Bad Budget Problems Made Worse

There are lots of thoughtful – and disturbing – observations by the Legislative Analyst about Gov. Arnold Schwarzenegger’s revised budget plan, which seeks to close a $21 billion gap between spending commitments and revenues.

In a report issued May 21, the Legislative Analyst says that while the GOP governor’s estimate of a $21 billion problem is “reasonable,” it is actually $3 billion higher.

In the report’s third paragraph it says that even if lawmakers adopt all of Schwarzenegger cost saving proposals there will still be gap between expenditures and revenues of $15 billion in the fiscal year beginning July 1,2010 “with higher annual operating shortfalls in the subsequent three years.” (Emphasis added)

Issuing $5.5 billion in revenue anticipation notes, RAWS, as they’re called, is “very risky,” a “terrible precedent,” and a “poor fiscal policy.” The RAWs are 20 percent of the governor’s proposed solution.  The report points out that RAWs are used to address temporary cash flow problems, not an annual budget deficit.

Apparently the governor agrees. He issued a statement shortly after the Legislative Analyst’s report came out that he was now abandoning the idea of borrowing and seeks $5.5 billion in further spending reductions.

(Editor’s Note: There is a marked tone change in the Legislative Analyst’s reports under Mac Taylor. His predecessor, Elizabeth Hill, tended to be more understated and reserved, preferring to illustrate why selling RAWs is terrible rather that saying it is.)

Several pages later, the Legislative Analyst reveals that $12 billion of the $21 billion in actions the governor proposes to close the budget gap are one-time. “Most of these solutions would make solving future budget problems even more difficult.” At the moment, after abandoning the RAW borrowing, the governor has lowered the one-time solutions to $6.5 billion although that may rise depending on how the governor ultimately fills the $5.5 billion the borrowing would have represented.

And, the report continues, reliance on these one-time fixes “along with the non-recurring nature of federal stimulus funds…and the temporary nature of the tax increases adopted in February” is why the future budget gaps are so big.

Nor does the Analyst believe the governor can sell $1 billion in business from the state-backed workers compensation insurance fund or obtain federal approval to cut Medi-Cal, the state’s health care program for the poor, by $750 million.

As for public schools and community colleges, the Legislative Analyst notes that the governor would defer $6.3 billion in payments until the next fiscal year.

“In essence, the administration is expecting districts to run a program (in the fiscal year beginning July 1) that the state cannot afford. This “credit card” debt does not include the state’s obligation to pay about $1.3 billion in … outstanding mandate claims or about $6.6 billion in revenue limit payments that the state has committed to pay at some point in the future.”

As is its custom, the legislative Analyst also offers some alternative actions the Legislature can take to balance the budget:

Among them:

*Save $120 million by having California State university faculty teach one additional class.

*Save $135 million by University of California professors teaching one additional course.

*Save $26.6 million by reducing state support of University of California research by 10 percent.

*Save $50 million by releasing inmates who have no current or prior serious, violent or sex offenses 30 days early.

*Save another $9 million releasing any inmate over the age of 55 with the same criminal record.

*Save $51 million by not admitting anyone to prison that will serve less than six months.

*Save $270 million by charging a fee to homeowners and businesses that are protected by state firefighters.

*Save $451 million by adding a third monthly furlough day or reducing state employee salaries by 4.6 percent.

*Save $465 million by eliminating the sales tax exclusion for animal feed, seeds, plants, fertilizers, drugs and medicines administered to animals and medicated feed and drinking water.

*Save $100 million by ending the exclusion of subsidized parking benefits from taxable income.

Missing from the analyst’s long list is eliminating the $700 million increasing to $1.5 billion tax break contained in a bill accompanying the February budget. Republicans sought this change in tax calculation. Some Democrats believe it hurts businesses located in California and benefits multi-state businesses not located here.

Currently, multi-state businesses are taxed based on an average of its proportion of sales, property and payroll in California. For most businesses, the sales factor is double-weighted.

Under this new law, which takes effect in 2011, most multi-state businesses can determine what income is subject to taxation by California by choosing either the current method or just basing it on a percentage of sales.

Businesses who derive more than 50 percent of their gross receipts from agriculture, mining or drilling, savings and loans, or banks and financial activities currently have their sales factor single-weighted. They would continue to use the three factors to determine state tax liability.

One category of California business whose taxes would be reduced by this change is those with lots of property and employees in California but with most of their sales outside the state.

Also missing are reducing or eliminating some of the long list of tax expenditure programs under income tax, business tax and the sales tax. A previous report by the Legislative Analyst catalogues them.

Just as an example: Applying the sales tax to prescription drugs, as half the other states do, would generate $1 billion, an amount likely to increase as Baby boomers continue to age. 

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