February 21, 2007

The bad, the good, and the ugly

Liz Hill taketh away, and she giveth. The legislative analyst, best known for poking holes in governors' fiscal plans, also likes to propose solutions. Because her ideas, while often logical, usually involve politically difficult decisions, they are rarely embraced out of the gate. But keep an eye on them because they often pop up later in the process as deal closers.

This year Hill has opined that the governor's budget overstates the government's fiscal health by about $2.8 billion. She thinks the state would end the 2007-08 budget year with a $700 million deficit if the governor's budget is adopted as proposed. She says revenues will probably be $2 billion below what Schwarzenegger is projecting for this year and next. And spending will be at least $800 higher.

But Hill has also offered a number of ideas for closing that gap. Actually, just two big ones would do the trick. The first is relatively painless. The second not so much.

Her first idea is to stop making early payments to retire the state's deficit bonds, approved by voters in 2004. Each year a portion of the sales tax goes to debt repayment. Next year's figure will be $1.5 billion. But Proposition 58, a balanced budget and rainy day reserve that passed along with the bonds, sets aside another $1 billion for repayment next year. The governor can waive that payment by declaring that the state's fiscal conditions requires the use of the money for programs rather than for repaying the debt. Finally, Schwarzenegger has also proposed a completely optional $595 million payment on the debt next year. He needs legislative approval for that one.

Hill is proposing that some or all of those optional payments be suspended. That would give state budget writers another $1.6 billion told their goal of closing the gap she is predicting. It's almost certain the Legislature will follow her guidance and refuse to go along with Schwarzenegger's proposal for the $595 million payment. It's less likely that the governor will on his own suspend the $1 billion payment now scheduled. But he might, especially if tax revenues continue to come in at a lower rate than he projected.

The second big area of savings Hill is pointing to is education, which is governed by the constitutional mandate known as Proposition 98. Each year at budget time lawmakers, using the best information available at the time, set aside an amount for education that at least matches what they think the guarantee will require. In the current year, because revenues are coming in lower than expected, it turns out that the state will probably have given the schools about $600 million more than the minimum requirement. If that money is left in the budget, it will become part of the base on which future budgets are built, and the state will be on the hook for another $635 million more next year.

Hill suggests taking back the $600 million this year. She has a way to do this that would not affect any existing classroom programs. About half the loss of funds would be covered by a shift from a transportation account that has a surplus. The other half would come from programs that were funded but have not begun, and from money that was set aside for community college students who never enrolled.

If the Legislature goes along with that proposal, it would save another $634 million next year. That's more problematic, because the education lobby would argue that it needs that money. Hill says even without it, school spending will still climb, and the schools would get enough to keep pace with enrollment growth and inflation. Given the beating Schwarzenegger took for trimming the growth in school spending a couple of years ago (in a move also recommended by Hill) don't look for him to pick this one up and run with it. But legislators looking to shave money from the budget without hurting health and welfare programs might be more eager than the governor to at least consider the analyst's recommendation.

If the Legislature and the governor suspended the early debt repayment and took Hill's advice on education, they would balance next year's budget, even with the lower than expected revenues and higher than expected spending that she says will come about. If they follow a few more of her recommendations, they might even make some progress on solving their deficit problem into the forseeable future.

Posted by dweintraub on February 21, 2007 3:06 PM