Schwarzenegger Rolls Budget Dice on Strength of Economic Recovery
By HOWARD FINE
Arnold Schwarzenegger is California’s latest governor to take up high-stakes gambling.
By cutting a string of deals, the governor could lop up to $5 billion off the 2004-05 deficit of $15 billion.
But in exchange for concessions now, Schwarzenegger has committed to making up billions in cuts in future years. Not everyone thinks it will work.
Last week, nonpartisan Legislative Analyst Elizabeth Hill said the governor’s plan is too big on borrowing, pushes costs to another day and restores cuts proposed in his January plan. As a result, the state could face an $8 billion deficit in two years, Hill said.
Schwarzenegger said the money for his plan will come from surpluses generated by the “booming economy” that he’s trying to stimulate with business reforms. The governor also is looking to reap savings from a massive reorganization of state government.
“I’m trying to do both, stimulate the economy and be responsible fiscally,” Schwarzenegger said at a press conference earlier this month. “We are trying to manage the government, making sure we are smart about the way we spend money. At the same time, we will do everything to keep businesses here and make the economy boom.”
It’s a dicey strategy, one used with different results by two predecessors, Republican Pete Wilson and Democrat Gray Davis.
If extra money or expected savings don’t materialize, it could bring difficult choices in two years, namely tax increases and severe cuts.
Davis was recalled after the onset of the current budget crisis, in which the dot-com bust caused state revenues to plummet. Combined with an economic slowdown, that meant revenues no longer could support pay and benefit raises granted to state workers and teachers when times were good.
When Wilson took office in 1991, he closed an initial multibillion-dollar deficit with cuts and tax increases. But as the recession deepened, he also resorted to fund shifting and borrowing. Wilson, too, took money from localities and promised to restore it, but never did.
In time, though, Wilson’s gamble paid off as revenues from the technology boom began pouring in.
The state Legislature is expected to go along with Schwarzenegger’s plan with tweaks, even though the Democratic majority generally is unhappy there are no tax increases.
Most vocal is Treasurer Phil Angelides, a Democrat who is gearing up for a gubernatorial run in 2006.
“It will take a revenue surge equivalent to the late 1990s,on the order of $10 billion a year or more,to have a balanced budget under the plan now being put forward by the governor,” Angelides said. “And because his plan does nothing to tackle the structural deficit, that surge would have to hold for a sustained amount of time.”
Others say the surpluses might not have to be quite so large. Still, they must be more than the current-year estimate of $2.2 billion, $1.2 billion of which is due to a targeted, one-time tax amnesty program.
Angelides and other Democrats say tax increases and the closure of tax loopholes are needed along with spending cuts.
But supporting tax hikes in an election year is risky for Democrats. And Schwarzenegger remains popular in public opinion polls. The governor has outmaneuvered Democrats by going directly to interest groups to cut deals.
In early January, Schwarzenegger got the California Teachers Association to agree to forgo $2 billion in funding increases for primary education next year.
Earlier this month, he cut two deals: one with the state’s higher education leaders that would save $660 million, and another with local governments that would net the state $1.3 billion.
Still in the works is a multiyear compact for gaming revenues from Indian tribes.
If Democratic legislators begin to reopen all these deals, Schwarzenegger can tag them as obstructionist, said Sherry Bebitch Jeffe, professor of political science at the School of Policy, Planning and Development at the University of Southern California.
The deals put off the toughest choices for future years.
In the pact reached two weeks ago with local governments, the state must find a way to give back $1.3 billion a year starting with the 2006-07 budget year.
And under the terms of the other two deals, the state can’t go back to schools for more funding cuts to close an ongoing structural budget deficit estimated at anywhere from $7 billion to $10 billion.
The big concern now is what will happen in 2006-07 when the provisions of these deals kick in. If the economy doesn’t generate at least $4 billion in surplus revenues each year to offset the loss of these diversions, it will force tough decisions on Schwarzenegger and legislators, right on the eve of a gubernatorial election.
On the other side of the ledger, Schwarzenegger is holding out the promise of several hundred million dollars, if not several billion, in savings from his government reorganization plan. Earlier this year, Schwarzenegger referred to this plan as “blowing up the boxes” of state government.
Among the provisions, several state departments would be dismantled, including the Business, Transportation and Housing Department. Also, up to 200 state boards and commissions, along with 1,500 political appointees, would be eliminated.
Schwarzenegger officially has booked about $150 million in first-year savings from his reorganization plan. But that’s considered a conservative estimate, according to news reports quoting those working on the plan, and that savings would grow in future years as the plan is fully implemented.
The governor promises to bring the reorganization plan to the Legislature in January or February. A tough fight is expected as various agencies fight to protect their turf. Many expect a severely watered down version to emerge before it passes.
That leaves both major underpinnings of Schwarzenegger’s long-term budget approach on shaky ground, especially since the state’s revenue stream is notoriously volatile.
“Every budget is a gamble,” said Jack Pitney, professor of government at Claremont McKenna College. “It’s just that this one appears to involve a few more ‘Hail Marys.’ He’s going to need a good deal of luck here.”
Fine is a staff writer with the Los Angeles Business Journal.
