California budget shortfall has stink of reality

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By DANIEL WEINTRAUB
Tuesday, November 21, 2006
Working from cramped quarters on the upper floors of a plain concrete-clad office building catty-corner from the state Capitol, California's nonpartisan legislative analyst is all but unknown to state residents. But think of Elizabeth Hill and her mostly anonymous crew of professional budget watchers as the conscience of the Capitol. Collectively, they are the skunk that ruins the budget garden party the governor and the Legislature would otherwise enjoy each year.

Every fall, just before Thanksgiving, Hill offers a five-year forecast that typically delivers a dose of reality amid the feel-good vibe and wishful thinking that permeate the central Sacramento district where laws and budgets flourish.

This year is no exception. After a campaign in which Gov. Arnold Schwarzenegger all but refused to discuss the state's fiscal condition other than to express repeated optimism that economic growth would make everything right, the pesky analyst has returned right on schedule with a more sober diagnosis of the situation.

The state, Hill says, is facing a $5 billion shortfall next year between the amount the government is projected to spend and the amount its residents and businesses will pay in taxes.

Schwarzenegger might be able to cover some of that shortfall with money left over after the current fiscal year ends in June 2007. But doing so won't solve the problem, because the underlying trends are still present _ and will be for the next three years at least.

"Basically, we're living on borrowed time," Hill told reporters last week.

The problem's roots can be traced back half a decade to the dot-com boom that fattened the treasury with income taxes paid mostly by California's newly minted millionaires. As all those billions flowed in, the Legislature and then-Gov. Gray Davis committed the new money to ongoing programs, spending more on education and health care mostly.

But when the economy slowed and revenues dropped, lawmakers and the governor didn't want to cut spending. So they borrowed instead, piling up budget debt that has been coming due ever since.

Schwarzenegger promised to end that practice when he persuaded voters to dump Davis in a 2003 recall election. But the former actor simply refinanced the Davis debt and borrowed a bit more. He did manage to slow the projected growth in spending for a year or two, but he gave up that goal after lawmakers rejected his proposals for cutting more and the voters turned down his ballot measure that would have given governors more power to go around the Legislature and make the cuts on their own.

As a result, Californians this year will spend about $99 billion on the services they're getting now _ plus another $3 billion to pay for services they got in previous years but didn't pay for at the time. Over the next three years, those payments for services already rendered will total about $10 billion. To put that figure in some perspective, consider that the state spends about $6 billion a year for the taxpayers' share of costs at the University of California and California State University.

The good news is that outside this fiscal hangover, the problem is getting smaller, not larger. Revenues over the next three years are forecast to grow by about 20 percent. Spending, if left unchecked, would grow by about 15 percent, according to the analyst's projections. Reducing that spending growth to 14 percent instead three years out _ a minuscule change _ would return the state's annual operating budget to the black after nearly a decade of red ink.

In the meantime, however, the newly re-elected Schwarzenegger and the Legislature must pay off all those old debts and reduce short-term spending growth while waiting for the anticipated revenue growth to materialize.

Finding things to cut, even in a $100 billion budget, will not be easy.

The voters have said pretty clearly that they don't want to reduce the projected growth in education spending, which is scheduled to rise from $41.2 billion this year to $45.8 billion three years from now, even as enrollment declines.

The next biggest chunk of spending _ on the Medi-Cal program for the poor _ is slated to grow from $13.8 billion this year to $15.9 billion by 2010. Reducing that growth would mean denying health care to the poor and disabled or cutting back payments to doctors and hospitals. That seems unlikely in a year when Schwarzenegger and Democratic legislative leaders have said their top priority will be expanding access to health care, not reducing it.

Prison spending is projected to climb from $8.5 billion this year to about $10.5 billion three years from now, driven by court-ordered changes to the prison health care system, an increase in the number of inmates and projected growth in salaries for guards and other prison employees.

Spending on transportation and debt service on bonds will also climb _ thanks to a package of measures voters approved Nov. 7.

Given those constraints, Schwarzenegger and lawmakers will probably ignore the legislative analyst's advice to get real and will instead find a way to fudge their way through yet another budget cycle while hoping that the housing slump ends early and the economy starts growing quickly again.