The New York Times, 9/20/12.
Gov. Jerry Brown of California announced when he came into office last year that he had found an alarming $28 billion “wall of debt” looming over the state, which had to be dismantled.
Since then, he has slowed the issuance of municipal bonds, called for spending cuts and tried to persuade the state’s famously antitax voters to approve a tax increase this fall.
On Thursday, an independent group of fiscal experts said Mr. Brown’s efforts were all well and good, but in fact, the “wall of debt” was several times as big as the governor thought.
Directors of the State Budget Crisis Task Force said their researchers had found a lot of other debts that did not turn up in California’s official tally. Much of it involved irrevocable promises to provide pensions to public workers, health care for retirees, the cost of delayed highway maintenance and an estimated $40 billion bill to bring drinking water up to federal standards.
They also pointed out many of the same unpaid bills from previous years that the governor had brought to light, like $8 billion in delayed payments to schools and community colleges, and $250 million that was raided from a fund dedicated to transportation and treated as revenue.
The task force estimated that the burden of debt totaled at least $167 billion and as much as $335 billion. Its members warned that the off-the-books debts tended to grow over time, so that even if Mr. Brown should succeed in pushing through his tax increase, gaining an additional $50 billion over the next seven years, the wall of debt would still be there, casting its shadow over the state.
“With inadequate information, our legislators and citizens are flying blind,” said David Crane, a board member who issued the task force’s special report on California’s fiscal condition at a news conference in San Francisco on Thursday.
Mr. Crane, a former adviser to Gov. Arnold Schwarzenegger, was joined by the economist George P. Shultz, who served various administrations as secretary of treasury, labor and state.
A spokesman for Governor Brown did not dispute the report but said the governor was making progress in his effort to restore fiscal balance.
The task force was founded last year by Paul A. Volcker, a former Federal Reserve chairman, and Richard Ravitch, a former New York lieutenant governor. They said they were acting out of a deep concern for the fiscal affairs of the states, which they thought received insufficient attention in Washington.
The task force is conducting detailed analyses of a sample of six states. The others are Illinois, New York, Texas, Virginia and New Jersey.
California was of particular interest, not only because it constitutes the world’s ninth-largest economy, but because of its intractable fiscal problems. It has also experienced an unusual string of municipal bankruptcies in recent years. In one of them, the City of Stockton is proposing to walk away from virtually all the principal and interest on one of its bonds.
Analysts are watching the case closely, concerned that if Stockton succeeds, other troubled cities may follow. Some contend that the State of California should be doing more to keep its cities out of bankruptcy, and to shield municipal bond investors.
Task force members said their focus on California was not meant to suggest that the state’s general-obligation bonds were at risk. Mr. Crane said he believed California’s bonds were very safe, acknowledging that he owned some himself.
Governor Brown’s efforts to chip away at the debt have led Standard & Poor’s to say it is considering an upgrade of California’s bond rating, long one of the lowest among the states. But the report pointed out that S.& P.’s review of California’s creditworthiness took into account a ranking in the state Constitution that shows which debts and government programs must be paid ahead of everything else.
While a rating increase would mean that California’s bondholders were more secure, it would not necessarily mean more money for the programs that didn’t make it onto the seniority list. Nor would it reflect any particular improvement in the fiscal health of the cities, school districts and other local bodies of government, which fall lower in the pecking order than the state’s general-obligation bondholders.
Link to full article: http://www.nytimes.com/2012/09/21/us/california-debt-higher-than-earlier-estimates.html…