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Fiscal irresponsibility also plagues local governments

By Dan Walters -- Sacramento Bee Columnist Wednesday, September 22, 2004

Five Year Anniversary of the Bubble Bursting
Bubble Bursting Creates Mounting Debt Which Impacts the 2005/06 Budget

It would be difficult, perhaps impossible, to overstate the abject irresponsibility that former Gov. Gray Davis and a compliant Legislature exhibited in 2000 and 2001 when the state treasury experienced a sudden, but very short-lived, surge in revenues. They went on a binge of spending and tax cutting that left the state budget with immense structural deficits when revenues returned to normal levels - deficits that now total something in excess of $40 billion and are still rising.

Davis' dereliction of public duty cost him his governorship, but his successor, Arnold Schwarzenegger, has not been any more successful in closing the gap. Schwarzenegger's first gubernatorial act was to reinstate a $4 billion-per-year reduction of taxes on cars that the state could not - and cannot - afford, and he backed down from his early declarations of spending austerity. Thus, it's likely that he and the Legislature will face another deficit in the $7 billion to $10 billion range next year.

As California's politicians were driving the nation's richest state into the poorhouse, they were also creating an immense mess in the pension systems for public employees. Just as gyrations in the stock market generated a very temporary surge in tax revenues, so did they temporarily fatten pension fund portfolios. Davis and the Legislature, caving in to pressure from public employee unions, sweetened benefits on the assurances of union-dominated pension boards that they would cost the taxpayers nothing.

When the stock market weakened and pension fund earnings plummeted, the state was left with a multibillion-dollar tab that contributed mightily to its budget crisis. In fact, the state is now borrowing money to meet those pension obligations because the deficit-ridden general fund budget can't cover them.

The budget-pension imbroglio is symptomatic of a larger and more insidious syndrome in politics - the willingness, even eagerness, to trade short-term political gain for longer-term grief. And, as we are learning, it's not confined to the Capitol.

A case in point is the growing financial crisis in San Diego, which for decades had prided itself on fiscal responsibility. When Standard & Poor's Rating Services suspended its credit ratings for San Diego this week, it was just the latest in a series of body blows stemming from mismanagement of the city's finances, especially its out-of-kilter pension system. San Diego is already under investigation by the Securities and Exchange Commission and the Department of Justice and, it appears, may be just one or two steps removed from having to file for bankruptcy protection.

What happened in San Diego is remarkably similar to what happened in Sacramento. Buoyed by momentary stock market gains, city officials lavished new pension benefits on their workers, and now the city's pension fund has a billion dollar-plus deficit that continues to grow because, once extended, pension benefits cannot be retracted.

San Diego officials - once again emulating their state-level counterparts - masked the problem for several years but also went a step further and apparently made misstatements about the city's finances on documents relating to its bond issues - which could violate securities laws.

San Diego Mayor Dick Murphy is feeling the political heat because he voted for the expanded benefits and is facing a tough re-election fight against county Supervisor Ron Roberts, who has made the pension crisis his central issue. But as a supervisor, Roberts also voted for expanded benefits that led to the county's having to borrow money to cover its pension costs.

San Diego is the current poster child for fiscal irresponsibility, but the disease is much more widespread. When the state's politicians lavished new pension benefits on their workers - especially those in police and fire services - many local governments, pressured by their own unions, followed suit and now are facing immense bills from the Public Employees' Retirement System for the new benefits and pension fund shortfalls.

The pension obligations are inescapable, so their effect is to soak up money that otherwise would be available for vital public services. And we should never forget that it results from irresponsible political decisions by those elected to serve the larger public.


California marks anniversary of dot-com boom - and its bust

By Dan Walters, Sacramento Bee Columnist, March 9, 2005

California is marking - but certainly not celebrating - an anniversary this week. It was precisely five years ago that the technology-driven Nasdaq Stock Market reached its zenith before beginning a long and painful plunge. Internet-centered technology was, as we should recognize by now, a genuine, legitimate economic phenomenon that was blown out of rational proportion by a feeding frenzy of speculative capital. It was something akin to the rampant speculation in tulip bulbs that infused Holland in the 17th century, when individual bulbs became as valuable as entire estates at its zenith, and less valuable than an onion after the bubble burst.

