State’s Budget Balancing Just an Act

Pathologically nosy as I may be, there are some closed-door meetings at which, thanks to my aversion to sheer futility, I don’t want to be the proverbial fly on the wall.

For example: any meeting at which the California Department of Finance tries to figure out how to balance the next budget.

Over the last year or two, California has tried a governmental version of every debtor’s dodge to convince the world that its fiscal condition is manageable. It has paid bills late to shift them into the next pay period, borrowed on shaky collateral, put off creditors by promising them larger sums later and even made up numbers.

The state has been a gargantuan Wimpy, offering to pay everybody next Tuesday for a hamburger today.

The latest sign of the budget’s true condition came with the release of state Legislative Analyst Elizabeth Hill’s annual fiscal outlook report.

Hill’s report, issued (rather impolitely) on Nov. 17, the one-year mark of Gov. Arnold Schwarzenegger’s administration, displayed in chart form the one-time and short-term tricks the governor used to balance the 2004-05 state budget -- including the use of $4.2 billion in long-term borrowings to support current spending, which used to be taught as a no-no in Civics 101.

Hill and her staff also called out the governor for several questionable projections in this year’s budget.

One of the biggest chunks concerned Schwarzenegger’s creative proposal to seize 75% of all punitive damages awarded to civil plaintiffs in state courts. The governor’s justification for grabbing this money is that, because punitive damages are designed to punish the defendant and discourage future misbehavior, the state should rightly take these funds and direct them “for public good purposes.”

Schwarzenegger estimated the state’s annual take from lawsuits filed after the measure’s effective date, July 1, at a cool $450 million, and promptly dropped that figure into the budget as a revenue item. Hill’s report says a more reasonable estimate is $60 million annually for two years. (The provision will expire in 2006.)

But even her calculation looks optimistic. Thus far this year, the state hasn’t collected a penny.

As my colleague George Skelton pointed out in May, when the measure was still working its way through the Legislature’s alimentary canal, the governor’s estimate was always too rosy. That’s because it was based on a study of California jury awards that included one enormous outlier: a $4.2-billion judgment later reduced to $1.2 billion.

The estimate also failed to account for certain realities of jurisprudence. For one thing, it’s rare for a lawsuit to progress from filing to judgment in less than a year or even two, so the chance of collecting any money in the current budget cycle is slim. Over the long term, the provision itself adds to the natural incentive of litigants to favor compensatory damages over punitive ones (which defendants try to avoid anyway because they’re not covered by insurance).

Hill also flagged the budget’s projection of its take from the sale of state assets, which the governor estimated at about $214 million this year. Thus far, the state has taken in only $20.6 million, almost all of it from the divestiture of one 15-acre parcel carved out of the grounds of a state mental hospital in San Jose; Hill’s report projects the final take at no more than $50 million.

Finally, Hill casts doubt on what might be best described as a slush fund of undifferentiated projected savings -- $396 million that is supposed to be realized from state agency reorganizations, operational efficiencies and improved purchasing policies. “To date,” she observes dryly, “no specific savings have been identified by the administration,” adding that the tally in the end will surely fall far short of the goal.

The governor’s finance department hasn’t specifically challenged any of Hill’s findings although it notes, fairly enough, that the budget also underestimated several categories of revenue.

The largest upside surprise has come from tax receipts. Personal income tax payments have been running nearly $300 million ahead of projections, and estimated payments on the corporate tax have totaled $607 million more than what was forecast for the first four months of the fiscal year, or through October.

The department is wisely avoiding the temptation to make too much of the corporate tax gain, though; it may be unclear until a year from now, when many large companies file their final tax returns for 2004-05, how much of this money the state will actually keep.

The reason: California this year reinstated a rule, suspended during 2002 and 2003, allowing businesses to carry tax-deductible losses into later years. Moreover, to mollify businesses for the two-year suspension, the rule was changed so that the percentage of losses that could be deducted from future earnings would rise next year to 100%, from the previous 65%. Some businesses may wind up receiving refunds.

The point of rehashing all of these maneuvers is not to flay the governor for past practices, but to underscore that such budget tricks, like magicians’ stunts exposed once too often to the same audience, become a spent force.

There are some indications that the governor is preparing to come to grips with the scale of the problem. The finance department’s spokesman, H.D. Palmer, told me that the administration was likely to revise upward its former estimate of a $5.1-billion budget deficit for the 2005-06 fiscal year.

The governor’s new finance director, Tom Campbell, doesn’t have the reputation of a man amused by phony accounting. Dare one hope that reality is about to take root in Sacramento at last?

Golden State appears every Monday and Thursday. You

can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.