California is sinking in a quicksand of debt but an initiative awaiting title and summary may have the answer to reduce the debt burden.
First, a review of the problem.
On Monday, the Assembly Budget Committee met to bemoan California’s rising debt obligation. With California sitting on $83.5 billion of long-term debt, the debt is costing the state treasury $6 billion a year. Over the last decade, cost of servicing the debt has increased 6.5 times faster than the increase of general fund revenues, which are used to pay down general obligation bonded debt.
Treasurer Bill Lockyer and Legislative Analyst Mac Taylor told the legislative hearing that bond service would hit ten percent in a few years. Since servicing debt has first call on the state’s revenue after schools that means that one out of every ten dollars will be used to retire debt and squeeze out funding for other government services.
This morning, the Sacramento Bee’s Dan Walters reports on a study by California Lutheran University economists that suggests the state is more likely than not to default on some of its debt.
While some in government just point to the problem and do nothing but cover their eyes in horror as if being approached by a monster in an old-time Saturday matinee, others have suggested a solution.
The Government Spending Limit Act of 2010 proposes to control state spending and pay down the debt. Filed with the Attorney General’s office in late November, this initiative constitutional amendment is awaiting title and summary before it can be circulated for signature gathering. (Full disclosure: I was asked to give advice on the formulation of this measure.)
If the initiative qualifies for the ballot and is passed by the voters it would bring back the Gann Limit, named for its author, Proposition 13 co-author Paul Gann. The Gann Limit used a formula of capping state spending to increases in population and cost of living growth. The measure appeared on a special election ballot in 1979 and steamrolled all opposition. The margin of victory was 74%-26%.
But the limit was altered over time by other initiatives. If it were still in place, experts say instead of California facing a budget deficit today, it would enjoy a surplus of $2 billion or more despite the debilitating recession.
Returning to the Gann Limit formula would help control state spending. However, a change in the original Gann Limit rules in the proposed measure would lead to dealing with excessive debt.
Under the original Gann Limit, if revenue to the state exceeded the limit that excess revenue would be returned to the taxpayers. That’s what happened in 1987 when Governor George Deukmejian ordered $1 billion over the limit to go back to taxpayers.
Under the provisions of the Government Spending Limit Act of 2010, excess revenue over the limit must first be used to reduce the state general obligation bond debt. The debt must be brought down to 6% of the general fund before the legislature can choose to use the money for other purposes.
Those other purposes enumerated in the measure are: continuing to pay down debt; contribute money to the budget rainy day fund; fund education, or return the excess revenue to taxpayers.
Mandating debt reduction to a reasonable and sustainable 6% from the projected 10% will strengthen California’s dire economic condition and give confidence to investors in California securities.
True, the debt reduction provision will have no immediate effect on California’s dire economic predicament. No one expects “excessive revenue” anywhere around California budgets soon. But, the mere fact that California recognizes the problem and takes a positive step to deal with it should re-assure the financial markets and the citizens of this state.