Dissecting the Budget: Tough Decisions to Come
By HOWARD FINE
It may not be what Gov. Arnold Schwarzenegger promised when he campaigned last year, but the $105 billion state budget has been described as being much like the ones of his predecessor, Gray Davis.
The budget borrows billions of dollars through a web of bonds, fund transfers and loans. It also has its share of risky assumptions, including revenue streams or savings that either might not materialize or could be challenged in court.
Above all, the budget puts off making the tough decisions needed to bring state spending in line with revenue. Here are some answers to key questions:
How much borrowing is in the budget?
Lots. First, there’s $11.3 billion from the $15 billion of deficit financing bonds that voters approved in March, which must be paid back from sales tax revenue taken from local governments.
It also uses $1.2 billion in bond proceeds from recently approved compacts with five Indian tribes for gaming revenue that would repay transportation loans ahead of schedule.
There’s also a $925 million pension obligation bond that diverts money from current pension payouts and postpones those payouts into the future.
Besides these direct borrowings, the budget relies on implicit borrowing: billions of dollars in “givebacks” from various interest groups that Schwarzenegger negotiated in return for guarantees against future takeaways.
Cities and counties, for example, agreed to yield $2.6 billion in the next two years in property tax revenue, while the California Teachers Association agreed to give up $2 billion in funding mandated by Proposition 98.
All told, the state Legislative Analyst’s Office estimates there is roughly $17 billion in borrowing in the budget.
How are bond-rating agencies viewing this reliance on borrowing?
They’re more concerned about the $5 billion gap between revenue and expenditure for the 2004-05 fiscal year.
The Legislative Analyst’s Office projects that the gap will grow to nearly $9 billion in the next two years. Why?
The budget contains various “side agreements” that Schwarzenegger negotiated. Local governments agreed to give up $1.3 billion for each of the next two years; the teachers’ union $2 billion and the prison guards $300 million, both for the current year.
In each case, Schwarzenegger promised that after the 2004-05 and 2005-06 periods, there would be no more such “givebacks.” That would force the state to plug the gap with other sources of funds. The impact of these agreements will hit with full force in the 2006-07 period.
“Where is that money going to come from? Will the state go back to borrowing again or will it cut programs or raise taxes?” asked Kim Rueben, research fellow at the Public Policy Institute of California.
Besides these side agreements, there is the continuing pressure on the expenditure side from the relentless growth of social programs such as Medi-Cal and aid to needy families. These programs are mandated to meet steadily growing caseloads and cost-of-living adjustments. And the rate of growth is expected to outstrip the 5% projected annual increase in revenue.
What about the California Performance Review report that says the state could save as much as $32 billion a year through various overhauls?
Many of the 1,000-plus recommendations are controversial, particularly the ones that would result in the biggest cost savings.
Since most of the recommendations require legislative or voter approval, many might never get implemented. Even if they do, they are unlikely to realize substantial savings for several years and won’t come in time to head off the expected crisis in 2006-07.
What are the risks in this budget?
Besides revenue falling short of projections, the biggest is that the $100 million annual cut of gaming revenue from five Indian tribes that Schwarzenegger negotiated could be nullified.
That could happen through passage of a November proposition that could open up casino-style gaming to card clubs and racetracks. But the budget relies on this revenue to float a $1.2 billion transportation bond.
Another risk is that state courts could throw out $930 million in pension obligation bonds. A state appellate court invalidated a larger $2 billion pension obligation bond last year on the grounds that it needed to be put to a vote of the people.
There also is an assumption that a provision to require 75% of all punitive damage awards in the state would be deposited into a special state fund. The Schwarzenegger administration pegged that amount at $450 million; since the program hasn’t gone into effect, there’s no guarantee that amount will materialize.
Finally, the budget assumes $300 million in as-yet undetermined savings and $75 million in revenue from the sale of surplus state property.
How did local governments fare?
Local governments agreed to give up $1.3 billion in property tax revenue in each of the 2004-05 and 2005-06 periods. In exchange, Schwarzenegger has agreed to campaign on behalf of Proposition 1A, which would restrict the ability of the state Legislature to “take” locally generated revenue from cities and counties in the future.
However, a two-thirds vote of the Legislature would allow such revenue diversions. And there’s no guarantee that Proposition 1A will pass.
If neither 1A nor a competing measure passes, cities and counties would gain no additional protection from revenue diversions.
How did transportation funding fare?
There actually was some improvement,at least compared with what the governor first released in January. The biggest change: an anticipated $1.2 billion bond backed by Indian gaming revenue that would be used to speed up repayment of previous General Fund borrowing from a transportation fund.
The state Traffic Congestion Relief Fund also would receive an additional $163 million in funds, again as repayment for past borrowing from the fund.
Meanwhile, the budget also restored some $44 million to expand the Garden Grove (22) Freeway.
Fine is a staff reporter with the Los Angeles Business Journal.
