Lawmakers Warned on Fiscal Policy

A rosy economic outlook and a few billion dollars of leftover bond money could allow the state to eke out another year without raising taxes or dismantling any government programs, the nonpartisan legislative analyst said Wednesday.

But Elizabeth G. Hill strongly cautioned lawmakers against taking that path to close a projected $6.7-billion budget shortfall for the coming fiscal year. Hill warned that doing so would plunge the state into an even deeper fiscal crisis in the following years, leaving a much bigger hole with few options for filling it.

“The state needs to take action now,” said Hill, whom lawmakers of both parties look to for advice on the state’s fiscal problems. “We really haven’t addressed the large structural deficit facing California.”

The analyst also made a bold proposal for dealing with it: suspend a $2.8-billion payment owed to schools -- a move that would keep school spending at current levels and allow for modest growth but would renege on a promise made to educators earlier this year. The proposal was met with immediate resistance from school officials.

The release of the analyst’s Fiscal Outlook report marks the beginning of budget negotiations in the Capitol, a process that will continue when Gov. Arnold Schwarzenegger presents his spending plan in January and extend into the summer, as lawmakers, administration officials, activists and others make demands, meet in back rooms and posture for the public while trying to reach consensus on a spending plan.

“No one should be heartened by this report and think we have dodged a bullet,” said Sen. Chuck Poochigian (R-Fresno). “We are standing in front of the bullet. We have to move quickly to bring this into balance.”

“Policymakers face a deceptively difficult challenge,” Hill said. To some, it would appear easy to balance the budget: There is money left over from the $15 billion in deficit borrowing voters approved in March. And Schwarzenegger made deals with education and local government leaders to put off receiving billions owed to them until 2006.

The problem, Hill and others warn, is that the bill comes due at the same time the state must start paying back the bonds. Beginning in mid-2006, taxpayers will be spending more money to repay those bonds and other borrowings than they currently put into the entire University of California system.

With all those pledges and debts coming due, Hill urged lawmakers not to tap the $3.5 billion in leftover bond money to balance the upcoming budget, and instead save it for next year, when they will need it much more.

Legislators are busily mapping out their strategies. Democrats feel they have been burned in the past by coming out in support of raising taxes early on in the budget process, only to have the GOP use it to paint them as reckless spenders. Republicans, meanwhile, will be under pressure from the business community to push through some of the corporate tax breaks recently passed in Washington -- even if it means cutting a deal with Democrats that involves a temporary sales or income tax hike.

Schwarzenegger, meanwhile, remains a wild card.

During an appearance on CNN’s “Larry King Live” Tuesday night, the governor gave little indication of how he will propose to close the gap.

“We have a budget crisis, and it will be probably another two years where we have to really watch out [with] our spending,” he said. “We balanced the budget last year without raising taxes. And of course this is the big, big challenge this year again.... We have a tremendous amount of new revenues coming in, but our spending also is going up. So we have ... to watch out, and we have to make just a streamlined government, and, like I said, be more accountable and be a better servant to the people.”

The budget plan he presents in January will set the tone for discussions. Both the governor and incoming finance director Tom Campbell have said they oppose new taxes, but Democrats are hopeful that a recent leftward shift in Schwarzenegger’s Cabinet appointments is a sign that he may be more receptive to their ideas this year.

Republicans call that wishful thinking.

“When Sacramento raises taxes, it is usually because they are at the end of the road, there are no other options, and they are about to go over a cliff,” said Bill Whalen, who was an advisor to former Gov. Pete Wilson. As long as the bond money is there, he said, the state hasn’t hit the end of the road.

Yet, neither side rushed to support the proposal put forward by Hill to curb school spending.

Asked about the proposal to deny schools the multibillion-dollar increase, Poochigian, who has long crusaded to reduce government spending, was noncommittal. “There are going to be strong and powerful constituencies for increased levels of spending in a broad range of categories,” he said.

Democrats were more wary of the proposal as a chorus of educators immediately called on lawmakers to resist it.

“Not fulfilling our commitment to California students is absolutely the wrong thing to do,” warned state Supt. of Schools Jack O’Connell.

Another option looking less palatable to lawmakers is raising taxes on the wealthy, one of the few tax hikes with strong voter support. Voters agreed this month to tap millionaires for a vast expansion of mental health programs. And it won’t help the state budget at all. Economists warn that trying to place another tax on the wealthy could prompt them to move out of state.

“It’s not rocket science. The problem hasn’t changed,” said Assemblyman Joe Canciamilla (D-Pittsburg), a business-friendly moderate who supports a deficit solution that includes a modest tax hike coupled with deep spending cuts.

“The options are beginning to run out. We’ve borrowed pretty much everything we can,” Canciamilla said. “We have maneuvered the budget every which way we can. Each year we put this off, there are fewer and fewer options. This is really getting to be a dangerous situation.”