“Easy,” “Prudent” and “Likely” Ways to Balance the Budget

(Editor’s Note: At a meeting with the Fresno Bee editorial board on November 9, Gov. Arnold Schwarzenegger said the state will end the current fiscal year, which concludes June 30, 2010, between $5 billion and $7 billion out-of-balance. The GOP governor’s Department of Finance, based on July revenue estimates, predicts the budget for the fiscal year beginning July 1, 2010 already has a $7.4 billion gap between revenue and spending commitments. Here’s what the governor told the editorial board:

“We have to go and still make cuts and still rein in the spending. It will be tougher because I think the low-hanging fruits and the medium-hanging fruits are all gone. I think that now we are going to the high-hanging fruits and very tough decisions still have to be made.”

The Legislative Analyst’s upcoming fiscal forecast could increase the $14.4 billion hole that must be filled over the next 18 months but, assuming a $15 billion problem, the following are some strategies for closing the gap. Obviously, given the creativity of some of them, they are not the creation of the chief correspondent of California’s Capitol. For want of a better description, the three sets of solutions can be considered “Easy,” “Prudent” and “Likely.”)

The “Easy” Package begins with $1 billion in “savings.”  Whether these savings are real or imagined, there must be at least $1 billion Democrats and Republicans can agree on.

Budgets are based on revenue assumptions. If budget-writers assume the state will receive $2 billion more in cash, then there is a $2 billion smaller problem to solve.  

Another “easy” piece is reducing the state’s contribution to public schools by $1 billion. Under the formulas that dictate how much support the state gives to public schools, when revenue to the state falls, so does the minimum amount schools must be paid.

However, a condition of receipt of federal recovery dollars for public schools is that the support schools receive from the state cannot fall below the level in the 2005/2006 fiscal year.

That may reduce the amount the state can lower school funding, which would be good news for educators who have already lost $14.5 billion during the budget process that ended in late July.

Nevertheless, a reduction of $1 billion in the fiscal year beginning July 1, 2010 seems doable.

Skipping the state’s second debt service payment of the fiscal year would save $3 billion.

But these solutions don’t even get the state halfway to closing a $15 billion hole. The answer: A 10-month budget. Use revenues through April 30 but ignore May and June 2011 expenditures.

A more “prudent” approach would be a mix of new revenue and spending cuts. Bring in $5 billion through increasing vehicle license fees, which were sharply reduced by Schwarzenegger when he took office, or boosting personal income tax.

Unlike the spending reductions envisioned in the “easy” model, the “prudent” approach would actually require real, permanent cuts of, say, $4 billion.  A good target would be entities like the University of California or the California State University System, which can raise fees to recoup the lost income.

Both were cut $1 billion in this year’s budget, driving them down to the lowest spending level allowable by law.

Public school spending would also be reduced by $1 billion.

The centerpiece of the “prudent” approach would be a $5 billion realignment that would shift responsibility for transportation and health care for the needy from the state to cities and counties.

While difficult politically because Republicans can block the two-thirds vote needed to raise taxes, revenue to pay for the new responsibilities imposed on local government would need to be provided as part of the package.

So what will likely occur as the Democratic majority Legislature reacts to the GOP governor’s January budget proposal?

Schools will be reduced by $1 billion. Another $1 billion in real or imagined savings will be identified.  Cuts in services of $3 billion will be proposed.  Then, another $3 billion in “across-the-board” reductions because they are perceived to be “fair.”

Revenue collections will be accelerated, as they were in this year’s budget solution, speeding receipt of $2 billion.

A variant on the realignment idea in the “prudent” approach would be “privatizing” various public services, which would shift the cost from the state to the users of the services. This would save $5 billion.

Nothing prevents lawmakers and the GOP governor from combining elements from each of the models to create a final solution.

Or, as is often the case with the Legislative Analyst’s more reasoned budget-balancing recommendations, all suggestions can simply be ignored.

-30-