California LAO Weighs In On Deficit

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ALAMEDA, Calif. — Gov. Arnold Schwarzenegger has correctly identified the scope of California’s $17.9 billion budget deficit, according to the state’s independent Legislative Analyst’s Office, which disagreed with some of his proposed solutions in a report released Tuesday.

“Overall, our view of the budget problem is similar,” said the report from the LAO, which is respected for its impartial take on budget matters.

Schwarzenegger’s budget projects that California will take in $86.5 billion in general fund revenue in fiscal 2010, which ends June 30, and $91.5 billion in fiscal 2011.

The LAO projects about $1.4 billion more tax revenue than the governor through the current fiscal year and the next.

Earlier this year, lawmakers passed two bills that give state decision-makers more flexibility in managing California’s cash position. That will help the state avoid liquidity problems, but it is not a panacea, the LAO ­concluded.

The flexibility provided by the cash legislation should help the state survive the first few weeks of the summer “cash drought,” when expenses often far exceed receipts, the report said.

“Nevertheless, should a prolonged budget impasse or financial market disruptions delay the state’s routine annual cash borrowing past August or September, the controller may again have to issue IOUs or implement unscheduled payment delays,” it said.

In 2009, state Controller John Chiang issued $2 billion of IOUs to lower-priority creditors to preserve cash for creditors with higher legal standing, such as bondholders. The IOUs were ultimately redeemed.

One of the state’s recent budget actions — a frontloading of tax withholding requirements — will impact the state’s balance sheet in as-yet-untested ways, the report said.

“California taxpayers are now scheduled to make 40% of their estimated annual payments in the month of June,” the LAO reported.

“This policy change, combined with April’s weak receipts, means that June 2010 is now expected to be the state’s largest revenue collection month for 2009-10. How much the state will receive in June is difficult to assess given the recent acceleration change and uncertainty over the precise strength of the state’s economy. June’s actual receipts will help clarify the state’s revenue outlook for the upcoming year.”

The analyst recommended that lawmakers reject the governor’s plans to eliminate the CalWORKs welfare program and child-care subsidies.

It is particularly counterproductive considering the programs’ funding structure, the LAO said.

Eliminating CalWORKs would save the state general fund $1.2 billion, but wipe out more than $4 billion in federal matching funds.

Even with such drastic cuts, the state’s long-term structural budget problems would remain, the LAO said.

“Even if the Legislature approved all these painful cuts and realized the savings assumed by their passage, a stubborn multibillion-dollar operating deficit would persist in the years to come,” the report said.

The LAO recommended that lawmakers use the current budget crisis as a prod to enact long-term reforms, including realigning programs between state and local governments, creating a meaningful rainy-day fund, and taking permanent budget actions to bring down the long-term structural deficit.

“While much of the budget process will focus on how to minimize the damage to taxpayers and program service levels, we urge elected leaders to use this crisis to better prepare the state’s budget and its government to cope with future economic downturns,” the report said.

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