Loans Seen as Remedy for Shortfall

SACRAMENTO — A bipartisan group of legislators is quietly trying to build support for a plan to resolve California’s budget shortfall by having the state borrow billions of dollars and pay the money back over several years.

A similar approach helped Orange County emerge from bankruptcy in the 1990s, and supporters of applying that idea to California’s budget problems say it could offer the state a way to spread out the state’s shortfall rather than try to patch it in a single year.

At least eight Republicans and eight Democrats in the Assembly are working on the plan, which could involve the state borrowing billions of dollars through bonds that would be paid off over five years or more, possibly with money generated by a car tax increase.

Although in its infancy, it is the first proposal for balancing the budget that appears to have support from members of both parties since Gov. Gray Davis revealed in November that California faced an 18-month shortfall of up to $35 billion.

Since then, leaders of the two parties have struggled to make headway: Last week, the Legislature approved a package of $3.3 billion in cuts and funding shifts, but that represents roughly a tenth of the overall challenge; it only came after months of debate and over Republican objections that it was far short of what was needed.

As a result, some Republicans and Democrats are searching for a different solution to the shortfall, and have lit upon the bond idea as a possible method for bridging part of the gap. Some in the group have taken to calling it the “Orange County model,” and financial consultants who helped the county out of bankruptcy have been brought in to offer advice.

“This idea has got potential,” said Assemblyman Joe Canciamilla (D-Pittsburg). “It’s certainly got more support and more life than most of the ideas out there.”

The plan would involve selling bonds to roll over at least $8 billion of the state’s debt -- but possibly much more -- through the next five to seven years. The bonds would be paid off with $4 billion raised annually from an expected car tax increase, or from other state revenues that would be freed up as a result of program cuts.

Stretching out the debt in such a way would ease the severity of other tax increases or program cuts needed to balance the budget, according to advocates of the idea.

The proposal is modeled after the recovery plan Orange County adopted after $1.7 billion in investment losses forced the county into bankruptcy. There, officials financed the county’s debt with $880 million in bonds that county taxpayers will pay back over 30 years. They also enacted roughly $300 million in budget cuts.

Such borrowing comes at a price. It could cost the state more than $1 billion to cover interest and other costs on the bonds. And some lawmakers may have suspicions about following the advice of the very investment firms that would profit from such bond sales.

How to pay off the bonds is also a delicate issue. The revenue from the projected car tax increase offers one possible source of money, but Republicans oppose that increase, which would cost drivers an average of $136 a year. Their opposition may prove moot, as attorneys for the state recently concluded that it could increase automatically; since that legal opinion was released, some Republicans have begun to factor that money into their budget calculations.

“We are not at all supportive of the car tax, but it is clear that the decision to trigger the car tax was already made,” said Assemblyman Keith Richman (R-Northridge), a leading member of the bipartisan group and one who advocates using the funds to cover the debt.

Some Wall Street analysts say an Orange County-type solution would be reasonable in the context of California’s fiscal problems.

“We assumed some multiyear plan was likely,” said Raymond Murphy, an analyst for Moody’s Investors Service. “Given the magnitude of the problem, you really couldn’t solve it in one year absent draconian cuts and major [tax] increases.”

But Murphy cautioned, “We can’t say whether we like or dislike a plan until we’ve seen it.”

Wall Street’s unhappiness with the state’s inaction, however, is already clear. Bond analysts were quick to criticize what they saw as the Legislature’s cautious and insufficient movement on the budget cuts approved last week.

Those reductions took so long to make that much of their impact was blunted, analysts said, and the cuts were quickly followed by an announcement from legislative leaders that they did not anticipate taking any more substantial budget actions until mid-May.

Also, a closer look at the package approved by the Legislature and signed by the governor reveals that only a portion of the savings are achieved through actual program reductions.

All told, the Legislature reduced general fund spending for the current year by $3.3 billion. Of that, $1.9 billion was in cuts to programs as varied as a teen pregnancy media campaign, summer school materials for students and the Los Angeles regional crime lab. But another $1.3 billion in savings was achieved merely by moving programs from one fund to another or delaying expenditures from June until July, when the new fiscal year begins.

Frustrated by that slow progress, some influential lawmakers not involved with the bipartisan group have expressed support privately for the kind of plan the group is working on.

According to proponents, following the Orange County model could still require at least an additional $10 billion in cuts to government programs or tax increases to stop the state from incurring even more debt in the future. Democrats are continuing to push for more taxes to preserve health care and social service programs, but Republicans want more cuts.

Republicans also are concerned about working against Assembly Republican Leader Dave Cox of Fair Oaks and others in the party who are calling for the budget to be balanced in no more than two years, with deep cuts only.

Cox said the type of plan Richman describes “makes no sense” because it is akin to using a credit card to pay off other credit cards. He also noted it relies on a car tax increase that Cox says is illegal and will be challenged in court.

In one respect, the borrowing proposal builds on another Republican suggestion circulating in the Capitol. Several weeks ago, Senate Republican Leader Jim Brulte of Rancho Cucamonga proposed closing the budget gap over two years, an attempt to spread out the pain that the cuts entailed.

Democrats criticized the plan at the time because it would have required cutting programs much deeper than even the governor has proposed. The Davis plan would cause more than 500,000 low-income Californians to lose their health insurance.

But Senate Democrats applauded the idea of rolling over debt, declaring in an analysis of the Brulte proposal that it recognizes “that the problem is too huge to solve in the budget year.” And some economists seized on the multiyear concept as a sensible way to close the budget gap.

“It’s something they should be looking at,” said Stephen Levy, director of the Center for Continuing Study of the Economy, a private research organization in Palo Alto.

Levy said stretching the payment out over several years is a more “humane” solution, and allows lawmakers to scale down the size of cuts and tax hikes needed to ultimately balance the budget.

“Both parties have to be willing to meet in the middle,” he said. “I think Wall Street will support this idea, but only if it comes along with committed tax revenues and pledges of cuts. No one could or should lend us money on the promise that we will take care of it next year.”

State Treasurer Phil Angelides cautioned lawmakers against trying to borrow their way out of the budget hole.

“I think you can [roll debt over] for a finite period if you have a finite plan,” he said. “But the wrong thing to do is roll it over on a hope and a prayer. That’s a formula for disaster.”

Cox said the bipartisan group may be looking at the wrong part of the Orange County model. Instead of championing the multiyear financing part of it, he said they should consider the first thing Wall Street investors demanded of the county.

“They came in and told them to whack their budget down,” Cox said. “That’s what they did in Orange County, and that’s what they are going to do in the state of California. They are going to walk in here and tell us, ‘You must make spending reductions.’ ”

*

Times staff writer Jeffrey L. Rabin contributed to this report.