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Governor Proposes Bond Sale, Spending Cap

Gov. Arnold Schwarzenegger today proposed a $15-billion bond measure along with a state spending cap, measures aimed at closing a huge gap in next year's budget, but which also could eventually drain billions from the state treasury.

The bond proposal — though controversial for its potential to cost the state as much as twice what it borrows — could cushion the blow of Schwarzenegger's first act as governor, an executive order to roll back the recent tripling of the vehicle registration fee.

When government runs deficits, they can do one of three things:

1. Raise revenues.

2. Cut spending.

3. Borrow from the future.

Schwarzenegger has decided that number 3 is the best thing to do since he doesn't want to raise taxes and he has yet to figure out where and how much to cut. Let's hope he figures it out soon, since borrowing from the future will only go so far before it leads to an increase in taxes and cuts in spending. This probably will not happen during his administration, but if he truly cares about California, he will be cognizant of these dangers on the horizon. As for me, I'm a bit wary about the prospect of paying $30b over 30 years instead of paying $15b now.

Don't get me wrong. A little deficit can be a good thing during hard economic times. But borrowing is expensive, so you want to make sure that you put the money to good use. How many dollars will you spend per job retained or created? How many dollars will you spend per business retained or created? How many dollars will you invest now to reap revenues in the future? Will your borrowed dollar give you a return on investment in a broader tax base or higher revenues that eases the cost of borrowing? The problem is, if you are simply borrowing to plug a gap, it won't have much of an effect on future revenues.

Now, he's also proposed spending caps that presumably will be indexed to population growth and inflation and possibly personal income. Sounds good, right? Let's not forget the environment legislators are working in. 70% of the general fund is already locked up in mandatory spending. Strict spending caps would mean that some vital programs will receive funding one cycle and possibly no funding the next. Not a good idea. Let's also not forget that these numbers are based on projections about the future. No national or state projection predicted the dot-com bust, the corporate accounting scandals, or the federal tax cuts (which affect state revenues). Nor did these projections predict economic catastrophes such as wildfires, floods, earthquakes, strikes, and disease outbreaks. What the state needs is not rigid budget laws but fiscal managers who have the flexibility to deal with disaster and the prudence to save during good times.

We'll see what happens. The Governor still has the Legislature to deal with. Unless the next budget cycle shows significant increases in revenue or decreases in spending, we might be faced with borrowing even more from our future selves. And that course of "action" is untenable.