The rampant formation of companies aiming to exploit the spread of Internet access could not sustain itself. It was ludicrous that brand new firms would have paper values in the billions of dollars when they were not producing products or services, much less profits. Eventually, even the most jaded day-traders accepted that what Federal Reserve Chairman Alan Greenspan had described as "irrational exuberance" had gripped the dot-com industry and the technology stock markets, and the big sell-off began in March 2000. Employees of new dot-com firms often had been lured by stock options. As the decline began, many hastily converted those options into stock and just as hastily sold their holdings to secure as much real gain as they could. Others, however, could not bring themselves to believe that the bubble was bursting and even though technology stocks are now showing signs of moderate recovery, those in the center of technology development and high-tech capitalism, the San Francisco-San Jose corridor, are still feeling the negative impacts of the decline.

Moreover, non-techies who had blithely ridden the technology elevator in their IRAs and 401(k) retirement accounts, but failed to switch in time, saw their paper fortunes erased and their dreams of early retirements in seaside cottages vanish. Thus, the residual effects of the dot-com plunge continue to be felt not only in Silicon Valley and environs, but in the personal finances of countless millions who ignored the Newtonian law of investments: what goes up very often comes down.

In Sacramento, 120 miles northeast of Silicon Valley,the impacts of the dot-com boom and bust are still afflicting state government. They will do so for decades to come, because while it lasted, the boom enticed politicians into making three very irresponsible, very destructive but very lasting decisions, to wit:

  • With the union-dominated public employees retirement system issuing assurances that public pension benefits could be raised sharply without cost to taxpayers because of stock market gains, then-Gov. Gray Davis and the Legislature eagerly agreed, and when the market dropped, state and local governments were stuck with billions of dollars in extra costs.
  • The state saw a one-time windfall of income tax revenues fill its coffers - about 12 billion extra dollars - as dot-commers cashed in their options and sold their inflated shares. In May 2000, two months after Nasdaq began its slide, Davis publicly acknowledged the windfall and pledged "to resist the siren song of permanent spending, whether it comes from the left or the right, (and) stand up to anyone who tries to convince the Legislature that they should spend most or all of this money in ongoing expenses." Within weeks, however, he had agreed to commit two-thirds of the $12 billion windfall to permanent spending and tax cuts.
  • The tax cuts, such as the $4 billion slash in car taxes, and the extra spending on schools, health care and other services created a huge hole in the state budget when revenues returned to normal growth levels a year later. Rather than admit error and reverse course, however, Davis and lawmakers borrowed heavily. Over the next four years, Davis, his successor Arnold Schwarzenegger and legislators amassed more than $30 billion in official debt and unofficial borrowing, such as siphoning money from transportation projects. And the state's "structural deficit" has yet to be resolved.

Hopefully, California never will see another speculative bubble such as the one that burst five years ago this week. We might not survive the next one.

Nasdaq's wild ride

Aug. 9, 1995 Shares of Web browser Netscape Communications more than double, to close at $58.25 on first day of trading after public offering.

Dec. 5, 1996 Federal Reserve Chairman Alan Greenspan says soaring stock prices reflect "irrational exuberance."

Nov. 4, 1999 Web grocer Webvan raises $375 million in one of the biggest Internet IPOs. Its stock soars 73 percent on first day of trading.

March 10, 2000 Nasdaq composite index closes at all-time high of 5,048.62.

April 14, 2000 Nasdaq composite index plunges 9.67 percent, its biggest single-day percentage loss since 1987.

July 13, 2001 Webvan files for bankruptcy.

Oct. 8, 2002 Cisco falls to closing low of $8.60.

