SACRAMENTO, Calif. (AP) — California closed an ugly chapter in its financial history on Wednesday by making its final payment on $14.2 billion in costly borrowing that plugged a budget deficit 11 years ago but eventually cost taxpayers about $5 billion in interest and fees.
State Treasurer John Chiang and Director of Finance Michael Cohen announced the final payment of nearly $929 million toward the Economic Recovery Bonds, debt that was approved by voters in 2004 after then-Gov. Arnold Schwarzenegger led a bipartisan campaign promoting them.
"They failed to make the difficult decisions possible. ... It was just the political will at that juncture," Chiang said of the decision by political leaders to promote the borrowing.
"Wall Street should not be the budget reserve of the state of California. It's costly, it makes no sense," he said.
Promoting the borrowing in Proposition 57 was one of Schwarzenegger's first acts in office, and he pitched the measure as a way to avoid public service cuts and tax increases. The state had the lowest credit rating among all 50 states in the nation at the time, which added to the interest costs.
Critics, including then-state Treasurer Phil Angelides, warned that it was a mistake to shoulder long-term debt to solve short-term problems and could put the state in a more perilous financial position.
Schwarzenegger enlisted help from all quarters to sell the plan, including Hollywood celebrities and lawmakers from both parties who he wooed with cigars, dinners and private plane rides. He even persuaded the governor he ousted from office, Gray Davis, to campaign with him.
After voters overwhelmingly endorsed the plan in March 2004, the governor triumphantly declared, "California is back on track." Voters in that election also endorsed a companion measure, Proposition 58, which set up the state's first rainy day fund and barred future bond sales to finance budget debt.
Still, the borrowing only worsened California's financial outlook. The state faced a $17 billion budget deficit the following year, including a $4 billion hole from Schwarzenegger's move on his first day in office to roll back an increase in the vehicle license fee.
Cohen said the state has been spending about $1.6 billion a year to pay off the debt — about 1 percent of incoming tax revenues. That money can now be used to pay for other state programs.
Wednesday's payment came a year earlier than state officials had previously projected, thanks to soaring income tax levels.
"We're doing everything we can to avoid repeating the same mistakes we made in the past," Cohen said.