Thursday, December 04, 2003
News from the Terminator's team:
The Golden State, From Red to Black
How Gov. Schwarzenegger will make California solvent again.
BY DONNA ARDUIN
Thursday, December 4, 2003 12:01 a.m.
SACRAMENTO, Calif.--For the past five years, California government has spent $23 billion more than it has taken in. Over the past five years, while revenues have increased by 25%, state expenditures have risen by 43%. If government had simply spent at the same rate that California's economy has grown, the state's budget would be balanced today.
Instead of resolving imbalances, the previous administration and the Legislature chose to borrow $25 billion from future state budgets in order to create or expand programs that the state couldn't afford. In health and human services alone, significant program expansions have totaled $1.3 billion.
The combined result of this overspending is stark. California faces massive budget deficits and has run out of places to borrow. And if we do not get our fiscal house in order, we will not be able to refinance the $14 billion of debt that matures in June, or be able to pay our bills.
Gov. Arnold Schwarzenegger did not create this crisis. But he is proposing a way to help lead California out of it.
First, the governor is asking the Legislature to send to the voters a constitutional spending limit that will significantly curtail spending next year.
Second, he is asking the Legislature to send to the voters authorization for a general obligation bond--but only if the spending limit is approved--in order to reduce the cost of currently contemplated borrowing.
Third, he is asking the Legislature to start curtailing overspending--and start now. In order to balance the current year's budget and begin to gain control of our fiscal situation, Gov. Schwarzenegger has said that he would ask the Legislature to enact roughly $2 billion in current-year spending reductions.
Let me discuss each of these steps in detail:
• Constitutional spending limit. This will require that expenditures in fiscal year 2004-05 cannot exceed revenues. It will truly require the state to live within its means. For the 2005-06 fiscal year, spending growth over the preceding year will match inflation and population growth. This spending limit will also establish a Revenue Stabilization Fund, which will receive any general fund revenue that comes in above the spending limit. This "rainy day" fund could be used--with a two-thirds vote of the Legislature--for the following four purposes: repaying deficit bonds, tax rebates, emergencies declared by the governor, and transfers to the general fund when revenues fall below the spending limit in the future.
This spending limit will allow the governor to declare a fiscal emergency in the event that the director of finance determines that general fund expenditures are projected to either exceed available general fund revenues, or exceed the spending limit. Once a fiscal emergency is declared, the governor is then required to call a special session and submit legislation to reduce expenditures. The Legislature would then have 30 days to enact, by a two-thirds vote in each house, any different package of legislation. But in doing so, the Legislature must make a finding that its package also solves the spending problem identified in the declaration.
• General obligation bond. This would be used to refinance $15 billion of the $25 billion in debt that has already been incurred.
As the 2003-04 budget was being debated this summer, the bond rating agencies chose to lower California's credit rating, citing the state's failure to close the gaps between revenues and spending, its reliance on short-term borrowing, and its use of spending deferrals. The rating agencies are also aware that legal challenges have been raised on both the pension obligation bonds and the deficit bonds authorized by the Legislature in the current budget.
In the discussion over whether to pursue a bond for this purpose, there's been a great deal of focus on the cost of debt. The state's financing objective is very simple--to obtain the full amount of money needed to address the accumulated deficit in as cost-effective a way as possible.
The voter-approved bond authority would provide insurance should the courts find the existing bond proposals illegal. We need to have an alternative plan.
If the bonds are structured with a longer maturity, it is no different from choosing to lock in an attractive home mortgage loan when rates are low, rather than risk having to refinance that loan in the next few years when rates are higher and new fees, or "points," have to be paid. That's why this bond proposes to refinance the $14 billion of short-term borrowing that's assumed in the current budget with longer term bonds that contain what are known as "call features"--which allow us pay that debt off earlier if circumstances warrant. That gives our economy time to grow and generate revenues. And if the economy grows faster than projected, we can pay off that debt faster.
• Spending reductions. Estimates vary on the size of the budget shortfall for the fiscal year we're now in. But they fall in the range of between $2.2 billion and $4.3 billion. The governor is asking this Legislature to eliminate nearly $2 billion of the projected shortfall immediately.
We have a list of proposals to start reducing spending now. It includes 38 specific actions that cover a range of program areas, including transportation, resources, health and human services, and education. Together, these total $1.9 billion in budget savings in the current and next year. I will seek additional savings through the new authority granted in this year's budget for the executive branch to make midyear expenditure reductions. Furthermore, we expect to generate additional savings from actions the governor is taking by executive order.
We have a realistic assessment of the state's fiscal picture, and a comprehensive plan to begin to fix fiscal problems that have grown in the past five years. No one is under illusions about how difficult this task will be. But the alternative--failing to take action--is simply not an option.
Ms. Arduin is the finance director for Gov. Schwarzenegger of California.
