June 20, 2003


A RAW Deal?

By Jon Coupal

We’ve all heard “good news, bad news” jokes. Well, the good news is that California convinced Wall Street to lend us $11 billion so that we could pay some bills that are about to come due. The bad news is that, in order to pay this $11 billion back, we’ll have to borrow even more money in September. California’s approach to fiscal management is a revolving charge card. Unfortunately, this is no joke.

A RAW is a Revenue Anticipation Warrant, a form of borrowing used to get us from one fiscal year to another. Think of it as closing the books on June 30th and realizing —whoops — you’re $11 billion short. RAWs are different from RANS (Revenue Anticipation Notes) which are generally thought of as short term borrowing within a fiscal year. RANS are more common because tax receipts come in sporadically during the year and we need something to even out the peaks and valleys. On the other hand, the fact that we needed RAWs just to stay afloat, reflects serious problems with the way California is being managed.

The $11 billion RAW sale on June 11th was notable for the fact that few people noticed. Other than finance experts and those who like to — or have to — monitor the budget debacle, average Californians were unaware of the sale, let alone the stunning magnitude. According to Reuters News, this was the largest short term bond sale in world history.

So what should average Californians — who consider it a minor miracle if they can balance their own checkbooks — know about the RAWs? Well, a few things.

First, there is a demand on Wall Street for California bonds. Indeed, there were 52 bids from various brokerages totaling $38 billion for the $11 billion’s worth of RAWs. More than three times the supply. Does this mean Wall Street thinks California has its act together?

Hardly. Never mistake the self-interest of those involved in the underwriting and marketing of public debt for confidence in California’s political leadership. If Wall Street really had confidence in California, we would not have the lowest credit rating of any state. (The ratings of these particular bonds were high because California shelled out an additional $84 million for a form of insurance to make the debt instruments more marketable. Question: How many teachers or CHP officers could we have hired or retained for $84 million?)

Second, notwithstanding California’s reputation on Wall Street as la la land, the actual cost of borrowing the $11 billion was low. Indeed,our governor and controller are virtually breaking their arms trying to pat themselves on the back for “saving Californians millions of dollars.” But as anyone who has recently refinanced their mortgage knows, the reason for the low cost is that interest rates are in the basement. Rather than claiming credit (no pun intended) Gray Davis and Steve Westley ought to thank their lucky stars for Alan Greenspan.

Third, the need for RAWs reflects gross fiscal mismanagement by those we elect to run the state. We didn’t need to borrow $11 billion because tax revenues have disappeared. Indeed, even with sputtering California economy, we will take in about as much revenue as we did about 3 years ago. Don’t blame the taxpayers for not doing their job. Unlike the state, they grasp the simple concept of not spending more money than you have.

Fourth, voters are deprived of their right to approve this massive amount of debt. The California Constitution clearly requires statewide voter approval for debt over $300,000. The last time we checked, $11 billion was a heck of a lot more than three hundred grand. Although those “self-interested” Wall Street types referred to above have carefully crafted California case law to create exceptions to voter approval, a lawsuit challenging the RAWs might nonetheless be in order.

Fifth, the ease with which California secured $11 billion in bonds will surely exacerbate this state’s growing reliance on debt. Like the credit card companies who send you offers with eye-popping credit limits, Wall Street has no hesitation on getting us hooked on more debt. After all, they make lots of money. But California taxpayers have to figure out what’s in our best interest and borrowing money to pay off last year’s loans is just not smart.

Sixth, the biggest difference between credit card debt and the RAWs —besides all the zeros— is that if a consumer gets overextended, they can always declare bankruptcy. Not a pleasant prospect, to be sure, but a viable option for those who lack self-restraint. And although cities and school districts can also seek bankruptcy protection, states cannot. We simply pass the debt onto our children. That alone should be a wake up call. Making our kids pay for a RAW deal is not the kind of legacy we should be leaving.

Jon Coupal is an attorney and president of the Howard Jarvis Taxpayers Association —California’s largest taxpayer organization with offices in Los Angeles and Sacramento. He can be reached through the association’s website, www.hjta.org.

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