State defers budget deficit

The Legislature passed a package of emergency budget measures Friday, which lawmakers touted as swift, responsible bipartisan action that averts a cash crisis and erases nearly half the state’s $14.5-billion deficit.

But their move would not actually reduce spending on that scale; rather, it would push most of the red ink forward with accounting maneuvers and borrowing.

The lawmakers’ measures would put taxpayers on the hook for more debt and would, at best, allow the state to hobble through the next few months, said budget experts outside the Capitol. What are the legislators waiting for? some asked. With the state in its worst financial shape in years, the emergency actions amount to little more than nibbling around the margins.

“Yet again, they are dodging and weaving and hoping . . . they don’t have to make any tough decisions,” said Christopher Thornberg, a partner at Beacon Economics, a consulting and research firm in Los Angeles. “It is kind of pathetic. At what point is someone going to say, ‘We have a problem and we have to deal with it’?”

Some of what lawmakers did would help close the state’s budget gap. But the savings would amount to only $2 billion over the next year and a half. Most of the cuts made to achieve those savings would affect schools and doctors who treat the poor.

Despite previous assertions by lawmakers and the governor that they had cut up the state’s credit cards for good, the package approved Friday also included $3.3 billion in borrowing authorized by voters years ago to deal with an earlier deficit but never undertaken.

The difficulty of making even $2 billion in cuts partly explains why lawmakers fell back on deferrals, delays, transfers and other accounting shifts to keep the state afloat.

The cuts, which the governor is expected to sign into law today, mean that school districts would have to forgo $506 million that was given to them in the current year’s budget, a move lawmakers said would not affect classroom instruction, though educators have disputed that. And reimbursement rates for doctors who provide healthcare to the poor under the state’s Medi-Cal program would drop by 10%.

Some of the same legislators who have argued passionately in favor of balancing the budget entirely through spending cuts -- as opposed to tax hikes -- couldn’t bring themselves to vote for cutting subsidies to doctors.

“Today’s action means doctors will simply stop seeing [poor] patients,” said Sen. Sam Aanestad (R-Grass Valley), an anti-tax crusader who suggested that healthcare cuts were disproportionately large.

A reduction measure that failed was aimed at buyers of yachts, airplanes and luxury recreational vehicles. The state Senate passed a bill to close a loophole that allows many of those buyers to avoid paying sales tax by keeping their new vessels out of state for 90 days.

Assembly Republicans, calling the measure a tax hike, blocked it. Legislative budget analysts estimated that eliminating the loophole would raise $26 million.

Assembly Speaker Fabian Nunez (D-Los Angeles) called on Republicans to join the effort to “close this ‘sloophole’ once and for all.” He said he would put the measure to another vote in the Assembly early next week.

Most of this week’s budget moves would not create lasting savings. They involve either borrowing or doing such things as delaying payments for various programs into the next budget year. These actions may give the appearance that part of the deficit has been eliminated, but the payments aren’t canceled. They are simply made later.

“A lot of this stuff is shell games,” said Ryan Ratcliff, an economist at the UCLA Anderson Forecast. “We are just sort of pushing obligations around to create an accounting statement that looks nice but does not really change the reality of the deficit.”

Ratcliff said lawmakers are exhibiting their usual reluctance to take substantial action until after the governor releases his revised budget plan in May. “We’ve got hard choices to make, but it appears we are not going to make them now,” he said.

Delay could prove costly.

With the deficit so large, the Capitol’s partisan divide so deep and three of the Legislature’s four leaders now lame ducks, few in the capital expect an agreement on how to eliminate the rest of the deficit by the July 1 deadline for enacting a new budget.

If there is no budget deep into August, as occurred last year, the state will be unable to sell billions of dollars in short-term bonds that finance officials are planning to use to keep from running out of money. Such bonds are routinely sold to “even out” the state’s cash flow; they provide funds to cover the cost of programs early in the fiscal year and are repaid when tax revenue surges in the spring.

But the bonds cannot be sold without a budget in place. The alternative is a costly bridge loan from investment bankers.

State Treasurer Bill Lockyer warned in a letter to lawmakers recently that such a move would probably be frowned on by credit-rating agencies and could trigger a downgrade.

A downgrade would increase the amount of interest the state must pay on its borrowing. Lockyer said that could cost taxpayers as much as $128 million in fiscal 2008-09 and $319 million more the next year.

Taxpayers won’t need to wait to assume more debt, however. The $3.3 billion in borrowing in Friday’s package would add two years to the repayment schedule for the debt that voters approved in 2004.

Schwarzenegger had promised never again to borrow to balance the budget. But his administration argues that it is appropriate for him to use what remains of the 2004 package.

Stephen Levy, director of the Center for Continuing Study of the California Economy, in Palo Alto, said the $3.3 billion in borrowing might have been justified as part of an overall plan that included spending reductions and new revenues that would close the budget gap.

“But so far they are using it just to kick the problem down the road,” he said.

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evan.halper@latimes.com

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Times staff writer Patrick McGreevy contributed to this report.