The money pit

With his first executive order, Schwarzenegger displayed his commitment to business as usual by pulling the oldest political trick in the book: using deficit spending to finance a popular tax cut. By slashing the state’s vehicle-license fee (VLF), he cast himself as an avenging action-movie hero to the frustrated taxpayers who voted to recall Gray Davis. But by adding an additional $4 billion to the state’s record $10 billion shortfall, Schwarzenegger also waved “hasta la vista” to any hope of solving the state’s budget woes—and crippled the state economy for years to come.

Nobody likes paying taxes, and it’s easy to understand why the VLF became an issue. Because California law requires that these fees be increased to pay for police, fire and other local services when the state doesn’t otherwise have funding for them, the VLF shot up by about 300 percent in response to this year’s deficit, and anger over the fee hike helped fuel the recall movement.

Enter the Terminator, stage right. All along the campaign trail, Schwarzenegger gained support with promises to roll back the VLF, yet he never explained how he would pay for basic services if he did. Now that he’s in office, it’s become clear that his plan is to borrow the money from Wall Street using a multibillion-dollar bond to be placed on the March ballot.

There are a number of problems with this. To begin with, using such a bond to pay off the state’s debt may not be constitutional, and it’s likely there will be a court challenge. But more to the point, trying to borrow your way out of debt is never a good idea, whether you’re a private citizen struggling to make ends meet or a state government attempting to close the gap between revenues and expenses. It solves nothing and only makes the problem that much worse the next time the bills come due.

And make no mistake, Schwarzenegger’s making a bad problem much, much worse. Rolling back the VLF without parallel spending cuts or tax increases in other areas means an additional $4 billion deficit this year and $5 billion in added debt each subsequent year—plus the costs of servicing this increased deficit. The inevitable result will be the creation of a “budget hole,” where the costs of paying off past expenses interferes with the ability to fund current public services.

The frustrating thing is that the governor could have used his landslide victory as an opportunity for real leadership. He could have claimed a mandate for change and pushed for what everyone knows is the only real solution to California’s budget problems: a combination of spending cuts and tax increases. Instead, he’s borrowing his way to popularity and passing the expense on to future generations.