New Budget Advisor Finds Problems ‘Breathtaking’

The top financial advisor to Gov.-elect Arnold Schwarzenegger delivered a long-promised review of state finances Saturday, saying the budget faces “breathtaking” problems that will grow worse if lawmakers don’t bring spending in line with revenue.

The review, however, offered no revelations about state spending and fell short of Schwarzenegger’s campaign pledge to audit state finances and “open up the books to the people of California so they can see where the waste is.”

The release was seen in the Capitol as a bit of a letdown after weeks of campaign allegations about waste in state government. In an interview with ABC news anchor Peter Jennings on the eve of the Oct. 7 election to recall Gov. Gray Davis, Schwarzenegger said he expected to find “billions of dollars” in waste.

The core of incoming Finance Director Donna Arduin’s numbers were in line with those of Legislative Analyst Elizabeth Hill, who reported Friday that next year’s deficit could reach $14 billion if Schwarzenegger follows through with his campaign promise to roll back an increase in the state vehicle license fee. But Arduin dramatized the problem by saying that, if nothing is done to cut the deficits, they will balloon to $62 billion in four years.

“We knew that this was going to be bad, but in fact it’s staggering,” said Arduin, a budget expert brought in from Florida by Schwarzenegger.

The report consisted of a few pages of charts repackaging numbers known in the Capitol for months.

Arduin said she would continue looking for waste, but she set no timetable for sharing the results with the public.

The new governor will have to present the Legislature with a budget for the next fiscal year -- which begins on July 1 -- by Jan. 10.

The report highlighted the difficulty of the task ahead for the new administration in bringing the budget into balance.

After he takes office Monday, Schwarzenegger is expected to call a special session of the Legislature and propose a $20-billion borrowing plan that would be financed over 30 years. During the campaign, he said repeatedly that the state should live within its means and not rely on deficit borrowing.

Republican consultant Dan Schnur said the session appeared to have been orchestrated to prepare the public for the potentially unpopular budget solutions that Schwarzenegger would be forced to present in the coming days.

“Think of it as shock therapy,” Schnur said. “This is the way you set the stage for a difficult set of proposals. The first step is to make clear how dire the situation really is.”

Democrats agreed. But they said it was also indicative of shock therapy the incoming administration may be going through itself.

“The governor-elect created extraordinary expectations on the campaign trail,” said Democratic consultant Darry Sragow. “He kept talking about how he could somehow magically solve our current budget crisis. Everyone I knew in Sacramento was mystified, because there are no magic solutions. There are three options: massive cuts in programs, increasing taxes or borrow.

“But people were also waiting to see if there is something he saw on the budget everybody else missed,” Sragow said. So far, he said, there doesn’t seem to be anything.

Arduin said she had not uncovered any hidden spending or budget assumptions that had not already been accounted for by the analyst.

Arduin said she had looked at the analyst’s figures, and “her numbers are very similar. I would not say we are at odds at all.”

The difference is that the Schwarzenegger report projects the deficit will reach $62 billion at the end of June 2007 if no corrective action is taken.

The analyst told reporters the day before that such assumptions would be meaningless because the state is required to balance its budget every year.

Deficits keep coming back because those budgets often fall out of balance during the year.

“The governor-elect asked me to show him a picture of the budget he is inheriting, not to make any assumptions about what he will do in the future,” Arduin said. “You can make your own assumptions, but this is a factual representation of where we are at this time, and without changes, this is where we would be.”

Assemblyman John Campbell (R-Irvine) said Arduin’s figures were meaningful, because, left unchecked, the budget deficit would grow to huge proportions. “You have to make changes to keep it from happening,” he said.

Other state finance officials suggested that the report was a manipulation of the numbers.

“It just doesn’t make sense,” said state Treasurer Phil Angelides, a Democrat expected to run for governor in 2006. “These projections don’t make sense, given Gov.-elect Schwarzenegger’s campaign pledge to solve our budget problems.”

“This ‘audit’ reveals nothing new,” he said. “In my view, it is a nonevent.”

The legislative analyst believes the budget problem could be solved largely through a combination of cutting programs and raising taxes about $12 billion this year and keeping the car tax at its new rate. As long as program cuts or new taxes to close the deficit this year remained in effect permanently, the deficit would not reemerge.

Arduin made clear that keeping the car tax at its current level is not an option. She said it had been tripled illegally by the Davis administration.

She started a conference call on the report by saying she had consulted the state controller, the state auditor and the legislative analyst while working on the audit. But the controller and the analyst said their dealings with Arduin had consisted of little more than brief introductory sessions.

“We have not been involved” in the audit, Democratic state Controller Steve Westly said.