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- Woman sleeping in car accused of attacking Cape officer (7/26/16)13
- Area groups working together to reintroduce elk in Missouri (7/18/16)1
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- Burglary of trailer leaves its residents homeless (7/27/16)4
- Cape resident gets seven years in prison for shooting at man (7/26/16)1
- Hastings in Cape closing (7/22/16)5
- Foot plots provide habitats and nutrition to attract wildlife, grow populations (7/18/16)
- City may spend extra park tax money on Cape Splash, skate park, other projects (7/25/16)10
Debt-ridden Calif. faces $15 billion question
SAN FRANCISCO -- California is quickly running out of cash and bracing for acute financial pain following three years of political procrastination and budget bungling.
Now voters must decide if it makes more sense to approve a $15 billion bailout bond that might extend the misery for a decade or more, or suffer it more intensely through temporary tax increases and deep spending cuts.
Gov. Arnold Schwarzenegger is trying to convince voters the bitter medicine should be dispensed gradually -- that paying back the bailout bond over the next nine to 14 years is the most humane way for California to rehabilitate itself.
His opponents say California will be making a terrible mistake if it shoulders long-term debt to solve short-term problems.
In either case, it's clear the time has come for California to balance its checkbook. The state will literally run out of money unless Schwarzenegger and the legislature find a way to produce $14 billion to pay short-term notes due June 16.
If voters refuse to authorize the bond under Proposition 57 on the March 2 ballot, Schwarzenegger says he'll have to make "Armageddon" spending cuts that will make California a less desirable place to live.
Without the bailout bond, California's obligation to make the June 16 payment would compete with its duty to provide essential public services, said Timothy Blake, managing director of Moody's Investor Service, one of three major credit rating agencies. "That is not an orderly situation."
But Schwarzenegger's critics say the bond measure would place the state in a more perilous position, by limiting the money California can borrow in the future to pay for schools, roads and other quality-of-life improvements needed to maintain home values and the state's economy, the sixth largest in the world.
"It will be another sign to business that California is stepping back from investing for the future," Stephen Levy, director of the Center for Continuing Study of the California Economy, wrote in his analysis of the deficit bond and its impact.
California's dilemma stems from its failure to reduce spending when the recession drained tax revenue. The poor financial management fueled the recall of Democratic Gov. Gray Davis, put the Democratic-led legislature on the defensive and left the state with a deficit the Republican Schwarzenegger estimates at $22 billion.
Recent improvements in the stock market will help, but not in time.
California has been in this situation before, most recently in the early 1990s under Republican Gov. Pete Wilson, who responded by arranging billions in short-term loans, reducing spending and raising taxes.
Schwarzenegger prefers to keep taxes at current levels and borrow over the long term, raising enough cash immediately to help pay $14 billion and free up money for other purposes. The bond would be repaid by siphoning one-quarter cent from the existing 7.25 percent statewide sales tax.
"This is the only solution for the state to move out of its financial problems in a practical way," Controller Steve Westly said during a municipal finance conference earlier this month. Westly, a Democrat and California's chief financial officer, has joined forces with Schwarzenegger to rally support for Prop 57.
A mid-January poll showed just 35 percent of voters in favor of the proposition. The initiative's supporters are counting on a television advertising blitz to change the tide.
Paying back just the principal on a $15 billion bond would cost about $425 per person, based on California's current population. That's before factoring in the interest, which will depend on the rate California gets.
A long-term bond will likely carry a lower interest rate than a short-term loan. California would pay less annually to service the debt, freeing up money for other bills, but longer repayments also mean higher total interest charges over the life of the loan.
Also to be figured into the interest rate is the state's credit rating -- BBB, just a couple notches above junk bond status. And the strong stock market is luring money away from the municipal bond market, forcing issuers to pay higher rates to attract investor interest.
State Treasurer Phil Angelides, a Democrat plotting a possible run for governor in 2006, says the bailout bond will haunt the state for a long time, if it's passed.
"It's the wrong way to go. It's hooey," Angelides said in an interview. "It's not going to solve the deficit. It's just going to run up our credit card bill."
Instead, he said, the state should do whatever it takes to eliminate the deficit within three years, even though that would mean billions in spending cuts.
On the Net:
Center for Study of California Economy: http://ccsce.com/