Power Woes Complicate Discussions on Budget

Jockeying over the state’s next spending plan, a tradition that usually takes place in the summer, already is turning intense as the energy crisis casts a pall over what otherwise might have been relatively painless budget squabbles.

A key state senator, worried about the slowing economy, is looking for places to pare as much as $4 billion from Gov. Gray Davis’ proposed $104.7-billion budget. And Republicans are beginning to demand that the state spend billions in general tax money to cushion electricity rate hikes of up to 40% being imposed on consumers and businesses.

Davis won’t sign the budget for the 2001-02 fiscal year into law until late June at the earliest. But with California mired in the energy crisis and the economy slowing, the new budget is shaping up to be especially vexing.

California’s largest utility and a major private employer, Pacific Gas & Electric, is in bankruptcy. The state has spent $5.2 billion in general tax money to buy electricity, with no end in sight. Even before summer temperatures hit, Sacramento shelled out $90 million to buy electricity in a single day last week.

And the Wall Street rating firm Standard & Poor’s, unsure that the state will be reimbursed for the power purchases, lowered California’s credit rating two notches for the first time since the recession of the 1990s.

Brightening an otherwise cloudy situation, income tax payments are meeting or exceeding predictions. More than $8 billion in checks from April income tax returns have flooded into the Franchise Tax Board, said Department of Finance economist Ted Gibson. On one day last week, the state’s haul was $3.6 billion, a record.

“Receipts are very much on track, I’m relieved to tell you,” Gibson said.

But even as budget writers were exhaling, the payments merely offered proof that the economy was strong last year, back when then-President Bill Clinton was heralding the longest period of economic growth in U.S. history, and Californians’ lexicon did not include the term “rolling blackout.”

State income and sales tax receipts softened in the first few months of 2001, an indication that people will be earning less this year--and paying less in taxes next year.

Seeing trouble ahead, Senate Budget Committee Chairman Steve Peace (D-El Cajon) wants to boost the state’s emergency reserve, which was $1.9 billion in January. To do that, Peace last week called on budget committee members to come up with a list of cuts totaling $2 billion to $4 billion.

Without a larger reserve heading into 2002, Peace said, the slowing economy could force the state to make deep cuts or raise taxes next year, at a time when most legislators and Davis will be running for reelection.

“The thing to be worried about is not the current year, but the trend line,” Peace said.

He adds a caveat for the spending plan that by law must be in place by July 1: There will be cuts if legislators fail to approve legislation that state Treasurer Phil Angelides says he needs to obtain short-term loans and market long-term bonds to finance electricity purchases.

Davis and Angelides are preparing the largest bond sale--a way that government borrows money--in U.S. history, as much as $12.4 billion. The state would use the proceeds to ease the shock to utility customers of record high electricity prices this year. The bond debt would be paid off over a period of perhaps 15 years.

Given the size and complexity of the bond issue, many legislators say Angelides may not be able to sell it for months.

Davis, however, has an immediate need for money. The governor must release a revised state budget within weeks. So, he is pushing for legislators to approve legislation that would allow Angelides to obtain a short-term loan of as much as $6 billion.

At least some of the proceeds of the long-term bonds would be used to pay off the short-term loan--sort of like using one credit card to pay the balance on a second piece of plastic.

Republican legislators are balking at the idea.

Back in December, before the state entered the power buying business, GOP legislators had called for $3.2 billion in tax cuts. With the energy crisis complicating the financial situation, some Republicans are contending that Davis should use as much as $5 billion from the budget surplus to soften the impact of electricity rate hikes.

“That will be a de facto tax cut,” said Senate Republican leader Jim Brulte of Rancho Cucamonga. “Our Democratic friends want to do the bridge financing so they can increase the size of government.”

Republicans are in the minority. But they have a significant voice, because state law requires that both houses of the Legislature approve spending decisions by a two-thirds vote.

The state Constitution says the budget must be in place by the July 1 start of the new fiscal year. Davis signed his first two budgets on time. Given this year’s uncertainties, however, some legislators are thinking twice about making July vacation plans.

The sudden turnaround may come as a shock to many legislators and lobbyists who seek slices of the state budget pie.

In recent years, legislators have grown used to the multibillion-dollar windfalls of tax payments, which allowed them to deliver new swimming pools, school programs, museums, parks, social and health care spending, and tax cuts to their constituents. Indeed, the budget in Davis’ first two years grew 37%, even as the Democratic governor and legislators cut taxes by $3.9 billion.

In a Legislature populated by term-limited newcomers, only a handful of current legislators were in the Capitol in the early 1990s, when the worst recession to hit California since the Great Depression caused the state budget to actually shrink. Then-Gov. Pete Wilson and the Legislature reacted to a $14-billion budget gap by raising taxes by more than $5 billion and slashing spending.

“It is not going to be the pie-in-the-sky budget some of us thought it would be last year and even as late as January,” said Sen. Jack O’Connell (D-San Luis Obispo).

Veterans of the annual summer rite say there is no template for the coming budget fights. Jean Ross of the California Budget Project, a private budget watchdog and advocacy group, said Davis and legislators not only must pay attention to the economy.

They also must take into account many unknowns: Will the judge overseeing PG&E;’s bankruptcy proceeding seek to raise rates further? Will federal energy regulators be able to effectively limit wholesale electricity costs? What will the economic impact be of summer blackouts?

“It’s a lot more complex and unpredictable than other years,” Ross said.

Legislators say they are lowering their sights. But letters from state senators requesting money for their favored projects fill five large red binders. “You wouldn’t know there is a money shortage based on requests in appropriations,” said Assembly Appropriations Committee Chairwoman Carole Migden (D-San Francisco), preparing for what she calls her “hatchet role” of blocking bills that require spending.

For his part, Davis has not decided to significantly cut back on his proposals, ranging from a sales tax “holiday” timed for back-to-school shopping to plans to clean sewage from beaches. He won’t reveal those decisions until he releases his revised spending plan.