Prepare to be shocked: California's state government is about to make its final interest payments on 2004 deficit bonds, payments that have averaged more than $1 million a day. That's $1 million a day, every day, for 11 straight years.

It's a sobering statistic that speaks volumes about California's decade of deficits -- a decade that saw billions more in both painful and gimmickry-laden fixes, a fair amount of national ridicule, and enough voter anger to prompt the historic firing of a governor before the end of his term.

"Ultimately, the reality is there is no free lunch," says Joe Canciamilla, a former Democratic state legislator who was deeply involved in the crisis negotiations over California's finances in 2003 and 2004.

The resulting debt, incurred through voter passage of Proposition 57 in 2004, will be officially wiped off the state's ledger by the close of business on Wednesday. Officials will certify the state has collected the final dollars needed to satisfy investors, money doled out when the last of California's Economic Recovery Bonds (ERBs) mature on July 1, 2019.

In truth, the cost of all that borrowing could have been much higher. Original estimates were that the Proposition 57 bonds could take as long as 14 years to fully retire.

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Gov. Jerry Brown pushed for accelerated payments after the tax revenue windfalls of the past few years. Brown has counted the ERBs as part of the "wall of debt" he inherited upon taking office, a series of costly short-term financial obligations that have weighed down the state budget and its ability to fund other obligations and services.

"People have to be able to think ahead," said Brown, when asked about it during a May news conference about how to pay for the state's needs.

"If you can't think ahead a few years and realize you don't have the money, you do that in your own personal life [and] you go bankrupt."

2003: The Debt Deal Was Born

California's state government isn't technically subject to bankruptcy laws, but the specter of fiscal calamity was palpable in the late winter of 2003. Republicans in the Legislature were the first to propose a short-term loan to cover a portion of what was then estimated to be a $35 billion budget shortfall.

The GOP proposal was more narrow -- a $10 billion loan to be paid back in five years with existing sales tax revenues -- than what was wanted by Democrats. By the end of that summer's long budget fight, Gov. Gray Davis signed a plan that included a $10.7 billion deficit bond financed through a complex system using existing tax dollars. It was quickly challenged in court.

"We looked at the Gray Davis debt as being fundamentally illegal debt," says Jon Coupal of the Howard Jarvis Taxpayers Association.

The legal fights over the deficit borrowing plan ended after Davis was recalled by voters in October 2003 and Gov. Arnold Schwarzenegger pushed what ultimately became Prop. 57.

Because Prop 57 -- a $15 billion deficit bond also to be repaid through a complex series of tax dollar reallocations -- had to be approved by voters, Coupal and almost every other government spending critic ended up endorsing the measure.

"It was voter approved," he says. "It doesn't mean it was smart debt."

Gov. Arnold Schwarzenegger led the campaign to persuade voters to sell up to $15 billion in deficit bonds. (Frederick M. Brown/Getty )

Schwarzenegger cast the bond measure, linked with the loose balanced budget requirement in Proposition 58, as a way to finally tear up what he called the state government's "credit card."

But one prominent critic disagreed, and still does: Former state treasurer Phil Angelides.

"We borrowed to paper over the problem," he says.

The decision facing Democrats in early 2004, weeks after Prop. 57 had been crafted, wasn't an easy one. Without a quick infusion of cash, the state was projected to run out of operating funds. But joining Schwarzenegger's campaign would no doubt boost the Republican's bipartisan credentials and his political power.

One Democrat, Schwarzenegger's most prominent ally in the effort, still insists it was a no-brainer.

"The governor and I did the only thing we could do," says Steve Westly, the former state controller who hit the campaign trail with Schwarzenegger to pass both the deficit bond and budget balancing propositions. "At that point, you can't really have an esoteric discussion about the pros and cons of debt. You're dealing with a crisis."

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The two men, Schwarzenegger and Westly, became the chief salesmen for the deficit bond and the budget balancing amendment. The most memorable TV ad of the time featured them finishing each other's sentences.

Early polls showed Prop. 57 losing, but Schwarzenegger's persistent sales pitch won them over. On Election Night, the first-of-its-kind deficit borrowing plan was approved by 63 percent of the votes cast.

