Contributors
M. David Stirling- Contributor

Mr. Stirling served in the California Assembly between 1976 and 1982, and as chief deputy attorney general from 1991 to 1998. He is vice president of Pacific Legal Foundation, a public interest legal organization.

Dealing With Loan Sharks
Legislature’s Budget Bonds Financing Scheme Violates the Constitution, Not to Mention Common Sense
[M. David Stirling] 10/24/03

To preserve [the] independence [of the people,] we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. Thomas Jefferson

Gray Davis’s recall resulted in large measure from voters’ belief he was responsible for the state’s budget mess. But the liberals who control the state Legislature are equally to blame. Indeed, the disgrace that the liberal majority has brought upon California is summed-up in a June 2003 U.S.A Today analysis on the health of state finances that cites the Golden State as the nation’s “worst performing state.”

My July 29 commentary, Destructive Government, described how the liberals who took control of the Legislature in 1998 had, in just four years, not only exhausted the near-$12 billion surplus they found in the state treasury when they arrived, but had, despite clear and frequent warnings of the dire consequences, spent California into an accumulated deficit of more than $38 billion. While California’s population plus inflation grew by a rate of 21 percent in this period, and the state’s revenues grew 28 percent, the liberals’ spending binge amounted to a whopping 36 percent increase. Thanks to the biggest spenders in state history, California’s budget deficit alone is larger than the entire general-fund budgets of every state in the country except New York.

This dismal state of affairs is now exacerbated by the smoke-and-mirrors fix lawmakers imposed through the current state budget. Sacramento Bee political commentator Daniel Weintraub (“Budget is a house of cards,” August 3) wrote that “this budget is more a restructuring of debts than a real attempt to arrest the tailspin. The state, in effect, has paid off its credit cards by pawning some valuables, getting a second mortgage on its house, and obtaining the rest in a questionable deal with the loan shark down in the seedy part of town.”

Weintraub’s Figurative image of California refers to the centerpiece of the budget plan, which pays off $10.7 billion of the accumulated $38 billion debt through the sale of deficit-reduction bonds repayable to the bond purchasers at a higher-than-normal interest rate over five or more years, beginning next July.

Of this unprecedented bond scheme’s many flaws, clearly the most serious—and perhaps fatal—lies in its having been crafted for the Legislature’s liberal majority by the attorney general solely to circumvent a state constitutional provision intended to protect the state’s taxpayers from a spendthrift Legislature. Article XVI, section 1 of the state constitution, originally offered by Senator Eugene Casserly and adopted at California’s 1879 constitutional drafting convention, states that:

The Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall ... exceed the sum of three hundred thousand dollars ($300,000) ... unless the same shall be authorized by law for some single object or work to be distinctly specified therein ...; but no such law shall take effect unless it has been passed by a two-thirds vote of all the members selected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all votes cast for and against it at such election.

Senator Casserly and the other authors of this language may be condemned by today’s legislative standards as unsophisticated and hopelessly straight-forward, but no one can question the meaning or intent of what they wrote, which was to restrict future politicians who might be tempted to go on a borrowing binge.

Yet, if their language is as clear and their intent as evident as it appears, how did the $10.7 billion deficit-reduction bond issue become law without being submitted to and approved by a vote of the people in a primary or general election? And how can the Legislature be promoting a sale of bonds, the proceeds from which will be used, not for “some single object or work,” like water and parks, transportation, schools, public safety, or other infrastructure project, but to pay the state’s past and present operating expenses? Indeed, of the many billions of dollars worth of state bonds sold since Senator Casserly added that section to the constitution, not one was sold to pay day-to-day operating expenses.

As indicated earlier, Attorney General Lockyer crafted the bond scheme for his liberal legislative friends who did not want its proceeds to go to the traditional “single object or work,” and who also were not convinced the voters would approve them if given the opportunity. San Francisco Chronicle writer Kathleen Pender, in a superbly analytical column headlined “Net Worth” (August 10), wrote that “The state’s plan to pay off $10.7 billion in deficit-reduction bonds has been called a shell game, but that’s an insult to shells.” Even his spokesman described the attorney general’s creation as “the most complicated financing scheme known to man.”

The spokesman then went on to explain (presumably with a straight-face) his boss’s “Alice-in-Wonderland” method of getting around the plain English of Senator Casserly’s safeguard provision. “The voter approval (mandate) applies to debt. This is not technically a debt bond. It is something else. It is something new, something different.” Apparently the attorney general was able to devise a sort of “mystical” bond that produces capital without borrowing; if there is no borrowing, there is no repayment obligation; and without such obligation no debt is created.

Yet, in the real world, under the age-old principles of finance, the sale of bonds—whether by a government agency or a corporation—constitutes the act of borrowing money from the bond purchasers, who, as lenders, are entitled to repayment of their loans, with interest. There is no way of getting around it; the obligation created by the sale of bonds is, pure and simple, a “debt.” As my colleague Harold Johnson wrote July 1 in the Sacramento Bee [and June 27 in CaliforniaRepublic.org-ed.]: “Casserly and the other delegates were no-nonsense folks who did not like the idea of government paying its bills by saddling future generations with debt.”

A responsible attorney general, asked to create a legal fiction to skirt constitutional protections, would have answered: “I will not be a party to denying the people the opportunity to vote on whether they will assume $10.7 billion of long-term bonded indebtedness solely to pay the state’s ongoing operating expenses.” It could have been a Bill Lockyer Profile in Courage. Instead, it was just another example of politics trumping the law.

In September, 2003, Pacific Legal Foundation filed a court challenge to this unprecedented bond scheme. The question is, will politics prevail or will the law prevail? Some will argue—perhaps even in court—that if the deficit-reduction bond element of the new budget is overturned, the budget too will fall and the state will be thrown into economic chaos; that at this time, with the state already reeling from a change in governors by way of the recall, it would be better just to let the bond plan take it’s course.

There is little merit in that position. Surely, ignoring or finding a clever way around Casserly’s language would be easier and more comfortable. It was, after all, the path of ease-and-comfort that created the financial mess in the first place. It is not surprising that the legislature chose ease-and-comfort in creating the illegal bond scheme, rather than making the hard choices that were and are necessary to resolve the problem. Yet, the ease-and-comfort solution will be short-term at best, while the diminution in the people’s constitutional protections from undisciplined politicians will be long-term and perhaps irreparable.

One thing is certain: If politicians who spent a huge surplus in the state treasury into a $38-billion debt in under five years are granted the unconditional authority to sell bonds to fund their caprice, the people of California will, on that day, enter a cycle of permanent debt, and the old fear of mortgaging our children’s future will become a reality. We can only hope and trust that the constraints that Senator Casserly and his wise and plain-spoken colleagues placed on all future legislatures 124 years ago will stand the test of time.

copyright 2003 Pacific Legal Foundation