Explaining Southern California's economy

Gov. Brown's veto means that borrowing is more important than state services

Gov. Jerry Brown just vetoed a measure that would have forced him to debate whether so-called "trigger cuts" will kick in if the state runs short on its revenue goals this year. As the LA Times PolitiCal blog notes: "If those taxes don't materialize, up to $2.5 billion in cuts would occur automatically, including the option for local schools to reduce the academic year by up to a week." 

What Brown wants is for the state to retain its capability to borrow at historically low interest rates. This is from the governor's press release:

"I am vetoing a third bill that would have undermined investor confidence in California by altering the budget’s mechanisms for automatic trigger cuts. The trigger mechanisms were adopted when I signed the budget and were essential to improving our credit standing. Indeed, our no-gimmick, on-time budget was the reason S&P assigned its highest rating to the short-term notes sold this past week—the first time that’s happened since 2007,” said Governor Brown.

The yield on those notes, as the LA Times reported last week, is a lot lower than it was when the state issued $10 billion is debt about a year ago. Interest rates on municipal bonds are linked to the rates on Treasuries, which are at rock-bottom lows in these days of market turmoil (investors are taking their money out of volatile equities market and moving it into "safe" U.S. government debt). So if Brown gives ground on the "trigger cuts" issue, the state could miss a chance to borrow money at levels some would characterize as the next best thing to free. This is money that California needs to make up for tax revenues it won't realize until sometime next year.

It's sad to say, but in the current economic climate, that could be worth giving up a week of school.

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Photo: Justin Sullivan/Getty Images

 

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