Lawmakers Warned on State Budget

California Controller Steve Westly warned Monday that state government is likely to shut down if lawmakers take as long as they did last year to agree on a budget.

Westly wrote to lawmakers that the state would run out of cash in September and would not be able to get loans to continue operations into the fall. There would be consequences, Westly wrote, even if a budget is signed by the July 1 start of the next fiscal year: Some school and highway money would stop flowing, and vendors, contractors and legislative staffers would not get paid.

Meanwhile, nonpartisan Legislative Analyst Elizabeth G. Hill cautioned lawmakers about Gov. Gray Davis’ revised budget proposal released last week, saying it relies heavily on borrowing, contains shaky revenue assumptions and fails to address the state’s fundamental problem.

Unless government stops spending more money than it takes in, California will run a growing annual deficit even if Davis’ budget wipes out the current projected $38.2-billion shortfall over the next 13 months.

As he prepared for a trip this week to meet investment bankers on Wall Street, Westly said an $11-billion loan he hopes to secure there -- the largest so-called “bridge” loan in California government history -- would keep the state going a couple of months past the July 1 deadline. Once the coffers run dry, the state might be able to get a costly loan to keep things running for only a week or two more, he said.

The letter was meant as a wake-up call to lawmakers, as the Legislature remains deadlocked over whether a budget should include new taxes. Democrats support the governor’s call for $8 billion in new taxes on vehicles, sales, tobacco and the income of high earners. Republicans say they won’t vote for another dime in new taxes.

“The message here is we are running out of runway,” Westly said in a teleconference with reporters. Come late August or September, he said, “we will have exhausted our credit opportunities. Wall Street has told us this.” Last year, the budget was signed Sept. 5.

Westly also warned that a recent court ruling means the state may not be able to make school payments until a budget is signed. Other money that would be cut off includes highway user taxes normally sent to local governments and payments to vendors and contractors.

“I’m very alarmed,” said Assembly Speaker Herb J. Wesson Jr. (D-Culver City). “I just don’t know what kind of effect this has on the other side of the aisle.”

Republicans say they, too, are concerned and are ready to negotiate anything -- except a tax hike.

As lawmakers struggle to reach a compromise budget that would avoid a government shutdown, analyst Hill warned that the multibillion-dollar borrowing both parties are seeking to pay off the deficit would have serious consequences.

“While borrowing does avoid some pain from cutting spending and raising taxes,” Hill said, “there are out-year costs to pay off this debt....Future Legislatures will have relatively fewer options on the table and less flexibility.”

The most extensive borrowing proposal put on the table so far is in the governor’s revised budget. It calls for borrowing $10.7 billion to pay off a current year deficit, and backing that with a new half-cent sales tax. Republicans have said they would favor the borrowing only if it is done without requiring a new tax.

Hill said the need to borrow money is probably “inevitable” at this point because of how long lawmakers have delayed in dealing with the shortfall. The budget gap was revealed in December. So far, lawmakers have approved about $7 billion in budget reductions through cuts, deferrals, loans and transfers.

“The current year is going to end in about six weeks,” she said. “There is not enough time to do all of the actions that would be required to bring the current year budget into balance.”

Hill acknowledged that California is not unique in the country in seeking loans to ease the pain of balancing a state budget, but she urged lawmakers not to sign off on a borrowing plan without bringing the state’s financial structure back into balance in earnest. She also noted that when the $10.7-billion loan is added to other borrowing proposals in the governor’s budget, borrowing accounts for $17 billion of the budget, or “over one-half of the total budget solutions proposed.”

The governor’s plan would achieve a balance for next year only, thanks to a combination of loans and one-time spending deferrals. But an annual budget hole of $7 billion would begin to reemerge by July 2004.

“We can’t grow our way out of this,” Hill said. “The economy cannot resolve the state’s fiscal problems. It means that we have to take ongoing actions either with spending reductions or tax and revenue increases in order to close the gap.”

She warned that failure to deal with that “structural” problem in the budget could have consequences on Wall Street.

The governor, who has called on lawmakers to fix the imbalance after a spending plan is in place, welcomed the findings.

“I couldn’t agree more with the nonpartisan legislative analyst,” he said.

Wesson said Hill’s concerns also resonated with lawmakers in the Assembly.

“We have a real problem,” he said. “It’s unfair for us to burden future Legislatures, and if we were to go in and do our job I think we could address this.”

In her critique of the governor’s revised budget, Hill also advised that even the balance it achieves in the coming fiscal year is “precarious.”

She said several hundred million dollars’ worth of the governor’s proposals would probably achieve less in savings than he has indicated. As an example, she cited the $680 million in proceeds that the Davis administration projects could be gained from renegotiating tribal gaming compacts.

“The actual amount of receipts from these compacts could be considerably less,” her report said.

Administration officials have said they are confident that the governor’s projections are not overly optimistic.

Some dispute also remains over the actual size of the budget hole. Although Davis now projects a $38.2-billion gap, Hill said the number is closer to $29.5 billion. She said that’s because the governor included some unnecessary spending in his budget and then also called for cutting that amount. Despite the large difference in the projections, Hill said, the administration and her office both agree on how much action needs to be taken.

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Times staff writer Nancy Vogel contributed to this report.