Pumping-up California’s debt

Bonds prolong fiscal nightmare

By David Zelster
From the March 2004 Print Edition

In 1975, New York City faced a severe fiscal crisis. Banks would no longer lend the city money, and basic city services, like police and fire protection, were in jeopardy. Indeed, stories abound about police who were told not to make arrests late in their shifts so that they would not receive overtime pay and residents who were forced to drive their own garbage to landfills in New Jersey.

Through budget tricks, bonds, and short-term loans, the city officials had managed to hide their budget problems and avoid any unpopular cuts to non-essential city services. While the banks kept on giving, the city had no incentive to make any cuts at all.

Bonds like Proposition 57, inherently lead to such fiscal mismanagement. The underlying spending problems are never addressed as the city or state simply papers over the crisis and crosses its fingers, hoping for a quick economic boom.

During the New York crisis, according to a report in Illinois Issues by Dan Miller, “an imposing 75 cents of every dollar spent from New York’s crisis-ridden general fund went to support services.” Miller goes on to say that the cycle of deficit spending only continued as city officials kept putting money into services and even creating new ones!

Perhaps Ron Nessen, President Gerald Ford’s spokesperson at the time of the New York crisis, put it best when he said that the city had “become like a wayward daughter hooked on heroin. You don’t give her $100 a day to support her habit. You make her go cold turkey to break her habit.”

Governor Arnold Schwarzenegger, the lead sponsor of Proposition 57, is touting his measure as an end to “business as usual” in Sacramento. One has to wonder, however, given the history of such bonds, how the profligate spending habits of the legislature in Sacramento will change at all.

At $15 billion, Proposition 57, if passed, will be the largest bond measure in the history of the United States. Just like in New York, where bonds and budget tricks led to the budget collapse, can California prevent a similar collapse, only on a much grander scale? After all, money does not grow on trees. As Ken Rosen, chair of the Fisher Center for Real Estate and Urban Economics, says, “There is no free lunch.”

It is important to remember that New York City was only able to avoid bankruptcy because of a massive federal and state bailout. Only then did city leaders gather up enough courage to cut spending like they should have done well before thinking about bonds. When the bonds come due, should California rely on begging Washington for money to stave off bankruptcy?

The familiar cycle of “spend-borrow-tax,” as State Senator Tom McClintock described it, can only be broken by a systematic restructuring of state spending, a task entrusted to the Governor and a task whose execution is required to balance this budget.

Indeed, postponing spending cuts with bonds has always been a good strategy for politicians who want to avoid making unpopular decisions in the short-term. No legislator seems to be willing to take the risk of cutting a wasteful program that is popular. However, as the case of New York shows, the long-term risk to the state of California is simply too great for an election year strategy.

Unfortunately, the California legislature is beholden to the idea that current fiscal irresponsibility can always be dealt with by the next guy. The cuts that have to be made are going to be painful, and probably can’t be made all at once. “It’s taken several years of fiscal mismanagement to create California’s budget crisis,” said Larry McCarthy, President of the California Taxpayers’ Association, “and we’re not going to solve it overnight.”

However, it is imperative that, unlike in New York, the incentive to make those cuts is not removed.

Bonds are never the answer to a fiscal crisis. When a person spills a glass of milk, he cleans it up immediately, instead of sweeping it under the table where it quickly turns sour. Bonds push the mess under the table, leaving it to fester and grow, until it again reappears, much worse than before. As the city of New York painfully learned, it is better to fix the fiscal mess and control spending before the creditors come calling.

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