Candidates Silent on State’s Cash Crunch

Three years after the fiscal crisis that set the stage for the California recall, Gov. Arnold Schwarzenegger and his two Democratic rivals are paying scant attention to the painful steps still needed to overcome the state’s chronic budget shortfalls.

The cash crunch -- the state expects tax collections to fall at least $5 billion short of its spending within three years -- is apt to be one of the toughest challenges facing the next governor. It threatens to undercut schools, hospitals, transportation and other public services even as the state’s population, and its needs, keep growing.

Yet Schwarzenegger and one of his Democratic opponents, Controller Steve Westly, have offered no concrete plans to close the budget gap. Neither has identified any spending he would cut if elected in November, and both have said higher taxes would be only a last resort.

The other major Democrat in the race, Treasurer Phil Angelides, has suggested specific steps to balance the state’s books: increase taxes on the highest-income Californians and close what he calls corporate tax loopholes. Yet Angelides talks about his tax-hike plans in just one context: his call for billions of dollars in new school spending.

The absence of vigorous debate in the race for governor about solutions to the state’s fiscal troubles stems from a maxim of political campaigns: no candidate wants to be the harbinger of bad news.

“It’s such a contentious issue that nobody wants to deal with it,” said Christopher Thornberg, senior economist at UCLA’s Anderson Forecast.

In his travels around California this week, Schwarzenegger has been spotlighting his record on the budget and economy. His reelection campaign started television advertising Monday on those themes. But in his opening ad, the Republican governor says nothing about how he plans to pull revenue and spending into balance.

After a San Francisco speech on Tuesday, Schwarzenegger was asked how he would address long-term budget troubles. He recalled that voters rejected the spending restraints he proposed in a November ballot measure, largely for fear of school cuts.

He also lamented the budget paralysis in the Legislature that bedeviled his predecessor, Gray Davis, and now himself.

“We have 120 legislators up in Sacramento that all have, maybe, not always the thinking that I have, and so you know, it’s challenging,” he said.

The governor added: “Most of the problems will be solved, I would say, through economic growth. This is why I am a fanatic about that, and I will do everything and anything to make sure that our businesses in this state will be successful.”

Prospects for that growth are in doubt. A report released Wednesday by the UCLA Anderson Forecast projected a slowdown in California’s job growth over the next two years, mainly because of weakness in the construction industry, a major employment source during the housing boom. Even before that, the state legislative analyst’s office had projected the $5-billion budget hole within three years, as spending outpaces revenue.

While keeping his future budget plans vague, Schwarzenegger has been bold about how he defines his fiscal record so far: He takes credit for saving the state from bankruptcy. He argues that by cutting the cost of insurance for workplace injuries, slashing the car tax and refusing to raise income taxes, he has created a business climate that spawned 500,000 jobs on his watch, along with a surge in new tax revenue.

Economists, however, say he has overstated how much credit he deserves for job growth and the fiscal rebound. Governors can influence job creation, said UC Berkeley economist Alan J. Auerbach, but “most of the changes in employment are due to factors beyond their control.”

The state’s job growth has occurred in sync with the rest of the country’s. And Thornberg, the UCLA economist, said Schwarzenegger’s policies had nothing to do with the surge in tax collections.

“The fact is, Schwarzenegger is no more responsible for the recovery the state’s economy is going through than Gray Davis was responsible for the collapse of the tech sector,” he said. The dot-com bust wiped out billions of dollars in tax revenue while Davis was governor.

It is largely the surge of unexpected tax revenue, along with billions of dollars in new borrowing under Schwarzenegger, that has pulled California out of the fiscal crisis.

The governor has restrained spending substantially in just one area, slowing the legally mandated growth of the education budget. He has paid a steep political price for not restoring the money.

At the same time, he has proposed $222 billion in new construction spending -- nearly a third of it in borrowed money -- for schools, highways, flood levees and other projects.

His Democratic opponents have also proposed ambitious spending plans. To start, both Democrats vow to return the money withheld from schools -- more than $3 billion.

“As governor,” Westly tells viewers in his latest television ad, “I’ll fully fund education, reform the lottery so more money goes to schools and invest in teacher training and after-school programs to keep kids learning and out of trouble.”

Westly has called for spending up to $200 million a year to eliminate tuition for many community college students. And he supports a plan to spend $300 million a year on health coverage for 800,000 children.

His advisors say greater efficiency in government and more aggressive collection of taxes would produce the money needed to cover his spending plans -- and billions more to close the projected budget hole. He also says cutting lottery payouts could produce as much as $500 million for schools.

“To start out by assuming that the solution to the budget has to rely on cutting programs or raising taxes is a false choice that he certainly doesn’t accept,” said Paul Rosenstiel, policy director of the Westly campaign. Instead, the candidate will “figure out how to spend the money more wisely or get more money that is already owed.”

The main achievement that Westly cites from his three-year tenure as controller is a crackdown on tax cheats that, by his account, has produced $3.5 billion for the state, a claim that Angelides calls exaggerated.

As for Angelides, he has proposed more than $1.5 billion in new spending to hire 6,442 grade-school counselors, expand college math and science programs and roll back higher-education fee increases that took effect under Schwarzenegger. He also backs the $300-million proposal for children’s healthcare, which Schwarzenegger says the state cannot afford.

To cover all of those costs, Angelides says the state can raise $300 million a year by developing empty lots and other public property, $2 billion by closing business tax loopholes and $2.1 billion or more by raising income taxes on the highest-earning Californians. He, too, promises more efficiency in government.

He argues that Schwarzenegger and other Republicans have stood for the principle that “it’s more important for the wealthiest to buy a Ferrari” than for young people to attend good schools. At the same time, Angelides has joined conservatives in railing against the debt that Schwarzenegger has relied upon to buttress his policy agenda.

“The fact is that Schwarzenegger’s proposing massive borrowing for the future with no way to pay for it,” Angelides said. “It’s not responsible. It’s just like George Bush wants to give everyone their goodies today and let our kids pay the bill.”

Still, in his television ads, Angelides has stuck strictly to “goodies” -- namely, his promises for higher school spending -- and avoided mentioning his plan to raise taxes or solve the state’s long-term budget problems.