A loan returns to haunt California’s budget

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While politicians wring their hands over California’s nearly $16-billion deficit, much of the conversation has focused on low tax revenue, swelling spending and a mandated increase in school funding.

But there’s another factor that’s weighing on the budget — a $2.1-billion repayment to local governments that the state is required to make this year. It’s another example of how short-term budget fixes, this one made under Gov. Arnold Schwarzenegger, can cause more headaches down the line.

Back in 2004, residents overwhelmingly voted for a constitutional amendment to prevent the state from siphoning away local property tax revenue — unless the governor and the Legislature claim there’s a financial emergency.

That’s exactly what happened when the state was facing down a $42-billion deficit three years ago. Schwarzenegger declared an emergency and lawmakers approved a plan to essentially borrow $1.9 billion in property tax revenue from local governments.

Mike Genest, who was Schwarzenegger’s finance director, said they did it for a simple reason: The state needed the money.

“Sometimes in desperate times you do stupid things, even if you know they’re stupid things,” he said.

The constitutional amendment required the state to pay the money back in three years. So far it’s paid $181 million in interest, according to Gov. Jerry Brown’s Department of Finance.

Now the state needs to pay off the rest of the debt, totaling $2.1 billion. It’s a case of seriously bad timing, since the state’s budget gap has almost doubled to a projected $15.7 billion. For reference, $2.1 billion is roughly equal to the total cuts Brown wants to make to CalWORKs and MediCal.

Genest said borrowing money from local governments may have made sense if the state expected to have recovered financially in a few years. But no one really believed that, he said.

“It’s a classic example of a one-time solution that is patently — no question about it — a bad idea,” he said.

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— Chris Megerian in Sacramento
twitter.com/chrismegerian