Sixty-two billion. Thatís the number the Schwarzenegger team wants you to remember. It doesnít have a whole lot of real-world significance, but you will probably be hearing it plenty just the same. Itís the number Schwarzenegger auditor (and Finance Director-designee) Donna Arduin has come up with to describe what would happen if the new governor, after rescinding the tripling of the car tax, left the rest of state spending and revenues on auto pilot throughout the three-year term to which he was elected. The $62 billion is the total of the annual deficits that would ensue under that scenario.
The more useful number is $14 billion. Thatís the amount of the structural gap between spending and revenues that Arduin says will exist in 2004-05 if Schwarzenegger rolls back the car tax, makes local governments whole for the money theyíd lose in the deal, and leaves everything else as is. Thatís pretty much the same number Legislative Analyst Liz Hill put out on Friday.
The audit, in other words, has so far uncovered little that we did not already know. It does show that the annual gap is projected to grow, even with a moderately healthy economic recovery. And it provides one helpful new number for each year: the size of that yearís projected operating deficit in isolation, stripped of the effect of prior-year gimmicks, tricks and transfers.
Given those numbers, if Schwarzenegger is going to stick to his guns on the car tax and other issues, here is the task he has ahead of him. General fund spending in the current year will be $77.2 billion. Revenues will be $72.9 billion. Next year, revenues remain basically unchanged at $73.1 billion. The year after that, they climb to $76.7 billion. The year after that, in what would be the final budget of the Schwarzenegger term, they climb to $83.2 billion.
And so, if Schwarzenegger is somehow going to balance the budget while cutting the car tax and increasing no other taxes, he must cut $4 billion, or about 5 percent, from this yearís spending (with half the year already gone), and then freeze spending for the following year. But programmed spending, absent any changes in law, is already projected to rise on its own to $87 billion in the fiscal year that begins July 1. So he must cut $14 billion, or 16 percent, from that number. And if he is going to leave untouched school spending dictated by Proposition 98, he must cut his $14 billion from $56 billion, which is the projected spending for the non-education part of the budget. Thatís a reduction of 25 percent.
There is no way Schwarzenegger is going to do this. So his only way out, if he really is not going to raise taxes, is to do some kind of borrowing.
How does that help? Basically, it buys him time. If you fast-forward to the third budget he would need to propose, for 2006-07, projected revenues are $83.2 billion. Since current year spending would be $77 billion, that means that during this three-year period, if he can bridge the gap between here and there, spending could grow by a total of 8 percent, or about 2.7 percent per year. Limiting the spending growth to that pace would be no easy task, given the growth in caseloads, inflation, employee compensation and the burden of temporary measures already adopted that will drive up costs in future years. It would translate into a serious reduction in state services. But it doesnít sound quite as intimidating as a $62 billion projected accumulated deficit.
NOTE: Some of Arduinís numbers are different from Elizabeth Hillís, but none of the differences change the basic scope of the problem Schwarzenegger faces and the outlook over the three-year period. Arduin, for example, expects $83 billion in revenue in 06-07, while Hill projects $85 billion. But given the time between now and then and the uncertainty about the strength of the economy, thatís a difference not worth arguing about.