Treasurer criticizes plan to borrow billions for state’s budget deficit

BY RAY DELGADO

An "avoidance and denial" mentality is running rampant in Sacramento, and the widespread legislative support of a $15 billion bond measure to close a state budget deficit is symptomatic of the problem, according to State Treasurer Phil Angelides.

State politicians should be looking to make tough but necessary budget cuts and implement unpopular tax hikes rather than borrow another $15 billion that will cost the state much more in the long run, Angelides said during a Friday afternoon discussion of the California budget at the first ever economic summit of the Stanford Institute for Economic Policy Research.

"I find it astounding that there's this great self-congratulation over the level of bipartisanship that's been achieved," Angelides said. "Over what -- the agreement to borrow more? This is not a great achievement in the move toward a structural balanced budget."

Proposition 57, which California voters approved with 63 percent of the vote on March 2, will allow the state to collect up to $15 billion from the sale of bonds to pay off the state's general fund deficit. The proposition, known as the Economic Recovery Bond Act, enjoyed wide support from Gov. Arnold Schwarzenegger and other legislators.

Angelides, a Democrat who was elected state treasurer in 1998, has been one of the most vocal critics of the proposal, arguing that the $15 billion bond measure will saddle the state with a bigger problem in the long run and hamper future budget discussions. He told summit attendees that the bond measure unfairly passes the buck to future generations because it will need to be paid back over 10 to 15 years with interest estimated at about $400 million over 10 years.

"I don't think it's particularly fair," Angelides said. "There's no question in my mind that there's going to have to be a level of sacrifice around the state to balance the budget."

That sacrifice, Angelides said, will have to come from at least a 5 percent reduction in the state payroll through layoffs to save approximately $500 million per year and by making prioritized cuts to state programs. Angelides praised former Gov. Pete Wilson's approach to closing a $14 billion deficit in the face of tougher economic times and high unemployment in the mid-1990s.

"He did it the old-fashioned way," Angelides said. "Like it or not, he raised $7 billion in revenues and made $7 billion in cuts. Did that damage the economy? No."

To raise revenues to help close the budget gap, Angelides expressed support for the quarter-cent sales tax increase proposed as part of the Economic Recovery Bond Act, which would raise an estimated $4 billion over the next three fiscal years.

He also proposed a three-year restoration of the higher income tax brackets that were instituted under governors Ronald Reagan and Wilson. Such a move would restore the 10 percent and 11 percent tax brackets on single taxpayers earning more than approximately $140,000 and $280,000 per year, respectively, and for married taxpayers filing jointly who earn more than approximately $280,000 and $560,000, respectively. The tax bracket restoration would generate an estimated $6.8 billion in revenue over the next three fiscal years, Angelides said.

The two actions combined would amount to about $10.8 billion in revenue over three years, Angelides said, and would help legislators retire the deficit in a timelier fashion.

"As a public leader, I'd be remiss if I didn't remind people that the piece we say is undoable must be done," Angelides said. "If [budget cuts] had been done, we wouldn't be here today."

Thomas MaCurdy, the director of the California Policy Program at SIEPR, challenged Angelides' plans for dealing with the deficit, but he also told the crowd that the current bond proposals are merely quick fixes for the state's economic woes.

"If the governor were to get everything he wanted right now, we're projected to be OK this fiscal year and next fiscal year, and after that, we're off to the races," MaCurdy said. "We really do have the same problem we were facing before. We either have to raise revenues or we're going to have to cut spending."

Although he argued in favor of making tough cuts to statewide programs, Angelides lamented the fact that a budget crisis has prompted state officials to make tough cuts to education and other programs instead of focusing their attention on long-term needs. He blamed the budget crisis on a combination of many factors: the energy crisis, the burst of the dot-com bubble, the events of Sept. 11, economic downturn, unemployment and stock market losses.

He also said that the state needs to do a better job of attracting businesses by reforming workers' compensation and liability laws and strengthening the future workforce by making widespread improvements to education, health care and infrastructure to support a population that is expected to grow from 35 million to 46 million by 2020 -- most of whom will be people of color.

"In the end, our competitive advantage will be that we're not the cheapest but we are the best," Angelides said. "I think all of us know that we're not going to be able to compete with Indonesia, China, Malaysia and India on the lowest cost production of goods, which means that we're going to have to make investments that maintain quality of life and quality of workforce."