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Jon Coupal- Columnist

Jon Coupal is an attorney and president of the Howard Jarvis Taxpayers Association -- California's largest taxpayer organization with offices in Los Angeles and Sacramento. [go to website] [go to Coupal index]

Trust Arnold, But Verify
Big bond to cover state debt may be defensible - if protections are built in
[Jon Coupal]

As the celebratory atmosphere winds down in Sacramento following Arnold Schwarzenegger's inaugural, the stark realities of California's budget crisis will quickly take center stage. The scope of the problem facing our new governor is breathtaking. No adjective can adequately describe the budgetary hole dug by Gray Davis & Co.

According to new Finance Director Donna Arduin, Schwarzenegger inherits a total debt of $25 billion. If spending were to continue at the current pace, that debt would grow $12 billion to $13 billion every year. Thus, if the Terminator were to stay on Gray Davis autopilot, we would have a $63 billion debt by the end of his term. Given overall state spending of about $100 billion annually, that would mean a staggering debt load of well over half of total spending.

Will the gravity of the crisis cause Schwarzenegger to break his no-tax pledge? Not likely. First, he has all the characteristics of a strong leader who keeps his word. As promised, he rolled back the dreaded car tax in his first hours on the job. Second, he is fully aware of how much damage even a small tax increase would inflict on the California economy's fragile psychological balance. Many businesses poised to leave the state have put their moves on hold to see what happens in this new political environment. Even if a modest tax increase didn't affect their businesses directly, such a move would send the horrible message of "business as usual" in Sacramento.

Hopefully, Arnold will bring the huge sword he wielded in Conan the Barbarian to his budget task. With taxes off the board, his remaining options are cut spending, cut spending and cut spending. The good news is there are dozens of credible studies full of great ideas to eliminate unneeded programs and make those that are worthwhile more efficient. The bad news is this can't happen overnight. Sure, we can cut as much as a few hundred million by measures like hiring freezes, but real savings will come about only through long-term structural reform.

That raises the issue of borrowing. It is important to understand that when this administration talks about debt, it is not new debt.

The budget deal crafted this summer by Davis and the Legislature contained well over $12 billion in new debt that was never approved by the voters. This illegal debt ($2 billion of which has already been stricken because of a Howard Jarvis Taxpayers Association lawsuit) might be put to the voters as early as this March.

If the new governor asks for voter approval to restructure the existing debt, what should voters do?

They must use their clout - demonstrated in the recall of Davis - to demand significant reforms in how Sacramento handles our finances.

First, voters must require confirmation that the debt on which they are being asked to sign off is for no more than the existing obligations already committed to by the state. In other words, there must be a clear demarcation between the mistakes of the past and the responsible policies of the future.

Second, voters must make clear that if they say "yes," they are not extending a new line of credit to the incoming administration and lawmakers. Approval of a debt restructuring is a one-time action.

Third, debt reorganization should not even be considered unless a plan is in place to immediately reduce current expenditures so as not to exceed available revenues - in other words, stop the bleeding. If ongoing expenditures are not brought into line with existing revenues very quickly, don't bet on any bond issue measure passing.

Finally, voters must insist that debt approval be accompanied by commitment to a meaningful, ongoing spending limit combined with the establishment of a permanent and reasonable "rainy day" fund to help the state fund vital services without raising taxes during inevitable economic downturns.

These requirements should be considered non-negotiable. If they are not met, the politicians in Sacramento should be reminded forcefully of what happened to the last powerful officeholder who badly disappointed voters.


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