Those left on the sidelines -- liberals and conservatives alike -- were not moved.

"There was a lot of, at the time, talk about, 'Oh, there's broad bipartisan support,'" says former treasurer Angelides. "But in fact, it was bipartisan support to kick the can down the road."

A Fix Or A Stopgap?

Even some supporters of the Prop 57 deficit bond thought the campaign -- the pitch that had been made to voters -- was all wrong.

"The folks were trying to sell this as a fix," recalls Canciamilla, who represented Contra Costa County in the Assembly and is now the county's registrar of voters. "We weren't solving anything. It was a bridge loan."

The gap covered by that bridge had been widened by Schwarzenegger himself on his first day in office, rescinding an unpopular but valuable increase in vehicle license fees.

State officials sold the first $7.9 billion in Prop. 57 bonds on May 5, 2004. Wall Street investors jumped at the chance to buy the California debt, perhaps in part because the state's tenuous finances forced a higher yield -- that is, the state had to pay a higher interest rate to bond buyers even though Prop. 57 was structured to guarantee a payback from dependable sales tax revenues.

The first interest payment was made on July 1, 2004, but the borrowing was far from over. In February 2008, almost four years after Prop. 57 was hailed as a one-time fix, Schwarzenegger and legislators approved selling another $3.3 billion in Prop. 57 bonds to shore up the rapidly eroding state finances months before the global economic collapse.

The 2008 borrowing was made legal by state finance officials attributing some of that year's budget woes to money shortages dating back to 2004 -- a decision that allowed more deficit borrowing, even though the original companion measure, Prop. 58, amended the state constitution to ban any new deficit borrowing.

Prop 57's Bottom Line: $19.2 Billion

Prop 57 deficit bond interest could have funded UC for 15 months. — How much is $4.4 billion? It could fund the state's portion of the University of California system for 15 months. (Frederick M. Brown/Getty )

In all, state treasury officials say the Prop. 57 bonds -- $14.2 billion in borrowing -- resulted in interest payments totaling $4.8 billion, plus another $200 million in administrative costs. The final payments have been set aside in a state escrow account to be disbursed to bond holders through July 1, 2019.

The formal ceremony on Wednesday marks the end of the collection of tax revenues to pay off the bonds. And that, say finance officials, allows the state to formally erase the debt, $19.2 billion in all, from the state's outstanding obligations.

Those involved with the policy and political effort to borrow the money don't dispute the fiscal impact. Interest payments of $4.8 billion, paid out since the first payment in early July 2004, have meant less money for other government services in the intervening decade.

How much less money?

For perspective, $4.8 billion could fully fund the state budget's current share of University of California system expenses for more than a year. It could fully pay for the California Department of Fire and Forestry Protection for more than two years. Or it could boost K-12 spending by as much as $658 per student.

But that would have required different and perhaps more politically impossible choices in late 2003 and early 2004: Tax increases, spending cuts or both.

"I'm glad this chapter of California's fiscal history is finally closed," said Schwarzenegger in an emailed statement. The former governor also praised voters for closing the door on future deficit borrowing with Prop 58.

Others involved in the saga that gripped California more than a decade ago seem, no matter their position, to look back with a least a twinge of disappointment that there wasn't another solution.

"If I were to do something differently, it wouldn't have been the actions that Gov. Schwarzenegger and I took," says Westly, the former state controller. "It would have been how did we get there to start with? The answer is we spent ahead of our means."

Critics of government spending agree on that point. They also note that California voters have a tendency to miss the real lesson in all of this: The actual cost of bond measures.

"They don't necessarily grasp the fact that bonds equal debt equal taxes in the future," says Coupal of the Howard Jarvis Taxpayers Association. "I think that is part of the problem."

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This story was updated early in the afternoon on Wednesday, Aug. 5 to reflect the final numbers provided by the state treasurer's staff on Prop 57 costs -- a slight uptick in cost from our original version. We also clarified that the final bond payments include both principal and interest, and not just interest alone.

Steve WestlySteve Westly

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