the state will be facing problems down the road," Davis said Wednesday.
Indeed, even with a menu of solutions included in Davis' plan to wipe out the deficit by the end of the next fiscal year, the state will face a nearly $8 billion deficit in 2005 unless the Legislature enacts changes in the way the state collects its revenues or makes permanent cuts to spending obligations.
"If the answer is 'We are going to wait for things to get better,' " Cohen, of Fitch Investors Services, said, "that's the wrong answer."
Despite warnings, however, banks and investment firms have an interest in helping California.
As Hallacy put it, "There is no real recovery in the nation without recovery in the state of California."
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
(Long Island, NY) Newsday, May 15, 2003
Davis' finance model: New Yorkers still paying 1975 debt
By TOM CHORNEAU Associated Press Writer
SACRAMENTO -- A New York City bond program, the model for Gov. Gray Davis' plan to finance part of the state's budget deficit, has been overtaken by the city's recent financial problems and may require the sale of new bonds to pay off the old ones.
So, as New York taxpayers are still paying off the debt run up the city's famous bout with insolvency nearly 30 years ago, they may be on the hook for another 10 years before they pay off the remaining obligation.
That experience has New York financial experts wondering about the wisdom of the 1975 bond program and Davis' plan to mimic it to solve a big part of California's $38.2 billion deficit.
"How many generations do you want to keep paying what is essentially a debt problem from one point in time?" asked Doug Turetsky, spokesman for the New York City Independent Budget Office, a city oversight agency. "It's generally not a good idea to start borrowing money to pay your debts."
While experts point out differences between New York's problem in the mid 1970s and California's current crisis, there are many similarities between both fiscal crises and methods of fixing them.
Davis' revised budget, released Wednesday, calls for $8.3 billion in new taxes and more than $18 billion in cuts and savings. But the centerpiece of the proposal is the plan to sell bonds to pay off the state's existing deficit.
By June 30, the end of the current fiscal year, the state will have spent about $10.7 billion more than it has taken in. If unchecked, the shortfall will reach $38.2 billion by July 2004.
Like New York 30 years ago, California's fiscal crisis is the product of declining revenues and rising costs of services. In New York, the shortfall was hidden for years behind questionable bookkeeping practices and budget gimmicks. In California, the downturn was painfully swift on the heels of recession and the collapse of the stock market.
When New York faced bankruptcy in 1975, the city was unable to borrow more money to pay its bills. So city and state leaders created the Municipal Assistance Corp., a public-trust agency established outside city government. Back by the state treasury, the agency sold bonds that were paid off by city sales taxes.
Between 1975 and 1984, the corporation issued nearly $10 billion in bonds to bail out the city. Still outstanding is $2.5 billion of the total _ which costs city taxpayers about $500 million a year in interest payments.
The last bonds are set to expire in five years, but budget problems brought on by recession and the aftermath of the Sept. 11, 2001, attacks led New York Mayor Michael Bloomberg to ask the state to help refinance the remaining debt over 30 years.
New York Gov. George Pataki rejected Bloomberg's idea this week but offered to help pay off the notes in 10 years.
Now, Davis wants to follow New York's lead by creating a separate agency to sell $10.7 billion in bonds and pay them off with money from a half-cent sales increase.
Unlike New York in 1975, California can still borrow money, although the state has one of the nation's lowest credit ratings. But Davis said California must create a special agency to control the repayments to skirt constitutional requirements that some of that money be shared with schools.
The administration also contends that bankers have insisted they would need a guaranteed source of repayment before they would consider buying the bonds.
Also unlike New York, Davis plans to pay back the bonds in five to seven years. Most banking experts say seven years is a short enough period for the state to pay off its bonds without having to refinance them.
Nevertheless, borrowing money to pay for the costs of operating state government is a bad habit that lead fuel more deficits, said Fred Silva, a senior adviser at the Public Policy Institute of California.
Because Californians "expect a high level of service, but are reluctant to raise taxes," Silva said, the state "has to come to grips with either raises taxes to provide the service or reduce services."
State Controller Steve Westly said he is comfortable with the governor's plan because the terms of loan will be locked in.
"There are two requirements for borrowing _ that you have a dedicated money stream for paying it back and you commit to when you will pay it back," Westly said. "It's a simple standard and that's what we need to do."
Stephen Levy, director of the Center for
Continuing Study of the California Economy, said that California
has a track record for using temporary taxes to solve budget problems.
"There always been the fear that when government gets an increase
in revenue that they will not impose the discipline, but that's