CA: Budget deal does little to solve crisis

SACRAMENTO -- The budget Gov. Gray Davis is expected to sign Saturday solves the state's immediate cash-flow needs, but still leaves a multibillion dollar shortfall next year and as well as billions of dollars in loans, accounting gimmicks and one-time savings that only delay tough choices.

"The path that the Legislature took is not good for the economy or the residents of the state," said Stephen Levy, director of the Center for Continuing Study of the California Economy. "They decided to neither cut spending nor raise revenues sufficiently to truly balance the budget.

"They picked a third option, which is to borrow and carry the deficit over," Levy said. "That means that the problem will be back with us and even more difficult next year."

The near-$100 billion spending plan was largely the product of Senate leadership -- President Pro Tem John Burton, D-San Francisco, and Republican Leader Jim Brulte of Rancho Cucamonga.

Both said the budget plan had elements "for everyone to hate," but they agreed it was the best deal they could reach under the circumstances: Democrats didn't want to cut any more services and Republicans opposed higher taxes.

That partisan split left California operating without a budget since the new fiscal year started July 1. The operating deficit has grown to nearly $11 billion and threatened to reach $38.2 billion by next July if nothing had been done.

With dwindling cash reserves and no budget in place, officials feared the state would run out of money in September. Last week California's already battered credit rating was downgraded by one of Wall Street's biggest firms to one notch above junk bond status.

And the budget crisis was hurting Davis as he prepared for an Oct. 7 recall election.

That combined to make it almost impossible for the two parties to have a real debate over spending and taxes this summer, lawmakers said. So they embraced politically expedient solutions.

Those were dominated by the planned sale of bonds to pay off the state's existing $10.7 billion deficit. The bonds are expected to be paid off in five years, and will cost close to $2.5 billion a year to pay back -- assuming an interest rate of about 4 percent -- according to the nonpartisan Legislative Analyst's Office.

Other borrowing includes the existing bonds sold against California's share of a court settlement with cigarette manufacturers and a $2.5 billion loan to pay the state's annual pension obligation.

Beyond the borrowing, the budget uses a variety of shifts and accounting maneuvers. It defers payment of $500 million borrowed from a transportation account to the general fund and carries out a long list of smaller transfers and loans to the general fund that total about $430 million.

Also, the budget saves $1 billion in savings by changing the accounting methods for tracking public health insurance payments.

Bringing in another $4 billion next year is the tripling of the tax car owners pay, but some Republicans and anti-tax groups have sued the state, claiming the increase is illegal. If the state loses the case they would have to pay back the money with interest, officials say.

Legislators saved about $40 million by taking money for housing projects from the general fund to money raised by the sale of $2.1 billion worth of bonds for affordable housing that were sold as part of Proposition 46, which voters approved last November.

"All this budget does is push the problems off into the future," said Assemblyman Keith Richman, R-Granada Hills. "The reason this budget came out the way it did was because this Legislature was unwilling to make the difficult decisions that are necessary to resolve the problems California faces."

In June, Richman and Assemblyman Joe Canciamilla, D-Pittsburg, proposed a balanced budget plan that relied on deep spending cuts and a half-cent increase in the sales tax. Both voted against the budget Tuesday.

Brulte disagreed the new budget doesn't avoid all the tough choices, saying it cuts in one year a potential $38.2 billion deficit down to $7.9 billion.

"We are going to hear from the coulda', woulda' and shoulda' crowd that we didn't do more," he said. "But as long as you need 27 votes to pass a budget in the Senate you've got to compromise."

Davis has pledged to create a panel of financial experts to examine the state budget and recommend to the Legislature how to balance spending and revenues.

The budget provides some new authority for the governor to make midyear adjustments to spending without the approval of the Legislature. The new powers allow the governor to move up to 5 percent of an agency's budget to any other agency to solve cost overruns.

At least one lawmaker involved in the budget negotiations doubts anything will change next year.

Legislators, said Assemblyman John Campbell, R-Irvine, "are going to wake up next June and it will be exactly as it has been the last three Junes -- we will have a deficit and the Democrats will be calling for a tax increase and we will be calling for spending reductions."

Campbell, who voted against the budget Tuesday, acknowledged that many of the one-time solutions and borrowing were originally Republican ideas that he supported as alternatives to higher taxes.

On the Net:Read the budget bill, AB1765, and the budget trailer bill, SB1044, at www.sen.ca.gov

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Open microphone catches California Democrats talking about prolonging budget crisis
(AP) - Unaware that a live microphone was broadcasting their words around the Capitol, Assembly Democrats meeting behind closed doors debated prolonging California's budget crisis for political gain. Members of the coalition of liberal Democrats talked about slowing progress on the budget as a means of increasing pressure on Republicans. A microphone had been left on during the closed meeting Monday, and the conversation was transmitted to about 500 "squawk boxes" that enable staff members, lobbyists and reporters to listen in on legislative meetings. More...

Democrats' Budget Debate - Excerpts [PDF] (CA GOP Caucus)
Calif. Budget Crisis (PPIC) | Message board

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