SAN FRANCISCO (Reuters) – California Gov. Arnold Schwarzenegger plans to ask for an infrastructure bond issue of $25 billion to $27 billion, the Los Angeles Times reported on Thursday, quoting administration sources. The celebrity Republican has already signaled he is seeking massive spending on infrastructure in the nation’s most populous state. But he has not given a final amount after his administration hinted at a number as high as $50 billion … After a stinging loss in a November special election on a series of his initiatives, Schwarzenegger has promised a new start ahead of his re-election run in November 2006. Rebuilding roads, ports and other infrastructure is a centerpiece of that effort … A bond issue in the $25 billion-$27 billion range would far outstrip a $10.3 billion infrastructure bond proposal from State Senate President Pro Tempore Don Perata, a Democrat. State Treasurer Phil Angelides, a Schwarzenegger critic and Democratic candidate for governor, has stepped up warnings about the danger of issuing new debt. In a recent report, he said California has $34.6 billion in general obligation bonds outstanding and $30.4 billion in authorized but unissued bonds.
Trying to understand what our replacement governor intends to do to reduce our structural deficit is a real challenge even for someone as well informed as John Ellwood. Consider, for example, his presentation A Daunting Task: California’s Problems in Dealing with its Budget Deficit, which presents an nice array of budgetary data and the political barriers to an effective resolution including this statement:
Through a Recall a new Governor Schwarzenegger is elected who promises to solve the deficit problem without any new taxes and without significant spending cuts. This does not work so Governor again turns to a tool of direct democracy – the initiative – to increase the power of those who want to reduce spending.
Of course, that failed as well. Governor Schwarzenegger will address the State tomorrow night and likely focus on information contained in his budget summary:
The economic recovery of California has begun strongly. This has brought new revenues to the State’s treasury. Nevertheless, because of the system of expenditure programs that has been created over the last decade, the expenditures made by the state government would, if allowed to continue unchecked, have gone up even more than the increase in revenue. Left alone, the systems of California’s public budget would have led to a widening deficit even as revenues increased. Both in his budget proposal and his structural reforms, Governor Schwarzenegger is proposing a course correction for California – to bring spending in line with revenues next year, and to bring the State’s Budget back into true structural balance in future years.
As usual, Schwarzenegger is arguing that we do not need to raise taxes to cure the deficit problem and that there is some painless magic to reducing spending. What bothers me is how the statement of the General Fund allows both game playing with expenditures and with the term “revenues and transfers”. The following graph shows both items – blue being revenues and transfers with purple being general fund expenditures – starting with the 1992-93 budget and continuing with the projected 2005-2006 budget. The governor is correct that we increased significantly spending during the late 1990’s boom after recorded revenues soared. The graph is misleading in that it records recent borrowing as “revenues and transfers” to suggest a low general fund deficit. It may also be misleading as far as recent expenditures, which have this appearance of not increasing very much until the current period – when they appear to jump. But this replacement governor is known for his smoke and mirror games.
Of course, the whole point of the budget’s discussion is to blast this apparent jump in expenditures and then suggest:
To achieve balance in 2005-06, virtually every part of state government must take a reduction in the funding that it would otherwise have received if spending were allowed to grow unchecked. Left unaltered, the operation of Proposition 98 would have crowded out all available general funds – and would have resulted in deeper and more severe cuts to health and human services programs provided by the State. Last year, the education community joined with the Governor in postponing $2 billion in what Proposition 98 would otherwise have provided. Given the alternative reductions that would have been required in health and human services, however, the Budget reflects a decision not to appropriate Proposition 98 increases of $1.1 billion in 2004-05 and $1.17 billion in 2005-06. These increases would otherwise have been required were the Proposition 98 guarantee allowed to run on autopilot next year.
When he ran for replacement governor, Schwarzenegger promised not to cut education spending so he now claims he is only postponing education spending. The governor’s budget is also claiming that we can easily avoid the circa $90 billion in General Fund spending with a new projection that this expenditure will magically be only $85 billion. Did the governor just discover the missing $5 billion in funds from the Parmalet fraud?
Schedule 6 of the Statewide Financial Information from the Governor’s Budget is entitled Summary of State Population, Employees, and Expenditures and provides a couple of useful pieces of information, which we graph. Our first graph compares total revenues and total expenditures from the 1992-93 year to the projected 2005-6 year. Notice in particular, that our overall deficit rose last year as the increase in total expenditures exceeded the increase in revenues. But this schedule suggests a dramatic drop in the deficit for the ongoing year by pretending that expenditures will magically decline by almost $6 billion.
Our last graph displays the ratio of government expenditures to personal income over the same time period. While the first observation in our graph (1992-93) was somewhat less than the percentages observed from 1978 to 1981, 8.49% was certainly high when compared to most other years until the 1999-2000 observation. I prefer looking at expenditures as a percent of income rather than in absolute terms for reasons similar to my earlier post today, but one might ask – why not real expenditures per capita? But perhaps you have already checked out Ellwood’s presentation, which does chart real expenditures per capita over time.
If our replacement governor is serious about fiscal responsibility, why is he suggesting a substantial increase in California’s borrowing? It is true that we Californians desire our roads to be repaired, more spending on education, and other services from our government. But shouldn’t we be asked to pay for these publicly provided services in the form of higher taxes? One might argue that the benefits from more and better roads and from public education accrue over the long-term so at least some borrowing is prudent. But this debt must be repaid with interest by California taxpayers in the future. Governor Schwarzenegger truly reminds me of President Bush in his pandering to the public with false promises of more government services without the need for higher taxes. Of course, this lack of political will from Governor Girlie Man will necessitate that we will have to pay even more in taxes later.