Davis’ Budget Too Optimistic, Analyst Warns

The budget proposed by Gov. Gray Davis contains assumptions that could leave the state $4 billion in the red, according to the state’s independent legislative analyst.

Elizabeth Hill warned lawmakers Tuesday that the $100-billion budget that Davis proposed last week to close a $12.5-billion shortfall is overly optimistic, relies heavily on one-time solutions and pushes a variety of expenses into the future. As a result, Hill predicted, California will end up with a $4-billion operating deficit in the 2003-04 fiscal year.

“We have an ongoing imbalance that needs to be addressed this year in order to put the state budget on better fiscal footing,” Hill said.

Davis’ budget, according to Hill’s analysis, not only fails to eliminate the threat of future deficits, it could also make them worse.

Davis has made a series of proposals that would allow California to borrow money and defer payments that would require the state to pay interest and other costs for years to come. The proposals include borrowing against the state’s tobacco settlement money, delaying contributions to state retirement funds and borrowing from a series of special funds.

In addition, Hill predicted, expected revenue will be $3 billion or more below assumptions used to fashion the state’s 2001-02 spending plan.

State Finance Director Timothy Gage said the $3-billion figure sounds too high.

But, he added, “If revenues are such that they won’t bridge the gap in [2003-04], obviously we’ll look at additional solutions. It’s a balancing act. Do you go in and devastate programs based on a forecast on revenues two years out?”

The $3.3-billion difference between Hill’s revenue assumptions and the governor’s largely reflects Davis’ expectations for revenues from stock options and capital gains this budget year and next.

The state’s projected shortfall over the next 18 months grows to at least $14.5 billion, according to Hill’s office, if Davis’ cost estimates for carrying out current policies are coupled with Hill’s lower revenue projections.

Davis is counting on the Bush administration to give the state about $1 billion in federal money to help cover medical and terrorism-related expenses. Hill said lawmakers should expect perhaps half that amount.

Davis’ proposed budget also assumes education expenses to be nearly $1 billion less than Hill’s projections.

Moreover, Hill added, the state faces repayment of $6 billion or more for past electricity purchases. California is seeking to sell bonds to repay the state’s general fund.

Senate Budget Committee Chairman Steve Peace, an El Cajon Democrat, defended the administration’s proposal to borrow as a means of closing the shortfall. He said that the alternative, raising taxes, would delay the state’s economic recovery, adding that deeper budget cuts would wind up costing the state more money down the line.

“I believe borrowing is the smart thing to do,” Peace said.

Senate Republican Leader Jim Brulte of Rancho Cucamonga said Hill’s review of Davis’ spending plan reflects contentions made by his party.

“We said we thought he was overestimating revenues and the analyst clearly agrees with us,” Brulte said.

“We felt it confirmed what we’ve been saying, which is that the governor didn’t submit a real budget,” added Assemblyman John Campbell, an Irvine Republican who is vice chairman of the Assembly Budget Committee.