$3.6 Billion in Borrowing, Cuts OKd by Legislators

The newly energized California Legislature approved a $3.6-billion package of spending cuts and borrowing Thursday, less than 24 hours after the agreement was reached, but still stood billions of dollars shy of a final budget solution.

After months of debate over the state’s projected $35-billion budget shortfall, the lawmakers were spurred to action by a deteriorating economic situation and increasingly dire warnings from Wall Street.

Adding even more urgency, the California Supreme Court ruled Thursday that, if a budget is not passed by the start of the new fiscal year July 1, state workers cannot continue to receive full wages. In years past as budget debates have dragged out -- last year’s budget was not approved until Sept. 1 -- lawmakers have kept paying the state’s workers, who number about 200,000. Now the court has said that many of them can receive only federal minimum wage.

Legislators in both parties hailed the bipartisan deal reached this week, even as they steeled themselves to grapple with billions more in cuts amid predictions that the shortfall has deepened.

On May 14, when Gov. Gray Davis submits revised estimates of the state’s finances, they are expected to reveal drops in tax revenue and increases in health-care spending sufficient to add $1 billion more to the shortfall.

Wall Street, meanwhile, has been pressing for action and warning that without some, California might not be able to borrow money that it depends on to pay for state services.

Faced with those legal, financial and political developments, the standoff between party leaders that had blocked progress since the beginning of the year has begun to subside, with Republicans and Democrats joining in support of key bills.

Davis is expected to sign Thursday’s measures into law on Monday. The borrowing and spending cuts are in addition to $3.3 billion in current-year reductions made in early March.

“Never have we done so much so soon,” Assembly Speaker Herb Wesson (D-Culver City) said, adding that Thursday’s action amounts to “a significant step in the right direction.”

Despite the progress, legislators remain billions of dollars away from resolving the issue and face an array of politically unappealing options they will have to tackle in coming weeks, including deeper cuts in education and human services, higher fees for students at public colleges and universities, and a possible tax increase.

Estimates of the size of the remaining hole vary, with some leaders of both parties maintaining that the cuts, borrowing and transfers already approved, combined with a proposed $10-billion borrowing plan advanced by Republicans, would leave the state close to filling the gap.

But the borrowing plan is not resolved, and the state’s economy has shown no signs of improvement in recent months. The result is that Davis and the Legislature could still need to make cuts or raise revenue of more than $10 billion -- more than the combined value of all the cuts they have made to date.

Among the cuts approved as part of Thursday’s action were $327 million in school spending and $316 million in health programs.

Lawmakers approved changing Medi-Cal eligibility requirements in a way that could make it difficult for thousands of people to remain on the rolls.

The legislators eliminated one of Davis’ more heavily touted programs -- the so-called governor’s scholarship. Under the $18-million program, students who scored high on statewide math and science tests could receive $500 scholarships.

“You can believe that he is not going to walk away from it,” Steve Maviglio, Davis’ press secretary, said, noting that the governor pushed hard to create the scholarship program at the start of his tenure in 1999. But its elimination won’t stop Davis from signing the package.

The timing of the legislative action was unusual, coming as it did two weeks before Davis was scheduled to issue his revised plan. But unlike past years, when the size of the deficits did not become clear until mid-May, this year the Legislature already knows in some detail the magnitude of the problem.

“The situation is entirely different,” said former state economist Ted Gibson, who served under Davis and former Gov. Pete Wilson. “The state is going to run out of cash. They’re really up against the wall.”

Fred Silva of the Public Policy Institute of California said in a separate interview that the Legislature and governor have far more budget work left. Like Gibson, Silva said the size of the problem requires them to make cuts earlier than in past years.

“With a problem this large,” Silva said, “you’d need to do something early.”

On Thursday, the bill that stirred the most dissent authorized the state to sell bonds to raise money for its annual contribution to an employee pension fund rather than use cash from taxes. Tax- and borrowing-wary Republicans had opposed the financing, and a smattering voted against it.

Under the bill, SB 29-X, the state will use the bonds to defer $2.2 billion in payments to pension funds for state employees and public school teachers. The state would repay the bonds over five years, incurring debt payments of $485 million.

The pension bond bill was approved on a 27-7 vote in the Senate and 71-5 in the Assembly. While local governments have issued bonds to meet pension obligations, the state has never done so. An Assembly analysis called the legal underpinnings of the bonds “novel,” and said they “require court validation in order to be marketable.” California has a constitutional provision limiting debt from one year to the next without a vote of the electorate.

“They are clearly illegal,” Sen. Tom McClintock (R-Thousand Oaks) said, citing the constitutional provision that the state cannot have more than $300,000 debt from one year to the next unless voters approve it in the form of general obligation bonds.

“The Constitution is absolutely unambiguous on that subject,” added McClintock, who voted against the borrowing measure. “It would require constitutional nullification, which won’t be the first time a court has done so. But this would be pretty brazen.”

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., would not say whether his organization would sue over the pension obligation bonds.

“We are deeply concerned about the ‘carry-forward’ of the debt,” he said. “Would we swallow the bitter pill of debt carry-forward in order to avoid tax increases? Maybe. Maybe.”

It was the Jarvis organization that sued in the 1998 case decided Thursday by the Supreme Court. The lawsuit contended that the state must have a budget in place to pay its bills in whole or in part.

While state attorneys analyzed the high court ruling, Davis and lawmakers of both parties said it could force an early resolution to any budget standoff.

“Squabbles, feuding, failing to get off ideological perches is going to result in a whole bunch of problems, apparently, for workers now, certainly for the state’s cash position and certainly for its long-term reputation,” said Davis, who did not sign last year’s budget until Sept. 6.

In recent decades, legislatures have routinely missed the June 15 constitutional deadline for approving spending plans, and governors have rarely signed budgets by the July 1 start of the fiscal year. Until Thursday’s ruling, however, lawmakers faced no specific penalty for not meeting the deadlines.

“We ought to have a budget on time,” added Senate Republican leader Jim Brulte of Rancho Cucamonga. “It would be tragic if we don’t.”