California Insider

The chorus in the morning papers today seems to be that Schwarzenegger is ducking the "tough choices" needed to balance the budget. Huh? The guy is proposing to suspend Proposition 98, the school funding measure that was supposed to be sacred. He is whacking local government for $1.3 billion a year for two years. He is proposing deep cuts in higher education. He is trying to de-fund employee pay raises given by his predecessor, which would be unprecedented. He did restore in his revision many of the deepest cuts from his January budget in health and welfare that Democrats and advocates said were untenable. But I think that for a lot of people, "ducking tough choices" is another way of saying he won't raise taxes. It's fine if some people think the state needs more revenue to fund more programs. But they should have the guts to say so, and make their case for it, not hide behind the idea that this budget proposal ducks the deficit. It's far from perfect, but from a bookkeeping perspective, it looks more responsible than his January proposal, not less.

The governor and his finance director, Donna Arduin, insist that their latest budget proposal would erase the structural gap between state spending and revenues by the end of the 2005-06 budget year. The May Revise doesn’t provide sufficient detail to test that claim, but there are plenty of hints. And it does look as if this plan moves them further in that direction than the January proposal.

They start with an estimated $15 billion gap between revenues and expenditures. If they did nothing, in other words, revenues would be about $75.4 billion next year while spending would soar to about $90.5 billion. That’s the structural gap.

To balance the budget in the fiscal year that begins July 1, the governor starts with about $3 billion in trims to K-14 education, a $1.3 billion cut in local government, nearly $1 billion in reductions to higher education, a $1 billion reduction in transportation funding and about $500 million in cuts to employee salaries. The rest of the gap he closes with a variety of measures, including revenue from tax amnesty, a pension bond, a new proposal to give the state a share of punitive damages in legal cases, additional federal funds and revenue still to be negotiated from Indian casinos. In the end, the governor says his budget would have revenues and other resources of $79.5 billion and expenditures of $77.6 billion.

The question for the long term is whether that balanced budget can be sustained, or whether it falls apart again in year 2 because of the extensive use of borrowing, shifts and one-time measures.

The legislative analyst scored the governor’s January proposal and concluded that the state would be facing a new, $7 billion gap next year. In other words, she said his budget proposal sliced the structural deficit in half, but did not eliminate it. Arduin never confronted that estimate head-on but suggested that she believed the new gap would be closer to $3 billion. Now, without providing documentation, she says that gap will be eliminated.

There are a couple of big pieces that point in that direction.

First, revenues are up. Most of the recent surge was due to a one-time tax amnesty program, but withholding from current wages is also up considerably from January forecasts, and that might be a signal of sustainable revenue growth. Finance has goosed its ongoing revenue estimate by about $1 billion for 04-05, and Arduin probably assumes that growth carries over into 05-06.

Next, the deal the governor made with local government officials to shift a share of their property tax to the schools for two years helps in 05-06, giving him another $1.3 billion toward the elimination of any new gap.

Arduin probably also assumes that the annual shift of the sales tax on gasoline from transportation to the general fund could continue for one more year. That’s another $1 billion.

Those two measures plus the new revenues give Schwarzenegger a potential $3 billion cushion going into 05-06. But he also has two other things going for him in this plan. One is that the 04-05 budget would end with a positive balance of nearly $2 billion that would carry over into the next year. And this plan uses $1 billion less from the March 2 bond measure for 04-05 than Schwarzenegger contemplated in January, leaving $3 billion in the bank from that source for 05-06 if he needs it.

Together, all of this gives the governor something like $8 billion in wiggle room going into 05-06, assuming he gets everything he has asked for in this plan. That doesn’t mean he would have an $8 billion surplus. It only means that he can survive the expiration of that much in one-time measures, or the falloff of revenues below projections, to that extent.

Legislative Analyst Liz Hill won’t score anything that isn’t already nailed down, and might also quibble with the revenue projections here. But I expect her assessment to confirm that this revision moves the state closer to wiping out the structural deficit. And if she counts the availability of the recovery bonds in 05-06, she might agree that the governor is very close to getting this thing balanced for at least two years, if not for the indefinite future.