Governor Brown has made paying off budgetary debt the cornerstone of his fiscal austerity program. The Republican Leader of the Assembly referred to this as “channeling his inner Republican” in a recent radio interview. This raises the following questions: what is budgetary debt? Why is it important to pay it off? Does the Governor’s budget meet that challenge?
While the Governor committed to repaying debt if his taxes were approved, his current budget lowers debt payment by $1 billion, putting repayment behind schedule.
Using one-time money to pay back budgetary loans would help the state avoid a fiscal cliff in the future.
What Is Budgetary Debt and How Much Do We Owe?
There are three main types of debt California owes: budgetary debt, regular indebtedness and unfunded liabilities. Recent reports suggest California has a total indebtedness of over $600 billion.
Budgetary debt was a unique tool adopted in California to avoid budget cuts in the last decade. The Legislature borrowed money from various state funds, Wall Street, and delayed payments for various obligations. They then used this money to avoid spending cuts. At its height, California budget loans topped $35 billion (end of the 2011-12 budget year). In the budget that will close on June 30, 2013, the state will have paid off $5.9 billion and made other adjustments.1 As such, the state will still owe $27.8 billion in budgetary debt at the end of the 2012-13 fiscal year.2
Why is it Important to Pay Off Budgetary Debt?
The Governor notes that each dollar spent on paying off debt means that there is less money available for on-going programs3. In the Governor’s 2013-14 budget, the Governor proposes to pay off $4.2 billion in budgetary debt which otherwise could have reduced class size in schools, rolled back tuition increases or provided for safer communities. In some cases, there is a cost to the borrowing or even delayed payments. This cost adds to the state’s indebtedness and does not add value to taxpayers or programs. For these reasons, the Governor laid out a plan in 2012-13 to pay off most of California’s budgetary borrowing debt by 2015-16 if the voters approved tax increases.4
Paying Off Debt With Temporary Taxes Will Help The State Avoid a California Fiscal Cliff
Proposition 30 imposed temporary taxes on Californians. The sales tax increase is scheduled to sunset in four years and the income tax increase in seven years (2018). Proposition 30 is estimated to raise from $6.3 billion to a high of $7.7 billion a year through 2018. In 2019, the tax revenue raised by Proposition 30 goes away by law. If Proposition 30 temporary tax revenue is used to create new programs or pay for on-going programs, the state will face a multi-billion budget deficit in 2019, a “fiscal cliff.”
If California uses Proposition 30 funds to pay down budgetary debt, this frees up future state funds that are currently being used for debt repayment, to meet the cost of ongoing programs. To this end, the Governor originally proposed to finish his debt repayment schedule by the time the temporary tax rolls off in 2018.
Does the Governor’s Budget Eliminate Budget Debt By 2015-16?
In the Governor's adopted 2012-13 budget, the Governor assumed $5.2 billion of budgetary debt would be paid in 2013-14. However, in his recent budget proposal, he proposed repaying $1 billion less, just $4.2 billion. This deferred $1 billion payment has been moved off until later years.
Overall, the Governor’s new repayment schedule does not have a target date to pay off all of the state’s remaining debt. It simply indicates that by 2016-17, there will be $4.3 billion in budgetary debt remaining. However, that assumes the Legislature or the Governor do not further alter the repayment schedule.
Is The Governor Required To Make Debt Payments?
All budgetary debt is not the same. The Economic Recovery Bonds were approved by the voters in 2003 and require a payment annually. The Legislature and the Governor cannot avoid this payment. There are $5.1 billion in Economic Recovery Bonds remaining which are scheduled to be paid off in 2015-16.
All other budgetary loan repayments are made at the Governor’s and at the Legislature’s discretion.5 In the past, the Legislature and the Governor have reduced or eliminated repayments to meet the cost of fast growing programs. This year’s budget faces a number of fast growing programs, including $1.3 billion in increased state employee costs.6
1 The Department of Finance estimates the value of each debt at a point in time. So for instance, the payroll one has dropped due to a lower estimate of total payroll in June 2013, compared to June 2012.
5 Some of the loan repayments are scheduled in statute. However, the Legislature, with a majority vote, can simply change the statute.