Analyst faults budget plan

The state’s chief budget analyst warned Monday that Gov. Arnold Schwarzenegger’s proposals for closing a $14.5-billion budget gap fail to properly prioritize how the state should spend its money, use questionable accounting methods and would be unnecessarily disruptive to schools and community colleges.

Legislative Analyst Elizabeth G. Hill, whom Democratic and Republican legislators look to for unbiased advice on fiscal issues, is particularly critical of the governor’s plan to spare almost no agency or program in calling for state spending to be cut immediately by 10%.

“It reflects little effort to prioritize and determine which state programs provide essential services or are most critical for California’s future,” Hill wrote in a report released Monday morning. She also said the proposed spending plan cuts too deeply into state services, and she called on the Legislature to offset some of the governor’s suggested reductions by raising fees and taxes or by scaling back existing tax breaks.

The report is the Legislature’s first assessment of the proposed budget that the governor unveiled Thursday. That blueprint, which covers the next 18 months, would rely on a series of deep reductions in government services to bring the state’s books into balance.

An emergency proclamation the governor signed last week forces the Legislature to cut spending immediately. If legislators fail to act on the budget within 45 days, they will be required by law to stop all other legislative business until they do so.

Soon after Hill released her report, a major bond rating agency put the state on notice that it was at risk of a downgrade. Fitch Ratings, expressing concern that the Legislature would balk at the steep cuts advocated by the governor, said failure to take action to balance the budget soon could lead to a downgrade of California’s rating on approximately $43 billion of outstanding debt.

Administration spokesman H.D. Palmer said the Fitch warning “is as clear a statement as I have seen that there will be consequences for inaction.”

Palmer defended the governor’s wish to cut across the board as a rational approach that allows the state to avoid eliminating any government services altogether and achieves its goal without burdening Californians with big tax increases.

“It is designed to protect essential services by spreading these reductions as broadly as possible,” he said.

Hill’s report, meanwhile, also takes aim at a proposal in the governor’s budget to raid $2 billion in projected tax revenue next year that normally would be reserved for the fiscal 2009-2010 budget. She asks whether the plan is “a reasonable change in accounting practices or merely a convenient way to generate a one-time revenue bump.”

Palmer said the federal government and other states already use the accounting method in question.

The governor’s proposal to cut school funding by $4.4 billion -- more than $300 per student -- “has several shortcomings,” Hill wrote.

Hill said the governor and legislators should take back $1.5 billion in extra cash that schools were allocated this year above what they are guaranteed under the state Constitution. That would automatically lower the amount guaranteed to schools next year without requiring legislators to suspend the spending formulas approved by voters.

School groups were skeptical that Hill’s plan would be any better for them than the governor’s, saying that both would cut too deep and ultimately hurt students.

“Either way you go about it, there is blood on the floor,” said Kevin Gordon, a lobbyist for hundreds of school districts.

Hill was also critical of Schwarzenegger’s proposal to put a cap on spending in years when state revenues soar and save that money in a rainy day fund. She described the plan, which would also give the governor unilateral power to make program cuts when the state budget falls out of balance, as a power grab.

It “represents a serious diminution of the Legislature’s appropriation authority,” she wrote.

Administration officials said the proposal would allow legislators first crack at making the cuts, giving the governor authority to act unilaterally only if lawmakers failed to reach a consensus.

And legislators should be prepared for the state’s finances to get worse before they get better, Hill said. The economic forecasts that the administration used to make its revenue projections are already 2 months old, she noted, and there has been a lot of bad economic news in the meantime.

Reaction to her report in the Legislature was mixed. Democrats applauded Hill’s rejection of across-the-board cuts and her call for more revenue. Republicans embraced the report’s call for swift action but reiterated that they would block any proposal that included new taxes.

Assembly Budget Committee Vice Chairman Roger Niello (R-Fair Oaks) said: “Raising taxes to pay for Sacramento’s poor spending choices is not the answer.”

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evan.halper@latimes.com