“But most of all, securitization failed”

Economist Paul Krugman’s column in last Friday’s New York Times brought to mind an interchange at a budget “townhall” I spoke at in South Central Los Angeles last spring. My co-panelist, a representative from Governor Schwarzenegger’s Los Angeles office, took offense when I described the Governor’s proposal to issue bonds that would be repaid out of future lottery proceeds as “borrowing.” “That’s not borrowing,” the Governor’s staffer replied, “That’s securitization.”

A number of members of the audience scratched their heads. It certainly sounded a lot like borrowing to them: the state would issue bonds and then pay them back in the future.

“Securitization” was last year’s catch phrase for describing proposals to borrow against future lottery proceeds. Now that the bloom is off the securitization rose in financial markets more broadly, proponents have adopted a new catchphrase: modernization. Proposition 1C, which will appear on the May 19 special election ballot, asks voters to authorize the sale of bonds that would be repaid out of future lottery revenues — revenues that the measure hopes to increase by encouraging more Californians to buy more lottery tickets. The description that appears in the Voter Information Guide talks of “modernization” of the lottery and increasing lottery revenues, not borrowing.

The Governor, leaders of the Legislature, and editorial writers speak of the $5 billion budgeted from the sale of bonds as cash in the bank if voters approve Proposition 1C. Unfortunately, it isn’t that simple. 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.

— Jean Ross