California Politics: The Dec. 5 Deadline

Friday (today Dec. 5) is the deadline for the legislature to approve referenda to be placed on the March ballot. Gov. Schwarzenegger is pushing for two in particular. One is a $15 billion bond deal. The other is a spending cap. By Saturday morning, we'll know what the legislature has agreed to do.

Democratic State Treasurer Phil Angelides is already campaigning against Schwarzenegger's proposed $15 billion borrowing. At the risk of going into total finance-nerd mode here, I'll say that this is a difference between state and federal budgeting. Deficits are counted differently at the state level than at the federal level. You have to cover the current operating costs. But long-term capital projects, like a four-year road project for instance, can be approved on the basis of borrowing money over a four-year period.

As a general rule, borrowing money through a bond issue is not only acceptable for a long-term project, but arguably a desirable thing. If a bridge will last 30 years before needing significant upgrades, it makes sense to finance it with a 30-year bond. The citizens that will be paying off the bond over that period are also the ones using the road.

But borrowing money over a long period of time to finance a single year's operating expenses is a whole different thing. The money is spent in a year, but has to be paid back over a much longer period. A lender will loan a car buyer money for up to five years normally - to use one of the governor's favorite campaign contributor industries. Because the car has some significant residual value for that period. A ten-year loan would be hard to come by, because if the car wears out in five or seven years, the lender would be much more likely to default on teh remaining payments.

Borrowing money to cover annual operating expenses is bad business, in other words. And it's bad in the public sector for essentially the same reasons. It reduces future annual operating budgets by the amount of the interest payments to fund services for a single year.

And that is the crux of the problem with Schwarzenegger's proposed bond issue. A significant portion of it goes to cover the state's annual operating deficit for the coming year, allowing the governor and the legislature to postpone decisions about program cuts and/or revenue increases.