Repaying This State Borrowing Goes Up in Smoke

Jon Coupal
President of the Howard Jarvis Taxpayers Association

Sacramento politicians and Japanese censors during WWII share a similar philosophy — they do their best to prevent the public from learning of their leaders’ mistakes.

The turning point of WWII in the Pacific was the battle of Midway where the Japanese fleet suffered a catastrophic defeat with the loss of four aircraft carriers. The response of Japanese officials was to announce a victory.

Seventy years later, Sacramento officials deal with failure in much the same way. Here, thanks to research by California Watch, a project of the nonprofit Center for Investigative Reporting, is some bad news the politicians do not want you to know.

A major bond rating agency is warning that California may not be able to repay $4 billion borrowed against the ten year old settlement with tobacco companies that would pay states approximately $246 billion over a 25-year period to compensate for tobacco-related health care costs. The problem? The money was not guaranteed, but tied to tobacco sales, and the number of smokers is declining more rapidly than anticipated.

After the agreement was finalized, state and some local governments issued $16 billion in bonds against California’s share of the anticipated revenue, a process known by insiders as “securitization.” This allowed Gov. Gray Davis and other officials to continue to ramp up spending, without having to deal with growing deficits. It was the J. Wellington Wimpy — Popeye’s buddy — approach to government finance, “I’ll gladly pay you on Tuesday for a hamburger today.” Now we are finding that all the hamburgers have been eaten and California taxpayers may be on the hook for billions of dollars borrowed against phantom tobacco receipts.

In a rational world, this would be called a failure by government and the public would be alerted, but Sacramento is quiet about this problem because this approach to papering over deficits is not unusual. Rather than limit spending so that it is line with realistic revenue expectations, the political class is constantly searching for gimmicks.

In 2009, Gov. Arnold Schwarzenegger worked with the Legislature to develop a complex measure, Proposition 1C, to securitize lottery revenue and advance the state $5 billion. Fortunately, voters saw through the scam, and rejected this along with the $16 billion in higher taxes that appeared on the same ballot.

And, in his last year in office, Schwarzenegger pushed to sell a number of state buildings. The idea was to sell the buildings for cash now, and rent them back. The long term implications were so expensive to taxpayers that the Office of the Legislative Analyst said it would be much cheaper to issue bonds to raise the desired revenue and, after Gov. Brown was sworn in, he put an end to this ill-conceived effort.

The lesson here, of course, is that there is no free money. Whenever officials engage in securitization of revenue or assets, you can bet that the long term impact on taxpayers will be negative. When securitization takes place, with a resulting temporary infusion of cash, the politicians will declare victory and claim it is the result of their good stewardship of government. However, when the bill comes due for their malfeasance, they are nowhere to be found.

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