SAN FRANCISCO — California Gov. Arnold Schwarzenegger’s plan to close part of the state’s $21 billion budget gap with revenue anticipation warrants is “very risky” and the governor may be underestimating the size of the revenue shortfall, according
Schwarzenegger last week laid out plans to close a growing deficit that was made worse by voters’ rejection of budget referendums this week. He proposed $7.5 billion of borrowing to close the gap in fiscal 2009-10, including a $5.5 billion revenue anticipation warrant issue that would have to be repaid in 2010-11.
“Using Raws to address the annual budget deficit would be a terrible precedent and a poor fiscal policy,” legislative analyst Mac Taylor wrote in a report yesterday. “The Raws merely would defer part of the state’s budget problem one fiscal year.”
He said the warrants would delay adjustments to spending and tax policies that are necessary to bring the budget into long-term balance and may violate the state constitution’s balanced budget requirements.
State Treasurer Bill Lockyer has asked for federal guarantees for the debt because he doesn’t think it can be sold at a reasonable interest rate without such an enhancement.
The LAO analyst also disagreed with Schwarzenegger’s budget estimates, but he called them “reasonable.” Taylor said he expects weaker revenues than the governor does, which would expand the expected budget gap to $24 billion from $21 billion.
In February, after months of stalemated negotiations, California lawmakers passed a package of spending cuts, tax increases and borrowing measures to close a $40 billion budget gap. About $5.8 billion of the fixes — mostly lottery bonds — required voter approval. Voters rejected the proposals at the polls earlier this week.
Schwarzenegger’s proposal seeks to fill that hole. It also addresses a $12 billion deterioration in forecasted revenue collection and a $3.1 billion of increase in spending that was largely triggered by the deepening recession.
Two of the three biggest fixes in the governor’s plan are borrowing measures. In addition to the Raws, which are the largest part of his proposal, the state would borrow $2 billion from local governments by intercepting their property tax collections. It would have to pay that money back with interest over three years. Other big fixes in the package include a $5.3 billion cut in education funding, using federal stimulus dollars for higher education spending, and selling the state workers’ compensation insurance fund.
Most of the governor’s proposals — $12 billion out of $21 billion — are “one-time” fixes, according to Taylor. “Most of these solutions would make solving future budget problems even more difficult,” he said.
Taylor said the Legislature should attempt to reduce reliance on short-term fixes in favor of changes that would bring the budget back into structural balance, though he said some one-time solutions are probably inevitable.
For instance, he recommended that the Legislature borrow transportation funds rather than issue warrants. Still, he urged lawmakers to rely on permanent spending cuts or revenue increases as much as possible.
“The state cannot continue current levels of services in all programs,” the analyst said. “Lower-priority programs must be cut substantially or eliminated.”
Taylor proposed politically painful spending cuts and fee hikes, including increases in community college tuition, taking vehicle license fee revenues from local governments, and reducing state employee salaries by almost 5%.
