By Harold Johnson
For all the rancor in Sacramento over how to fashion a budget, Gov. Gray Davis and Republican leaders are in accord on one element: big borrowing. Both sides favor floating more than $10 billion in bonds, to be paid off over five years or longer, to shrink the state’s mammoth deficit. Where they are stuck is over funding for this new debt. The GOP would use existing revenues. Davis proposes a hike in the sales tax.
But even if negotiators reach agreement on how to pay off the bonds, another obstacle to closure comes from Democratic Sen. Eugene Casserly.
If Casserly’s name doesn’t ring a bell, it’s because he died more than a century ago. His influence reaches across the decades, however, in a plank he added to the California Constitution at the drafting convention in 1879. The rule he sponsored Article XVI, Section I of the Constitution prohibits the state from borrowing more than $300,000 unless voters approve in a statewide election.
The players in Sacramento don’t seem eager to acknowledge the electorate’s role in the process. Neither the governor nor legislators have stressed to the media that they’ll have to schedule a popular vote on a key element of their budget. But if the final recipe includes debt financing on the scale proposed, they have no alternative at least if they want to avoid a lawsuit that could torpedo their handiwork.
To be sure, court decisions allow the state to take out short-term loans, paid back over several months (not years) with tax dollars that will soon be in the pipeline. Such “revenue anticipation” instruments are being used right now to keep the state operating through the summer. But general obligation bonds that would be retired over a half-decade or longer are another thing; long-term borrowing has never been attempted by the state, for any purpose, without an up or down vote at the polls.
Davis’ sales-tax increase, if enacted by the Legislature, would also be subject to a vote of the people, at least indirectly. If lawmakers approved a tax hike to pay off the deficit bonds, and the bonds themselves were rejected by voters, there would be a legal argument that the tax increase should also be scuttled.
Sen. Casserly and other delegates to the 1879 Constitutional Convention were non-nonsense folks who did not like the idea of government paying its bills by saddling future generations with debt. The Constitution is quite restrictive in the purposes for which multi-year borrowing is allowed. Under Article XVI, debts of more than $300,000 are permitted only for a specific “single object or work.” Borrowing to buy parks or build schools passes this test. But long-term debt to meet payroll and to keep government buildings open, does not. The general operations of government do not constitute a “single object or work.”
Therefore, if the governor and the Legislature want to pay down the deficit today by taking out loans that will be due over many tomorrows, they must ask voters not just to pass the proposed bonds, but also to amend the Constitution. The state’s fundamental law would have to be changed to permit government to operate through deficit financing. A recent memo from the Legislative Counsel’s office concurs with this interpretation.
This would be an ominous shift, and voters would have cause to pause before allowing government to start paying its way by floating bonds. There are already too few restraints on impulsive spending in Sacramento. Giving lawmakers more opportunity to buy wish lists on credit could put the state on a fast boat to bankruptcy.
In sum, the people have the constitutional right to vote on any long-term bond strategy th at ends up as part of the deficit fix. If the budget includes a plan for major borrowing, either it gets taken to the polls or it could well get taken to court.
Harold Johnson is an attorney with Pacific Legal Foundation (www.pacificlegal.org). A Sacramento-based public-interest law firm, PLF has a long history of litigating for tax restraint, including in support of Proposition 13 following its enactment in 1978.