The economic stimulus plan being written by President Barack Obama and Congress could cover a third of California's projected budget deficit and give Gov. Arnold Schwarzenegger and state legislators a way out of their political dilemma – but the governor says it would be foolish to count on it.
California's share of direct spending in the package has been calculated at $21-plus billion, and Jed Kolko, an economist for the Public Policy Institute of California, told an economic seminar in Sacramento Monday that about $14 billion of that could underwrite state education, medical care and other spending programs over the next two years.
However, Kolko noted that California's share of the package is no larger than its share of the nation's population and warned that because of its short-range nature it would not resolve the state's enormous structural budget problem.
Minutes later, Schwarzenegger echoed that caveat. It would have, he said, "no effect on the structural deficit," adding, "We don't want the federal government to fix our problem. We have to fix our problem."
Those are rational responses to receiving a temporary infusion of cash from Washington, but politics are not rational. With an assumed deadline for budget action looming in less than a week, politicians may be tempted to write off a big chunk of the state deficit with federal funds.
Schwarzenegger's administration has estimated that the gap between state income and outgo over the next 18 months at $40 billion, and he and legislative leaders have been negotiating over how it would be closed. The Republican governor has proposed a series of new taxes, along with spending cuts, but Republican leaders have publicly shunned the former and Democrats have been unwilling to embrace the latter.
There are indications that Republicans would supply enough votes for new taxes of some kind if Democrats acceded to GOP demands for changes in environmental and labor laws and a constitutional cap on spending growth, but Democrats, under pressure from environmental and labor groups, have been reluctant.
"We are getting closer and closer to solving the problem," Schwarzenegger said. "It will take a few more days to get there."
The assumed deadline for action is Sunday – Feb. 1 – since Controller John Chiang has indicated that he will defer some February payments without movement on a new budget plan. One element of such a plan presumably would be legislation that would allow the state to borrow about $2 billion from restricted state funds to ease the looming cash flow crunch. Also, any school aid cuts in the plan would also ease the cash flow problem.
Without any action by Sunday, too, major municipal bond rating agencies are poised to drop the state's credit rating, now tied with Louisiana for worst in the nation, even lower.
Put it all together and this may be the week in which either something happens or California falls off the fiscal cliff.
Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.
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