Revenue Up, Governor to Reverse Cuts

As California’s economy improves and unanticipated cash flows into state coffers, Gov. Arnold Schwarzenegger is set to reverse some of the sharp budget reductions he has proposed in transportation and education spending -- actions that drove unions and other groups to organize against him.

Administration officials, lawmakers and advocacy groups say the revised budget that the governor is scheduled to unveil Friday will probably have hundreds of millions of dollars in added spending to help repair crumbling roads and jump-start other transportation projects delayed by state cuts in recent years.

They say the governor will also move to increase the pay for teachers in low-performing and dangerous schools.

Department of Finance spokesman H.D. Palmer said restoring as much of the $1.3 billion in transportation money the governor had initially proposed to cut is the administration’s top priority for the new revenue.

“Tapping into transportation spending is one of the difficult choices the governor had to make to come up with a plan to close the state’s budget gap,” he said. “To the extent we have additional revenues, we want to see what we can do to put some of that money back.”

The news comes as transportation officials warned that dozens of stalled road projects are in danger of being canceled altogether. Palmer would not specify exact amounts, but transportation groups say the administration has signaled to them it would be at least $500 million to $700 million -- enough to keep the projects already in the pipeline on track.

“We are hearing some pretty optimistic things,” said Jim Earp, executive director of the Alliance for California Jobs, an umbrella group that represents labor unions and contractors involved with transportation projects. He said the money is sorely needed.

“The state basically hasn’t funded a new project since June of 2003,” Earp said. “That is a very long time.”

The extra revenues are a welcome break for the governor, whose administration has suffered a number of setbacks in recent months and whose approval ratings have fallen significantly amid an assault of television advertisements from teachers and other unions angered by his cuts and proposed ballot initiatives.

Schwarzenegger will have more than $2 billion of additional tax revenue to close a budget shortfall estimated to be $8.6 billion for the fiscal year that begins July 1. State coffers have benefited from higher than anticipated earnings from Californians through stocks and other investments. Also, according to the nonpartisan legislative analyst’s office, corporate profits “soared” in a number of industries, including manufacturing, real estate and financial services.

The federal government is similarly seeing increased tax revenue, particularly from corporations, according to the Congressional Budget Office.

California’s 2005-2006 shortfall could be whittled down even more if the governor opts to use a large chunk of the $4.2 billion that came into the state through a controversial tax amnesty program last month.

Most of that amnesty money, however, was given to the state under protest by companies involved in complicated tax disputes. The companies are filing legal appeals to get it back. State Controller Steve Westly says California can safely use $2.7 billion of the money to help balance the budget. But the administration is taking a far more cautious approach -- at least initially. Finance Director Tom Campbell said last month that it would be risky to use more than $300 million, particularly since the money is a one-time windfall. Regardless, the state’s fiscal situation is much brighter than when the governor unveiled his initial budget plan in January. But the release of a revised proposal is unlikely to go far enough to neutralize many of the governor’s critics.

Legislative Democrats, whose approval is needed to pass a budget, say they will continue to fight Schwarzenegger on school and social service issues. California spends less money per student than most other states, and Democrats have joined with the politically powerful California Teachers Assn. in an aggressive campaign to bring the state above the national average.

The revised budget is unlikely to get California anywhere near that goal.

The governor’s “recognition pay” proposal would result in only a small boost for local schools. It would still leave schools roughly $2 billion short of what they are owed under voter-approved spending formulas the governor is proposing to suspend. Strategists say the governor is trying to shift the debate away from the amount the state puts into education and focus it on how to reform schools using the more than $40 billion already budgeted for them.

Democrats are so confident the public is on their side that they have suggested the state should raise taxes if there is no other way to boost education spending above the national average. Schwarzenegger and Republican lawmakers, however, are firmly opposed to any new taxes.

Assembly Speaker Fabian Nunez (D-Los Angeles) said Democrats would unveil their own plan for balancing the budget soon after the governor presents his revised spending proposal. The Democratic plan, he said, may include some “modest” tax increases.

“We feel strongly that our alternative is reflective of the values of Californians,” he said.

