Cash Surge Fills State’s Budget Gap

In an unexpected election-year gift for Gov. Arnold Schwarzenegger, California coffers are suddenly flush with enough cash to wipe out what was projected to be a multibillion-dollar gap in next year’s state budget.

Nonpartisan Legislative Analyst Elizabeth G. Hill reported Wednesday that, largely because of robust economic growth, tax receipts were far exceeding forecasts. At the current rate, the state is heading toward ending the fiscal year in June with a budget reserve of $5.2 billion -- four times what was anticipated when the governor signed the budget over the summer.

Hill, whom lawmakers of both parties look to for guidance on the budget, said that was enough extra cash to eliminate the shortfall that had been projected for next year if spending remained at current levels. It would be the first time in five years that lawmakers would not have a multibillion-dollar hole to fill.

Politically, that means less pressure on the governor to propose program reductions or to break his pledge not to raise taxes when he unveils his annual budget plan in January. It also takes away opportunities for his opponents to back him into a corner on those issues when the state nears its summer deadline for passing a budget -- and the 2006 race for governor heats up.

“The budgetary situation for the state of California is considerably better,” Hill said at a press conference. “There are sufficient amounts available for 2006-2007 to end the year with a balanced budget.”

But she cautioned that the relief was temporary. Unless there are significant program cuts or tax increases, she said, spending will quickly outpace revenue by billions of dollars again by the end of 2007 and continue to do so for several years.

“The state is not out of the woods,” Hill said.

There are other significant caveats: Hill’s projection assumes the state would not repay billions of dollars that have been borrowed from schools over the last two years to balance the budget. School groups and Democrats who control both houses of the Legislature have vowed to get that money back.

Complicating matters for the governor, the analyst is suggesting that some of that money could come from the elimination of one of his most prized programs.

Schwarzenegger’s interest in spending tens of billions of dollars fixing the state’s decaying infrastructure poses another challenge to keeping the budget in balance while avoiding a tax increase, as do a number of ballot initiatives from well-financed groups seeking approval for costly new government programs.

While traveling in Shanghai on a trade mission, Schwarzenegger welcomed the revenue news but also stressed that the state’s financial problems were far from solved.

“This is just good news, but we have not gotten rid of the problem,” the governor said.

Still, some in his administration saw the analyst’s report as a validation of the governor’s fiscal policies.

“When the governor took office, he said he was going to put the state budget on a workout plan, much the way you would a company that is trying to emerge from bankruptcy,” said Department of Finance spokesman H.D. Palmer. “We think the report released today indicates that plan is producing dividends.”

Higher than expected corporate profits are leading to a large chunk of the extra cash flowing into state coffers -- and much of that is attributed to the record oil company profits of late. Those business profits helped generate an increase in corporate tax receipts and, because of the capital gains they produced, also delivered a boost in personal income tax receipts.

Hill’s report suggested the state roll back one of the governor’s biggest political victories: an initiative he championed to spend hundreds of millions on after-school programs. Proposition 49, approved by voters in 2002, was Schwarzenegger’s first venture into state politics.

That measure will take effect for the first time next year, forcing lawmakers to allocate $428 million of the state’s $117.3-billion budget to programs that offer tutoring, homework assistance and educational enrichment before and after regular school hours. The mandate comes at the same time education groups are trying to get back the billions of dollars for core instructional programs they say schools have sacrificed in recent years. The current rate of school spending would not provide enough money to cover even enrollment growth and cost of living adjustments next year.

“It is absurd to talk about putting money into after-school activities when we are not funding core educational programs,” said Senate President Pro Tem Don Perata (D-Oakland). “To take a half-billion dollars for schools and put it into something else at a time we are not even doing an adequate job on literacy is absurd.”

While administration officials defend the Proposition 49 program, saying it accounts for only a tiny fraction of the $36.7 billion that the state spends on schools, Perata said legislative Democrats would consider asking voters to repeal it.

Democrats are also not ruling out pushing for a tax hike. They argue that current levels of spending are unacceptably low, particularly in education, and that now is the time for the state to reinvest.

“Rather than agreeing to just hobble through another year, I would prefer to take an assessment of where we are and what we need to do to provide Californians with adequate services,” Perata said.

School groups, meanwhile, are continuing to pressure lawmakers to put more money into education.

“The fact that our budget was balanced on the backs of students should not be celebrated,” state Supt. of Public Instruction Jack O’Connell said in a written statement issued after Hill’s press conference. “Ignoring the need to fully fund our schools would be a costly mistake that ignores the will of voters.”

A coalition led by Hollywood producer Rob Reiner is expected to announce today that it has collected enough signatures to qualify for the June ballot a measure raising income taxes on the rich to pay for universal preschool in California. “This is something we need to fix public education,” Reiner said in an interview.

Other groups are hoping to place on the ballot initiatives to raise tobacco taxes to pay for new public health programs.

Polls show there is voter support for such taxes, which puts pressure on GOP lawmakers and the governor to consider supporting them through the Legislature. That way, they could at least maintain control over how the tax money would be spent. The ballot measures, on the other hand, would create new programs Republicans say the state cannot afford.

Adding to the pressure on GOP lawmakers is the governor’s push for a huge investment in infrastructure, perhaps tens of billions of dollars. Such an investment could require borrowing on a scale the state has never seen before. The state may not be able to pull off such a bond sale without money from new taxes or fees to back it.

But GOP legislators continue to say that the biggest mistake they could make now would be to vote for a tax increase.

Assembly Budget Committee Vice Chairman Rick Keene (R-Chico) stressed that now was not the time “to return to the irresponsible ways of the past by raising taxes.”

“We must continue to tighten our fiscal belts until the balance is restored,” he said.

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Times staff writers Robert Salladay in Shanghai and Jordan Rau in Sacramento contributed to this report.