Oct. 9, 2002 Nasdaq index reaches post-bubble nadir, closing at 1,114.11, off 77.9 percent from peak.

Aug. 19, 2004 Search engine Google completes $1.67 billion initial public offering, symbolizing Nasdaq's recovery.

March 9, 2005 Nasdaq index closes at 2,061.29, up 85 percent from 2002 low.


Ever-mounting debt symbolizes the Capitol's dysfunctional culture

By Dan Walters, Sacramento Bee Columnist, May 4, 2005

The single most graphic symbol of the Capitol's utter dysfunction - its chronic inability to respond to reality and reason - is the immense public debt that politicians have amassed in the last four years to pay for their foolish budget decisions.

The state received a one-time, $12 billion windfall of income taxes in 2000. Then-Gov. Gray Davis and legislators of both parties blew most of it on permanent spending and tax cuts that could not be sustained when revenue returned to normal, creating a "structural deficit" of around $8 billion a year.

Squandering the windfall was a monument to the lethal combination of ideological imperatives, special-interest pressures and single-purpose budgetary laws that afflicts the Capitol. But what followed was even stronger evidence of the Capitol's fundamental collapse.

Rather than fess up to their huge error, and rectify it with spending cuts or tax increases, Davis and lawmakers began running up the state's credit cards to cover the deficit. Democrats resisted spending cuts, while Republicans opposed tax increases. Since each party had veto power, the only way they could write budgets was to borrow ever-larger amounts of money.

They shifted money out of special state funds, borrowed from banks, tapped local government treasuries and engaged in Enron-like accounting tricks that borrowed money off the books. The official debt accumulated so far is at least $25 billion, and there may be an additional $10 billion in backdoor debt.

Davis' fiscal miscues helped lead to his recall, and Arnold Schwarzenegger was elected governor largely on his promise to clean up the mess. But he has scarcely made a dent in the structural deficit, and even worsened it by reinstating a $4 billion-a-year "car tax" cut.

Schwarzenegger persuaded voters to issue long-term bonds to refinance some of the state's short-term debt, which was threatening to spark a cash-flow crisis. While he hailed it as getting a handle on the out-of-control budget, however, it made no headway in closing the structural gap. In fact, it provided a few extra billion dollars to finance future deficits.

Schwarzenegger's 2005-06 budget counts on running up still more debt, even though pro-spending groups, especially those in education, are criticizing it for being too chintzy. Schwarzenegger will unveil a revised budget next week - on Friday the 13th, interestingly enough - and he'll likely have several extra billion dollars in revenue. Will he use it to pay down the state's staggering debts, such as those owed to state transportation accounts, or will he succumb to pressures from the California Teachers Association and others to loosen up on spending?

The culture of debt that infuses the Capitol is evident in a new transportation proposal from Don Perata, the president pro tem of the state Senate. He wants the state to issue another $7.7 billion in general obligation bonds to repay $2.3 billion that has been shifted from transportation projects to shore up the state's deficit-ridden budget, finance completion of the stalled San Francisco-Oakland Bay Bridge seismic reconstruction project, shore up levee roads along Northern California rivers, finance improvements in and around congested seaports, and improve local streets and roads.

All of those goals are worthy; the state's lack of investment in transportation, despite ever-increasing demand from an ever-larger population, is one of the most important issues of the era. But financing them out of a general obligation bond issue continues the borrow-and-spend syndrome and moves further away from time-tested methods of financing transportation, such as gasoline taxes or revenue bonds backed by bridge tolls, port berthing fees or other user charges.

Margita Thompson, Schwarzenegger's spokeswoman, said Tuesday that he opposes more borrowing that would have to be repaid from general tax dollars - but Schwarzenegger backed a very questionable bond issue, approved by voters last year, to finance stem cell research.

The further we proceed down this path, the more California's state government, once a model of fiscal probity, will resemble the debt-saturated federal government and the more we will saddle our children and grandchildren with the burden.


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Last modified: March 9, 2005

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