Californians are tired of hearing about government’s problems. Because they are struggling with their own crises — including record high unemployment foreclosures and taxes — the last thing they want is more bad news from government. But want it or not the bad news keeps coming.
After approving the largest tax increase in the history of all 50 states last February the Sacramento politicians told us that the ship was righted and we were on course. When the state budget was back in the red just five months later we were told that the necessary corrections were made through spending cuts and we had avoided disaster. Now we learn that the state is upside-down by another $20 billion and this will necessitate further program cuts new taxes or both. But compared to what is coming down the pike this is the good news.
Just like the bulk of the iceberg that was struck by the Titanic — a ship with whose passengers many Californians now identify — was under the surface so too we are finding that some of government’s most severe maladies have been hidden from view.
State Legislative Analyst Mac Taylor and Treasurer Bill Lockyer are sounding the alarm that it is debt that may sink the ship of state. A quarter century ago state treasurers like Tom Hayes were recommending a debt ratio of no more than 4%. More recently Phil Angelides the former treasurer who recommended bonds as a panacea for most that ails our state said we could safely handle a debt ratio of 6%
The debt ratio is calculated by determining how much the state is obligated to pay out on existing debt as a percentage of the general fund. Since each new state bond that is approved — like those for stem cell research and bullet trains — and sold increases the annual obligation for debt retirement. Put too many bonds on the market too quickly or suffer a decrease in revenue due to a sour economy — and California has been subjected to both — and the debt ratio goes up.
Now Taylor and Lockyer warn that the ratio could go to 7 or even as high as 10%.
And although California already has the lowest credit rating of all 50 states the oblivious Legislature has placed an $11 billion water bond on the June ballot without considering the impact on just how this will impact California’s long term fiscal health. Because of our already huge debt and the lack of confidence the financial community has in the Sacramento governing class California debt instruments are no longer the sound investment they once were.
All this means that although California can still sell bonds like a consumer with bad credit that debt will be very expensive. But after selling $36 billion of debt this year and struggling to find further takers Treasurer Lockyer may begin seeking to sell bonds to overseas investors. “We are running out of tricks” Lockyer told an Assembly hearing. “Shortly we are going to have to go international to sell California bonds. I don’t know how expensive that is going to be.” California currently pays higher rates than Brazil Indonesia and Mexico the treasurer says.
What does this mean to the average citizen as a practical matter? Since constitutionally the state is required to meet its bond obligations before one dime can be spent from the general fund on other programs a high debt ratio means less money for schools law enforcement transportation healthcare or any of the other programs that most Californians value. It means that Californians will not only have to accept less from government but that there will be even greater pressure to raise taxes to pay for the services that remain.
Californians already pay some of the highest taxes in the nation and our state competes with New Jersey for the heaviest tax burden per capita. Higher taxes would drive even more jobs out of state and increase the number of people depending on dwindling state services. It’s not a pretty picture and if during the holiday season Californians would prefer not to dwell on the iceberg lurking under the surface who can blame them?
Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.