Tuesday, November 25, 2003

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SAN FRANCISCO - The director of California's Department of Finance told lawmakers yesterday that Gov. Arnold Schwarzenegger's plan to use $15 billion of general obligation bonds to pay off the state's accumulated budget deficit will be well received by Wall Street if it is coupled with a spending cap.

Donna Arduin told the Assembly committee that the mega-bond is the plan B the state needs should the courts bar California from issuing $10.7 billion of non-voter-approved fiscal recovery bonds to help repay $14 billion in short-term borrowing coming due in June. Also, $1.9 billion in pension bonds are needed to help pay off unfunded pension obligations face legal challenges.

"We need to have more than one plan," Arduin said.

But Treasurer Phil Angelides said massive borrowing should only be used as a last resort after examining all options of bringing expenditures in line with revenues. California is borrowing more money than the federal government "and we can't print money," he said.

Arduin and Angelides appeared at hearings of the Senate and Assembly budget committees during a special session, as state lawmakers race against a Dec. 5 deadline to decide whether or not to approve the bond referendum and a spending cap question in time for the measures to appear on the March ballot.

Details about the structure of the GO bond issue were missing in the proposal but they will be established with the help of a bond committee Arduin named Monday.

Arduin said the GO bonds would have longer maturities than the proposed $10.7 billion in deficit bonds now tied up in court and would allow the state to lock in lower interest rates.

"Gov. Schwarzenegger did not create this [fiscal] crisis but is proposing a way out," she said.

The way out includes curtailing spending now, establishing a legislative spending cap allowing the governor to declare an emergency when expenditures exceed revenues, and the proposed mega-bond authorization, according to the budget director.

Wall Street would look favorably on spending caps, Arduin said.

"A spending cap allows state government to grow as the economy grows and at a rate taxpayers can afford," Arduin said. It also would give the government a predetermined rate of growth that would make it easier to budget for social services and programs, as well as to get the state's "fiscal house in order," she said.

The testimony came after Schwarzenegger announced $1.9 billion in proposed spending cuts for the current year and next year affecting transportation, health and human services, and other programs. The governor met with yesterday with seven mayors of large cities, including Los Angeles, San Diego, and San Jose. The mayors want him to replace state funding for local government threatened by his repeal of the tripling of vehicle licenses fee.

Arduin said "failing to take action is not an option."

She noted that the disputed deficit bond issue was to be secured by a tax swap between the state and counties, while a GO bond issue would be better received by investors because it would have the state's full faith and credit backing. The deficit bonds have been challenged in court because they were not approved by voters. Proceeds were needed to help remedy a $38 billion shortfall without raising taxes.

"That is why he is asking you to approve a spending limit that would signal to the market ... we are determined to balance our budget," Arduin said.

However, Angelides disagreed.

"The spending cap is the illusion of balance without balance," he said, repeating to budget committee members what he stated to the press in recent weeks of his concerns about the level of borrowing, interest rates.

"We are in uncharted waters in trying to put this much debt in the market," Angelides said.

Arduin Monday appointed a three-member panel that will provide financial advice on the issuance of the GO fiscal recovery bonds to Schwarzenegger as part of his California Recovery Plan.

The panel consists of John A. Bohn, Robert E. Denham, and Carl E. Reichardt.

From 1989 to 1996, Bohn served as president and chief executive officer of Moody's Investors Service. He resigned in 1996 as the firm was being investigated for anti-trust violations and was the subject of a probe by the Department of Justice. However, he said, a trial judge later dismissed the case. Bohn currently serves as chairman and chief executive officer of GlobalNet Venture Partners LLC, a global financial advisory and consulting firm.

Denham served as chairman and CEO of Salomon Inc. He was appointed to the post by Warren Buffett, who took over the firm following a treasury bond trading scandal. He left after Salomon was acquired by Travelers Insurance, which merged with Citigroup. Denham currently serves as partner in the law firm of Munger, Tolles & Olson LLP, whose practice emphasizes advising clients on strategic and financial issues.

Reichardt is the retired chairman and chief executive officer of Wells Fargo & Co. and its principal subsidiary, Wells Fargo Bank. He is a director at Ford Motor Co.

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