Elizabeth Hill: The governor estimated a budget problem of fourteen and a half billion dollars, and largely due to the lower revenue estimates that we have for the current year and the budget year combined, we're at $16 billion… If the Legislature did everything that the governor has proposed, we would still — the state would still have a $4 billion budget problem the year after … then about a three, two, and then it goes to a little bit under $1 billion in '12, '13, by our estimates.

We were concerned with the approach the administration took because it was an across-the-board approach, taking basically every general-fund program and cutting it by 10%. And we were concerned that it didn't really set priorities for the state. It has an appearance of fairness, but in many cases, then programs aren't going to be able to operate very effectively.

So we tried to step back and say … Is there a way to do more targeted reductions, look at what's not working in state government, things that are duplicative? Are there ways too that we could try to identify more of the core services and maintain core services from the current fiscal year, '07-'08, into '08-09? …

For example, in health, our goal was to try to maintain primary care health services. So what sort of reductions could we make and maintain primary care? The governor, for example, proposed a provider rate decrease for the docs, for Medi-Cal. When we looked at it we were concerned since doctors haven't received — who participate in Medi-Cal — haven't received a rate increase since 2001. We were concerned that a 10% reduction to that rate would cause more doctors to get out of Medi-Cal, and it would also cause more patients to go to emergency rooms rather than primary care. So we didn't adopt … the governor's proposal on that.

Similarly, in higher education, our concern was to try to maintain access to higher ed … We proposed among other things to increase some fees, but then we raised financial aid to pay for the fee increases. The governor had also eliminated part of the Cal Grant program, it's called the Competitive Grants; we suggested that that be restored …

And then in Proposition 98, which is kindergarten through the community colleges — again, we were trying to maintain current services in education year over year. The governor, actually, year over year, reduces Prop. 98 by $1.1 billion. So we made both some specific targeted reductions in Prop. 98 and some programs that, in our general view, aren't working very well. But we are also proposing some local block grants to also give districts more flexibility along kind of thematic grounds, so we have one in special ed, and some targeted to really low income students for success in school and the like. So we took about 42 different programs and collapsed them into these four block grants. It actually totals about $42 billion among those programs.

Robert Greene: And do you see that as a viable, long-term approach, or this is just a … to take care of the immediate budget problem the next couple of years …?

Hill: No. In terms of the block grant, we've been advocating that for some time. So even if this was a great budget year, we think it would still be a good idea. I think, though, particularly in a very tight budget year, it does give the districts a lot more flexibility …

So basically, we tried to target reductions. We also tried to look [for] other money that could keep a program going … And we came up with about $11 billion in program reductions. The governor had proposed as part of his plan to sell the last increment of the deficit financing bond that voters had approved — Prop. 57 — and so that $3.3 billion has actually already gone out for sale. And we incorporated that in ours also.

Greene: Do you favor that?

Hill: We thought given the current circumstances, it made sense. I mean, the voters authorized it. At the time, say, January, when he proposed it, we were going to be in the red in the current fiscal year. So it made sense to us. and then because in good budget times, we had both reduced fees and reduced taxes, we wanted to apply the same analytical framework that we had applied on the spending side of the budget to tax expenditures. That's a techie term for exclusions, deductions and credits in the tax code.

Greene: Even that's technical. We call them loopholes.

Hill: (Laughs) Other folks use that terminology. There's about $50 billion of those, and so we identified 12, one of which was one that the governor had also identified, related to the yachts, aircraft and recreational vehicles. In some cases, they were rolled back to ones we that had increased in the good times. In other cases, it was just an analytical priority setting … So together we came up with about $17 billion … so that's what the Legislature is debating.

Schwarzenegger's budget reform proposal

Hill: Now, the governor also has a budget reform proposal. We had some concerns as to the specifics of his budget reform proposal, but we suggested an alternative …

Greene: I hope you can talk a little bit about that, the robo-budget idea.

Hill: Well, I mean, we're, as a legislative office and with the Legislature's appropriation authority being their main constitutional responsibility, we get very concerned when proposals try to diminish the Legislature's appropriations authority. And we would argue what was just done in special session shows you that in fact that the Legislature can act in special session and make reductions. They've "solved" about half of the budget problem by what was done in the special session.

But we do think, given the volatility of our revenue structure in California and also just normal economic cycles, it's really important to have a healthy reserve. And that's been difficult to build up in the kind of post-Proposition 13 period, because any time that we have unanticipated revenues, if you will, there's incredible pressure for spending commitments, additional in any one of a number of areas, or revenue decreases. That's kind of what we did in the last good times.

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