Here’s a fact I learned during the state’s recent (and unfortunately somewhat ongoing budget crisis and cash crunch): When cash runs short, other states pay their bondholders – the people they’ve borrowed money from – back first. But not California.
Here bondholders are second in the priority of payments. Education is first.
Proud? Don’t be. It’d be better for public services, for the state – and perhaps even for education – if we reversed the two priorities.
Why? At a Zocalo Public Square event I moderated last month in Los Angeles, Peter Taylor, managing director in the public finance department at Barclays Capital, explained that California’s priority payments probably hurts our credit rating a little. So we pay a little bit more to borrow for the privilege of putting education first. The extra money we pay to borrow would be better spent on more public services, including education.
This difference is one reason – but hardly the only reason – why California has the lowest credit rating in the country. The big problems: our budget and economic problems are deep, and the markets are skeptical that the state has a real plan to get rid of its long-term structural deficit and budget dysfunction. But changing the priority of payments might make it slightly less expensive for the state to borrow money.
Flipping the priority of payments – bondholders first, education second – should be a no brainer. There’s little real risk to education. It would still be high enough on the priority list to be well protected. But the politics would be dangerous. The state constitution would have to be amended, and it’d be easy for an opportunistic politician to oppose such a change by saying that education should be first.