November 14, 2007

Feeling lucky?

Liz Hill said all the right things -- the state is out of easy solutions, it's time to really fix this problem. But don't count on it. There is no way that the Republicans in this Legislature are going to raise taxes, and it is almost as unlikely that these Democrats would accept real, ongoing spending reductions of the kind it would take to solve the problem. They are not even likely to split the difference.

Which is why I see a big lottery deal looming in the state's future. The bankers have opined that the state could bring in somewhere between $14 billion and $37 billion by leasing the lottery to a private operator. Hill cautioned against it, but it still seems like the most likely scenario. It would allow both parties to wiggle out of this without doing what they don't want to do. So if that's the most probable path of least resistance, it is probably time to start thinking about how they might do it in the "least irresponsible way" possible.

Interestingly, Hill's report shows that the biggest problem is in the short term, over the next two years, when the state will be around $18 billion short of what it needs to fund all services at their current levels, plus population growth. The problem is about $10 billion next year and $8 billion the year after. Beyond that, once the deficit bonds are repaid, the problem shrinks to about $3 billion a year. And on a $120 billion to $130 billion general fund budget, that's really not that big a deal. You are talking less than 3 percent.

So if Schwarzenegger is going to propose using the lottery, he should not repeat the mistake he made at the beginning of his first term as governor, when he proposed and agreed to a big deficit bond without a binding plan to close the deficit. He got the borrowing but not the long-term solution.

This time, they could use the lottery for the big short-term problem, and at the same time adopt a three-year or four-year plan that would, at long last, permanently (as best as anything is ever permanent) close the gap. They would need to adopt about $3 billion (or maybe $4 billion or so just to be safe) in ongoing solutions that would be phased in over three years so that once the lottery money covered the short-term problem, the permanent fixes would solve the long-term problem.

There's talk around the Capitol that the CTA is not wild about re-tooling the lottery. But there are two reasons why I think the union's opposition will fade. First of all, Liz's numbers show that even if the state fully funds Prop. 98 next year, the education budget will be almost $2 billion short of what the schools need to pay for a cost of living increase and enrollment growth (with all of that growth coming in the community colleges). CTA needs a find a way to get more than the state "owes" the schools, to use the union's favorite choice of words. The lottery would be the easiest way to do that.

Second, the state's needs for budget-balancing are on the low-end of the projections for what the lottery lease might bring in. The school lobby has been trying to find a way to get more money for the longer term. Suppose they were promised a share, a big share, of any lottery revenues in excess of the $18 billion or so the state needs over the next two years. I think they might begin to like the idea a lot more than they do now.

Then again, maybe I'm wrong about this. Maybe the governor will propose a package of tax hikes and spending cuts that will solve the problem without the lottery gimmick, and both parties will rush to pass it with a two-thirds majority.

Right.

Posted by Dan Smith on November 14, 2007 12:31 PM