Assembly Revenue and Taxation Committee Chairman Johan Klehs (D-San Leandro) said some are considering raising taxes on what they consider high incomes -- one of the few tax increases that has majority support from voters in most public opinion polls -- and broadening sales taxes to include some services. Sales taxes are currently charged only when consumers buy goods, such as clothing, appliances and automobiles.

The governor, meanwhile, is seeking to use the increased spending proposed in his revised budget to rebound from what has been the most difficult period of his administration. Since unveiling his initial budget in January, his approval rating in public opinion polls has dropped percentage-wise from the low 60s to the mid-40s as criticism swelled from school groups, public safety unions, seniors, nurses and others.

“If you want to make good news with voters, education and transportation is where you go,” said Bill Whalen, who was a speechwriter for former Gov. Pete Wilson. “For the last couple of months the governor hasn’t been getting positive attention. This gives him a chance to go out and get it.”

On transportation, Whalen said, “the governor now has the opportunity to go up and down the state ... to hand out money and announce new projects.”

Not all the news is good, however. The state still has so many debts coming due in fiscal 2006-2007 that California would face a budget shortfall of as much as $10 billion at that time. The governor would have to confront that while campaigning for re-election, if he chooses to run for another term.

Fiscal conservatives say that is reason enough not to use the new money for government programs.

“Spending extra money we had in a good year is what got us into this mess in the first place,” said Sen. John Campbell (R-Irvine).

“This budget crisis is persistent. It is not just this year, but this year, next year, the year after and the year after. My first priority would be using the money to pay off our debts.”

The administration intends to propose some of that Friday. Palmer said a top priority is to reduce the amount of borrowing in the budget. That could include setting aside $1.7 billion in bond money the governor had proposed using to close the budget gap and saving it instead until the following year. Administration officials are also looking at the possibility of replacing that bond money in the upcoming budget with some of the disputed amnesty payments. If the state ends up having to give back some amnesty funds, it could go ahead and use the bond money.

The governor also has a longer-range plan. A committee led by his political allies says it has turned in enough voter signatures to place on the ballot an initiative imposing a hard cap on state spending. If passed, the measure would permanently change the voter-approved formulas for education spending, driving down the state’s obligation to schools by billions of dollars.

And whenever the Legislature fails to produce a balanced budget, the cap could force billions of dollars more in across-the-board cuts -- in education, health care and other areas -- without its consent.

“The issue is what you do when the fiscal year ends without a budget in place and you don’t have revenues to sustain spending,” said Palmer. “Right now there is nothing in place to address that problem, which we have seen repeatedly.”

The governor says he would like the measure to appear on the ballot in a special election in November. He has until mid-June to call such an election. Democrats say they are willing to negotiate possible alternatives with the administration, but would not sign off on anything resembling what is in the proposed initiative.

Klehs called the proposal a “gimmick” to allow the governor to escape his responsibility to balance the budget with lawmakers by forcing automatic cuts.

“Their spending cap is a silly idea,” he said. “It will be defeated.”

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Surprise revenue

In January, Gov. Arnold Schwarzenegger announced that state government would face an $8.6-billion budget gap in the 2005-2006 fiscal year. Since then, the state’s situation has improved markedly thanks to an uptick in the economy and a tax amnesty program. (Much of the tax amnesty revenue is still in dispute.)

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2005-2006 budget gap: $8.6 billion

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Total tax amnesty revenue

Total collected through amnesty program: $4.2 billion

New tax revenue from uptick in economy: $2.2 billion

Shortfall remaining: $2.2 billion

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Controller’s estimate

New tax revenue from uptick in economy: $2.2 billion

Controller’s estimate of tax amnesty money that can be used: $2.7 billion

Shortfall remaining: $3.7 billion

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Schwarzenegger’s plan

New tax revenue from uptick in economy: $2.2 billion

Revenue from tax amnesty program that Schwarzenegger plans to use: $300 million

Shortfall remaining: $6.1 billion

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Sources: State budget, Legislative Analyst’s Office, California Franchise Tax Board