DALLAS - California Gov. Arnold Schwarzenegger's proposed budget understates the shortfall by about $1.5 billion, leaving a funding gap of $16 billion in fiscal 2009, according to a report from the Legislative Analysts Office yesterday.
The LAO, the Legislature's budgetary watchdog, proposed an alternate approach to Schwarzenegger's spending plan, swapping across-the-board cuts for more targeted reductions in spending.
"The administration's across-the-board budget reductions reflect little effort to prioritize and determine which state programs provide essential services or are most critical to California's future," the report said.
Elizabeth G. Hill, legislative analyst for the LAO, said the larger shortfall is due to lower revenues than Schwarzenegger forecast, as the economy continues to weaken.
"Even if the legislature adopted the governor's budget in whole, the state would face multibillion dollar shortfalls in future years," Hill told a news conference in Sacramento. "We project that the state would face about a $4 billion operating shortfall in 2009-10, shrinking to between $2 billion and $3 billion in the two following years."
The alternative budget proposal came a day after Schwarzenegger announced additional cuts designed to save $100 million by June 30. All agency secretaries and department directors were told to immediately reduce their spending by 1.5% by cutting nonessential services.
The governor's action followed a $2 billion mid-year budget reduction announced last week.
Hill said that the Legislature's action in a special session last week to cover $7 billion of what was then thought to be a $14.5 billion shortfall would help lessen the pain of the austerity measures.
"All Californians would make sacrifices under our proposals," she said.
Legislative remedies included additional borrowing, delaying previously planned early debt payment and deferring some cost-of-living increases on welfare payments. The package, signed by Schwarzenegger Saturday, left many controversial spending cuts he proposed, such as early prisoner release, closing some state parks, and suspending required minimum spending on education.
The LAO proposed a less severe approach to educational spending cuts under the state program known as Proposition 98. While the governor proposed suspending $4 billion of the Proposition 98 spending, the LAO suggests only $800 million.
Proposition 98, also called the "Classroom Instructional Improvement and Accountability Act," requires a minimum level of education spending based on three tests. But the law allows the governor to suspend the program when necessary.
The LAO's proposal does not add any new debt, but does propose restructuring existing debt.
Despite a slowing economy, Hill said she is not forecasting a recession in California.
"However, we're aware that all of these numbers could change," she said.
The LAO projects lower tax receipts this year in all three of the state's major revenue areas: personal income tax; sales tax and taxable corporate profits. The office also expects lower receipts from the state's gambling compacts.
On Tuesday, the governor said revenues are falling short of expenses by $500 million to $600 million each month.
The LAO's report also proposes closing certain loopholes in the tax law to increase revenue. One that has attracted a lot of attention in the state is an exemption on taxes for yachts and motor-homes if they are purchased outside the state and remain outside the state for a certain period of time. Schwarzenegger has proposed eliminating the exemption.