Securitizing The Future

Building off Brian’s post, George Skelton’s discussion of Prop. 1C gets things about right – the choice is between a terrible public policy and deeper debt.  Supporters of the special election will only show you one side of that argument, the expanding budget deficit that would result from failure, wrapping that into a fearmongering message of urgency.  Opposers of the special election prefer to look at the actual policy, which Skelton describes accurately.

Prop. 1C — the “Lottery Modernization Act” — is one of six budget-related measures proposed by the Legislature and Gov. Arnold Schwarzenegger. It is by far the measure with the biggest immediate money impact.

It would authorize significant tweaking and expansion of the state lottery, creating more winners. And it also would allow the state to borrow $5 billion immediately against future lottery revenue.

Those should be separate questions: 1) Should the state expand its gambling operation? 2) Should Sacramento take out a loan for, say, 30 years just to help pay one year’s worth of daily expenses? […]

You could also call it a payday loan. That’s how far Sacramento has fallen.

This is probably the easiest $5 billion the state can pocket, even if it would have to pay back double, including interest.

Put aside the fact that lottery revenues have dropped consistently over the past several years (per capita participation is among the lowest in the nation), and that, even if this scheme of more advertising and bigger payouts worked, you would be balancing the budget on the backs of a lottery-buying constituency composed mainly of the poor.  But borrowing policies like this, as a result of putting off tough decisions and mortgaging the future for 30 years, are why our deficit bursts at the seams relative to other states.  In the long term we will pay far more for this borrowing that could ever be brought in.  The solution from the legislature and the Administration, literally, is to not call it borrowing.  David Crane (Arnold’s economic advisor) initially makes a decent point, then hides behind the word “securitization” to mask the reality.

Crane maintains that both tax increases and government spending cuts slow economic recovery. Government programs are “a way of keeping more people employed,” he says. “In a recession, you want government to be counter-cyclical — the teeter-totter” to a falling private sector.

“The overriding principle is that, at a minimum, you want government to be retaining the same level of expenditures, if not expanding.”

Crane points to President Obama’s economic stimulus package, which is heavy on new spending.

Of course, the feds can run up huge deficits and print money. States can’t. And many California conservatives would rather see state government go belly-up than pay higher taxes.

Part of the distasteful remedy may be the lottery borrowing. Only don’t call it “borrowing” in front of Crane. It’s “securitization,” he insists. Future lottery revenue would “securitize” the state’s repayment of $5 billion in bonds.

This is a semantics game with political consequences. When the “borrow” word is used to describe the lottery proposal, I’m told, voter support for it drops by 25 percentage points.

Of course, it is borrowing – when you issue bonds and promise to pay them back later, you’re borrowing.  But the “securitization” model also masks the fact that California officials will have to go out into the market and find investors to buy debt based on future lottery revenues.  Despite the success of recent state forays into the bond markets, that’s not such an easy sell:

The ballot measure simply gives the state the legal authority to go out into the financial markets and find investors willing to purchase debt backed by a revenue source that has declined since 2005-06.

Before counting on quick cash from the sale of lottery bonds, it is worth reviewing borrowing-related assumptions made in recent budget agreements, such as the $1 billion in proceeds from the sale of EdFund booked as part of the 2007-08 budget agreement, a sale that was never consummated, or the $1 to $2 billion in proceeds assumed in various budgets from proposed, but never sold, pension obligation bonds. Or the $1 billion in proposed, but never issued, bonds for transportation programs that were to be repaid out of tribal gaming receipts. The careful reader may note a pattern here – a pattern that began long before the global meltdown in financial markets that has made obtaining loans more difficult for even the most creditworthy borrowers.

This isn’t a serious funding measure, it’s an accounting trick – a way to take $5 billion off the books quickly and easily with a minimum of pain.  It’s symptomatic of the failed solutions taken by this legislature and this Governor for years, which constantly try to push off solutions and never deal with the consequences (of course, the needy in this state always do).  That anyone would sink money into protecting this status quo speaks to a failure of imagination, and a willingness to delay fundamental reforms that must happen before it’s too late.