January 10, 2008

On budgets and leverage

Some thoughts on the governor’s budget proposal:

--It’s not real. I know, as Schwarzenegger said in his speech the other night, “Duh!” He knows and we know that there is no way the Democrats in the Legislature are going to suspend Prop. 98 and then cut $4 billion from the schools next year. Nor are they going to cut a similar amount from Health and Human Services. We’re talking here about real year-to-year reductions, not just shaving the rate of projected growth. It would mean teacher layoffs and larger classes in the schools, and real cuts in health and social services for the poor. Assuming cuts of that magnitude are going to happen on the Democrats’ watch is no more realistic than it would be to assume the Republicans are going to approve an increase in income taxes.

--So if it is not real, what is the real plan? He may not have one at this point. But I would guess he is using this document to try to force lawmakers from both parties to come up with something better. Some of the cuts – in prisons, parks, and schools – cut deeply into things the Republicans value. Perata even talked about restructuring the education budget to punish schools in districts represented by Republicans who vote against the budget. So there seems to be some effort afoot to engage Republicans by showing them that they can no longer vote “no” and still have their priorities funded.

--But what about the Democrats? Perata and Nunez were softies at their press conference today. Perata sounded as if he was on medication, and Nunez sounded as if he needed to be on drugs. Maybe they’re just sick. But their tone was so conciliatory toward the governor that it sounded as if they had promised him that they would not attack him personally. It sounded as if the three of them have a game plan of some kind for how they want this thing to roll out, and it does not include all-out partisan warfare.

--Another way? Even assuming the Republicans continue to balk at tax increases, I still think some form of short-term revenue relief is going to be part of the final package. Democrats dissed the governor’s lottery idea a year ago at budget time, and again in the context of health care. Today Nunez said it was worth another look. If Liz Hill’s trend line is accurate, it might make sense to do something along those lines: use a temporary measure to address one-time issues in the short term while agreeing to a long-term workout package that solves the problem as far as the eye can see.

--If Schwarzenegger is smart, he will insist that any short-term moves be tied to real, long-term change in the budget so that the problem is solved once and for all. Amazingly, all the stuff he proposed today still does not solve the problem. They are still forecasting deficits, though smaller ones, in the years ahead. Finance Director Mike Genest says the governor’s budget reform would fix that. But if so, it would do it by assuming that the Democrats are forced by his new spending limit to cut 5 percent from projected spending a couple of years from now. But it seems crazy to go through all this pain and still plan on using a formula to force cuts in a year or two. Why not just try to fix it now?

--Cash flow. Unlike in past years, this year the state is also facing a cash shortage. This is separate from the budget, and potentially scarier. The state borrows every year to smooth out the ups and downs in the annual flow of taxes into the treasury, which don’t line up neatly with the flow of spending going out. That borrowing must be repaid within the same fiscal year in which it is executed. This year’s amount is due in March, and will be repaid by the sale of the last of the deficit bonds voters approved in 2004. But the state will be out of cash again in July or August and will need another short-term advance on its tax receipts to pay its bills. The administration is proposing to solve that problem by pushing scheduled payments back later into the fiscal year to provide a cash cushion.

Democrats probably won’t object too much to that move, even though it will make things difficult for local agencies on the receiving end of that money, including schools, counties and transportation districts. But it’s possible that some Republicans might object, arguing that instead of deferring obligations the state should be making real, permanent spending reductions. If so, they would be in position to cause a real crisis, and a threat of default by the state, if they hold out on the budget well into July or August. Talk about leverage. Keep your eye on that one.

Posted by dweintraub on January 10, 2008 2:35 PM