Opinion: California may get loan guarantees from D.C. after all

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Never mind that Geithner guy -- California Assembly Speaker Karen Bass (D-Los Angeles) predicted this morning that Congress would help California with its cash-flow problems. But Bass wants one thing to be perfectly clear: Washington isn’t going to bail the state out of its larger budget mess, and the state isn’t asking it to. And before the state can expect any help, Bass said, lawmakers will have to close the multi-billion-dollar budget gap with a mix of cuts and revenue increases.

Here’s the background. California typically has to borrow money in the summer because tax and fee revenue lags. It pays off these short-term loans later in the year, when tax receipts hit their peak. But this year, the credit crunch and the state’s burgeoning budget gap have made it hard for Sacramento to find a cheap source of short-term cash. The state needs roughly $10 billion to solve its cash-flow problem, and if it has to borrow the money at market rates, it will wind up spending hundreds of millions of tax dollars more on interest payments instead of health care, schools and other services. State Treasurer Bill Lockyer appealed to Treasury Secretary Timothy F. Geithner earlier this month to help the state by guaranteeing its short-term borrowing, but Geithner told a congressional panel that he doesn’t have the authority to do so.

Bass said that Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told her he expects Congress to pass a bill authorizing federal guarantees for loans to states with cash flow problems. Such guarantees would dramatically cut California’s costs, and because the state would be borrowing against future tax revenues, the risk to federal taxpayers is minimal. Still, as the Times editorial board noted Tuesday, any move by Congress to help Sacramento would send a dangerous message after a) legislators made such a mess of the state’s budget, and b) voters overwhelmingly rejected a slate of tax increases and program cuts. To wit, it would tell lawmakers and voters in other states that they didn’t have to make tough decisions on their budgets because Uncle Sam would ride to the rescue regardless. Bass may be right when she says the state never asked for a bailout, but the distinction between California’s long-term and short-term financial problems is too fine....

It’s unfortunate, Bass said, that ‘our problems are complex and very difficult to understand.’ But lawmakers can help clarify matters -- and draw a bright line between its budget gap and its cash-flow issues -- by revising its budget to eliminate the more than $20 billion shortfall (part of it in the current year, part of it in the fiscal year that begins July 1). ‘I believe we will be able to act quickly,’ Bass said, because the state already has budgets in place for those years. It just has to cut them. Deeply. She also noted that it can cut programs with a simple majority vote, not the two-thirds required to pass a budget that raises taxes. Ways to increase state revenue are on the table too, she said; only ‘tax increases’ appear to be out of the question, given the GOP’s stance. ‘We need to be creative,’ Bass said. ‘There are different forms of revenue.’

One other point on the budget: Bass rejected the idea of eliminating safety-net programs, as Gov. Arnold Schwarzenegger suggested this week. In particular, she defended such programs as CalWorks, which tries to help families move from welfare into work. ‘I don’t want to see California look like Mississippi,’ Bass said, adding that if the state cut the $1.3 billion CalWorks program, it would lose an additional $4 billion in federal aid. Instead, Bass said she prefers across-the-board reductions.

Bass said she and Senate President Pro Tem Darrell Steinberg (D-Sacramento) plan a second confidence-building step in the next few weeks: unveiling a plan for fundamental budget reforms, including multi-year and performance-based budgeting. Good luck with that -- like the voters, state lawmakers are sharply divided on the cause of the state’s budget dysfunction, let alone the solution.

If California closes its budget gap and launches an overhaul of its budget process, that would certainly help Frank push a bill through to provide loan guarantees. But a more important factor in the bill’s success or failure may be other states’ cash-flow problems. And luckily for California, it’s not alone: Bass said about 10 other states are running into similar difficulties with their short-term borrowing needs.