The Golden State, From Red to Black
How Gov. Schwarzenegger will make California solvent again.
BY DONNA ARDUIN
Thursday, December 4, 2003 12:01 a.m.
SACRAMENTO, Calif.--For the past five years, California government has spent $23 billion more than it has taken in. Over the past five years, while revenues have increased by 25%, state expenditures have risen by 43%. If government had simply spent at the same rate that California's economy has grown, the state's budget would be balanced today.
Instead of resolving imbalances, the previous administration and the Legislature chose to borrow $25 billion from future state budgets in order to create or expand programs that the state couldn't afford. In health and human services alone, significant program expansions have totaled $1.3 billion.
The combined result of this overspending is stark. California faces massive budget deficits and has run out of places to borrow. And if we do not get our fiscal house in order, we will not be able to refinance the $14 billion of debt that matures in June, or be able to pay our bills.
Gov. Arnold Schwarzenegger did not create this crisis. But he is proposing a way to help lead California out of it.
First, the governor is asking the Legislature to send to the voters a constitutional spending limit that will significantly curtail spending next year.
Second, he is asking the Legislature to send to the voters authorization for a general obligation bond--but only if the spending limit is approved--in order to reduce the cost of currently contemplated borrowing.
Third, he is asking the Legislature to start curtailing overspending--and start now. In order to balance the current year's budget and begin to gain control of our fiscal situation, Gov. Schwarzenegger has said that he would ask the Legislature to enact roughly $2 billion in current-year spending reductions.
Let me discuss each of these steps in detail:
• Constitutional spending limit. This will require that expenditures in fiscal year 2004-05 cannot exceed revenues. It will truly require the state to live within its means. For the 2005-06 fiscal year, spending growth over the preceding year will match inflation and population growth. This spending limit will also establish a Revenue Stabilization Fund, which will receive any general fund revenue that comes in above the spending limit. This "rainy day" fund could be used--with a two-thirds vote of the Legislature--for the following four purposes: repaying deficit bonds, tax rebates, emergencies declared by the governor, and transfers to the general fund when revenues fall below the spending limit in the future.
This spending limit will allow the governor to declare a fiscal emergency in the event that the director of finance determines that general fund expenditures are projected to either exceed available general fund revenues, or exceed the spending limit. Once a fiscal emergency is declared, the governor is then required to call a special session and submit legislation to reduce expenditures. The Legislature would then have 30 days to enact, by a two-thirds vote in each house, any different package of legislation. But in doing so, the Legislature must make a finding that its package also solves the spending problem identified in the declaration.
• General obligation bond. This would be used to refinance $15 billion of the $25 billion in debt that has already been incurred.
As the 2003-04 budget was being debated this summer, the bond rating agencies chose to lower California's credit rating, citing the state's failure to close the gaps between revenues and spending, its reliance on short-term borrowing, and its use of spending deferrals. The rating agencies are also aware that legal challenges have been raised on both the pension obligation bonds and the deficit bonds authorized by the Legislature in the current budget.
In the discussion over whether to pursue a bond for this purpose, there's been a great deal of focus on the cost of debt. The state's financing objective is very simple--to obtain the full amount of money needed to address the accumulated deficit in as cost-effective a way as possible.
The voter-approved bond authority would provide insurance should the courts find the existing bond proposals illegal. We need to have an alternative plan.
If the bonds are structured with a longer maturity, it is no different from choosing to lock in an attractive home mortgage loan when rates are low, rather than risk having to refinance that loan in the next few years when rates are higher and new fees, or "points," have to be paid. That's why this bond proposes to refinance the $14 billion of short-term borrowing that's assumed in the current budget with longer term bonds that contain what are known as "call features"--which allow us pay that debt off earlier if circumstances warrant. That gives our economy time to grow and generate revenues. And if the economy grows faster than projected, we can pay off that debt faster.
• Spending reductions. Estimates vary on the size of the budget shortfall for the fiscal year we're now in. But they fall in the range of between $2.2 billion and $4.3 billion. The governor is asking this Legislature to eliminate nearly $2 billion of the projected shortfall immediately.
We have a list of proposals to start reducing spending now. It includes 38 specific actions that cover a range of program areas, including transportation, resources, health and human services, and education. Together, these total $1.9 billion in budget savings in the current and next year. I will seek additional savings through the new authority granted in this year's budget for the executive branch to make midyear expenditure reductions. Furthermore, we expect to generate additional savings from actions the governor is taking by executive order.
We have a realistic assessment of the state's fiscal picture, and a comprehensive plan to begin to fix fiscal problems that have grown in the past five years. No one is under illusions about how difficult this task will be. But the alternative--failing to take action--is simply not an option.
Ms. Arduin is the finance director for Gov. Schwarzenegger of California.
Comments:
Post a Comment
