Newsom, Legislature build new wall of debt

When Jerry Brown returned to the governorship in 2011, he pledged that fixing a deficit-ridden state budget would be his highest priority.

A big piece of Brown’s fix was taking down what he called “a wall of debt,” more than $30 billion in various kinds of loans that predecessor Arnold Schwarzenegger and the Legislature had taken out to cover revenue shortfalls during the Great Recession.

Brown coupled his budget maneuvers — including a hefty increase in sales and income taxes — and paying off the debts with annual warnings that another recession would inevitably strike. He persuaded voters to create a “rainy day fund” to cushion the impact.

That rainy day, more like a monsoon, is hitting the state hard, due to personal and business shutdowns ordered to fight the COVID-19 pandemic, and once again the state budget is awash in red ink. Gov. Gavin Newsom and legislators are dickering over a fiscal plan for the current fiscal year that ends June 30, the 2020-21 fiscal year that begins on July 1 and, inferentially, two or three years beyond that.

Newsom pegs the multi-year deficit at $54 billion and his budget proposes to bite the bullet and make steep spending cuts that would be rescinded if the federal government provides a big state and local government relief appropriation. The Legislature’s budget would maintain spending more or less at pre-recession levels and make cuts later only if federal aid doesn’t materialize.

What no one is talking about, at least publicly, is that both Newsom and the Legislature want to run up many billions of dollars in new debt. They want to raid state special funds for “loans” that would have to be repaid later, make “deferrals” in state aid to schools that would have to be repaid later, and impose temporary ceilings on corporate tax breaks that businesses could recoup later.

The new wall of debt would be at least $20 billion over several years, the biggest chunk of it in deferrals of constitutionally required aid to K-12 schools and community colleges.

Newsom’s revised education budget would defer “approximately $13 billion” in this fiscal year and next with the promise to repay it slowly beginning in 2021-22 and in doing so, raise the schools’ share of state revenues. The Legislature takes a different approach but still counts on education deferrals to balance its budget on paper.

The caps on business tax breaks would, both budgets assume, generate $9 billion over two years, but corporations could accumulate unclaimed deductions and take them after the caps are lifted. So in reality, they are loans that would have to be repaid.

Budget documents detail dozens of raids on special funds that would have to be repaid, ranging from under $1 million to $300 million from the Public Utilities Commission’s program that provides discounts on telephone service for low-income Californians and $551 million from the Underground Storage Tank Cleanup Fund.

The biggest single raid, however, is on something close to home for politicians — replacement of the state Capitol’s west wing, which houses the governor’s and lieutenant governor’s suites, legislators’ offices and hearing rooms. The nearly 70-year-old annex has been deemed to be antiquated and money had been set aside for a $755 million replacement.

Newsom’s budget would grab $734 million of that special fund and, instead, finance construction with “lease-revenue bonds,” a sneaky device the state uses to run up debt while evading the state constitution’s requirement that any debt of more than $300,000 have voter approval.

It’s fitting, in a sense, that the new wall of debt would include a loan to build fancy new offices for the Capitol’s politicians.

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