Budget Borrowing...Or Not

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Most budget watchers will tell you that 2004's Proposition 58 bans borrowing to pay off deficits. But what constitutes deficit borrowing? Welcome to the world of state budgeting.

Governor Schwarzenegger said today that the ban includes an Assembly Democratic proposal to help close the current deficit through a 20 year financing plan.

"It's illegal," said Schwarzenegger in a quick chat with reporters after an unrelated event this afternoon. "Under Proposition 58, we cannot borrow."

But is it borrowing? Don't be surprised for that to be one of the debate points.

The proposal in question is the key part of a broader jobs and budget fix package unveiled by Assembly Speaker John Perez on May 25. It calls for the state to essentially get an upfront $8.9 billion cash advance from Wall Street investors on 20 years worth of revenues from the beverage container recycling fund -- revenues that would be linked, in part, to a new tax on oil production.

(I'll spare you the details this time around; you can see my blog posting from that day for more.)

The plan avoids the 'deep cuts vs. major tax hikes' choices that others have suggested, thereby appearing to be a 'third way' around this year's morass. Some, though, have criticized it as a risky move that will stretch out this year's red ink over two decades.

The governor had not commented on the plan until today, when I asked him whether his stated opposition to new budget "borrowing" included the Dems' plan -- which is technically a 'securitization' of future revenues.

It's unclear whether Schwarzenegger's dismissal of the container fund securitization as illegal under Prop 58 would be backed up in court. Assembly Democratic staffers said today the Guv is wrong because the voter-approved ballot measure's ban is much narrower than the plan they're pitching.

And here's what Prop 58 actually says:

...the State may not obtain moneys to fund a year-end state budget deficit, as may be defined by statute, pursuant to any of the following: (1) indebtedness incurred pursuant to Section 1 of this article, (2) a debt obligation under which funds to repay that obligation are derived solely from a designated source of revenue, or (3) a bond or similar instrument for the borrowing of moneys for which there is no legal obligation of repayment. This subdivision does not apply to funding obtained through a short-term obligation incurred in anticipation of the receipt of tax proceeds or other revenues that may be applied to the payment of that obligation, for the purposes and not exceeding the amounts of existing appropriations to which the resulting proceeds are to be applied. For purposes of this subdivision, "year-end state budget deficit'' does not include an obligation within the accumulated state budget deficit as defined by subdivision (b).

Clear, huh?

Assembly Democratic staffers maintain that the securitization is not a plan to fund a deficit, this not banned under Prop 58. They also point out that a fair amount of the money would go towards a jobs program and not the actual state budget.

The proposal has yet to be heard by the joint budget committee that's now going line by line through the governor's proposal. And staffers say when it's heard in committee, the securitization plan will likely include some modifications from its original form -- not because of Schwarzenegger's pronouncement on its legality, but rather to improve on what's still a work in progress. But it will still include the securitization, they say.

It's also worth noting that the governor offered his own complex securitization plan last year, one that used future lottery proceeds as the source for paying back the money. So why was that one okay under Prop 58? Because, says his staff, it would have first been ratified by the voters; the Assembly Democratic plan would not.

Of course, we know what happened to the Guv's cash advance proposal: voters rejected it and all the other budget measures in the disastrous 2009 special election.

All of this is only the first stage of the debate over the Assembly Democratic plan. There's also likely to be intense debate about the budget offering from Senate Democrats. And yes, all of this has yet to play out as the first of 2010's budget deadlines comes and goes. The sense that budget talks are still a long ways from critical mass is probably what prompted today's warning from Controller John Chiang, that a budget deal after August 1 would prompt even more money delays for schools and other state programs.

By the way, you can play along at home... with the controller's nifty chart of what can, and can't, be paid in the absence of a budget in two weeks time.

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About John Myers

John Myers is senior editor of KQED's new California Politics & Government Desk. He has covered California politics for most of the past two decades, serving previously as Sacramento bureau chief for KQED News and most recently as political editor for KXTV News10 (ABC) in Sacramento. In 2014, he was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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