Monday, February 16, 2004

SAN FRANCISCO (AP) — California is quickly running out of cash and bracing for acute financial pain after three years of political procrastination and budget bungling.

Now voters must decide if it makes more sense to approve a $15 billion bailout bond that might extend the misery for a decade or more, or suffer it more intensely through temporary tax increases and deep spending cuts.

Gov. Arnold Schwarzenegger is trying to convince voters the bitter medicine should be dispensed gradually — that paying back the bailout bond over the next nine to 14 years is the best way for California to rehabilitate itself.

His opponents say California will be making a terrible mistake if it shoulders long-term debt to solve short-term problems.

Either way, the state will literally run out of money unless Mr. Schwarzenegger and the legislature find a way to produce $14 billion to pay short-term notes due June 16.

If voters refuse to authorize the bond under Proposition 57 on the March 2 ballot, Mr. Schwarzenegger says he’ll have to make “Armageddon” spending cuts that will make California a less desirable place to live.

Without the bailout bond, California’s obligation to make the June 16 payment would compete with its duty to provide essential public services, said Timothy Blake, managing director of Moody’s Investor Service, one of three major credit-rating agencies.

“That is not an orderly situation,” he said.

But Mr. Schwarzenegger’s critics say the bond measure would place the state in a more perilous position, by limiting the money California can borrow in the future to pay for schools, roads and other quality-of-life improvements needed to maintain home values and the state’s economy, the sixth-largest in the world.

“It will be another sign to business that California is stepping back from investing for the future,” Stephen Levy, director of the Center for Continuing Study of the California Economy, wrote in his analysis of the deficit bond and its impact.

California’s dilemma stems from its failure to reduce spending when the recession drained tax revenue. The poor financial management fueled the recall of Democratic Gov. Gray Davis, put the Democrat-led Legislature on the defensive and left the state with a deficit that the Republican Mr. Schwarzenegger estimates at $22 billion.

Recent improvements in the stock market will help, but not in time.

Mr. Schwarzenegger wants to keep taxes at current levels and borrow over the long term, raising enough cash immediately to help pay $14 billion and free up money for other purposes. The bond would be repaid by siphoning one-quarter cent from the existing 7.25 percent statewide sales tax.

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