Analyst Says Budget Plan Doesn’t Go Far Enough

Gov. Arnold Schwarzenegger’s proposed $99-billion state budget is a solid first step toward a balanced fiscal plan but the state would still be $6 billion short by mid-2005, California’s nonpartisan legislative analyst reported Tuesday.

Legislative Analyst Elizabeth G. Hill said the governor’s spending plan would result in “real and lasting savings.” But it also “would have far-reaching consequences for the scope of state services” without coming to terms with lawmakers’ penchant for spending more than the state receives in revenue. She urged lawmakers to consider either raising taxes or removing tax exemptions to increase revenue.

“Even if every solution proposed by the governor were adopted and the savings scored by the administration were realized,” Hill said, “we estimate there would be at least a $6-billion structural budget problem remaining.”

Hill also advised lawmakers to be wary of at least $2 billion in deficit-reduction measures that Schwarzenegger is counting on because they “may not be fully achievable due to legal and other factors.”

In her report, Hill wrote that the negative impact a limited tax hike might have on the economy “should be weighed against the negative consequences of the alternatives, including deeper cuts in public spending in infrastructure, education and other areas, or more borrowing.”

The analyst cited transportation as an example, where transferring $1.1 billion away from road projects could result in the loss of construction jobs, project delays and create uncertainty that would make it difficult for cities and counties to plan.

The report is a prelude to a comprehensive evaluation of the governor’s proposed budget that the analyst will present in mid-February.

Schwarzenegger made clear when he presented his budget on Friday that increasing taxes was out of the question. The budget instead relies on billions of dollars in cuts in a variety of government services, which administration officials acknowledge would result in more than 110,000 poor Californians losing health insurance, major tuition hikes at state universities, suspension of road projects and scores of other reductions.

Administration officials said Tuesday that a tax increase would only cause more problems for state finances.

“The governor has been unambiguous in his opposition to a tax increase,” said Finance Department spokesman H.D. Palmer. “We are a high-tax state and a highly regulated state. In an environment like this, any incremental cost you add to the cost of doing business can send more and more businesses to the tipping point.”

But the legislative analyst’s comments on taxes give a boost to Democrats, who are pushing for an income tax increase on wealthy Californians as an alternative to some of the deep cuts proposed by the governor.

“Liz Hill’s findings tell me we need more options to solve this crisis,” said Assembly Budget Committee Chairwoman Jenny Oropeza (D-Long Beach). “We have to do more than cut programs for the poor and make it harder for students to go to college.”

Hill said the governor’s budget uses reasonable revenue and expenditure projections, accurately describes the scope of California’s fiscal problems and “offers a solid starting point for budget deliberations.”

But she noted that several measures proposed by Schwarzenegger to reduce the state’s $15-billion shortfall may be based on overly optimistic projections, or may not pass muster with the courts.

Those include $400 million in unspecified savings from the state prison system and $500 million that the governor hopes to generate through negotiations with Indian casino operators, who are under no obligation to make payments to the state.

“The Legislature was faced with a similar proposal in last year’s budget,” Hill said of the gaming revenue. “The state to date has not had success in gaining additional revenue” from the tribes.

Hill questioned the legality of a plan to borrow $930 million to cover the state’s annual payment to a pension fund for government workers after a Sacramento judge blocked a similar proposal late last year as unconstitutional.

Also of dubious legality, she said, is nearly $1 billion in savings the administration plans to achieve by reducing rates paid to doctors through the Medi-Cal program. Just before Christmas, a federal judge ruled that such a rate cut appeared to violate federal Medicaid requirements that doctors be paid competitive rates.

Assembly Budget Committee Vice Chairman Rick Keene (R-Chico) said Republicans are aware that some of the savings outlined in the governor’s budget may not be achieved.

“It’s a necessity those be put into the budget and be worked on,” he said. “If you don’t put them in the January budget, there is no way they can be incorporated into the final result. The governor wants to set a figure and work toward it in the coming months.”

The Schwarzenegger spending plan is a starting point for budget deliberations that are expected to stretch into the summer.

The constitutional deadline for approving the budget is July 1, the start of the new fiscal year.

Administration officials say much of the $6-billion chronic shortfall identified by Hill would be eliminated through cost efficiencies and other reforms being worked on. They include a host of proposals, from changes in the state pension system to increasing fraud investigations to privatizing some government functions.

The proposals will be more developed by the time the budget is approved and result in significant savings by 2006, administration officials say.

“We didn’t think it was prudent to put a price tag on those savings until we fleshed out the proposals,” Finance Department spokesman Palmer said.