‘Delighted if it didn’t get worse’

When Gov. Arnold Schwarzenegger proposed his plan to close the state’s deficit with across-the-board cuts, California Legislative Analyst Elizabeth Hill saw so many problems that her office took a rare step — it wrote its own budget proposal. Hill stopped by The Times last week to discuss her alternative budget; below is a partial transcript.

The basics of the alternative budget

Elizabeth Hill: The governor estimated a budget problem of fourteen and a half billion dollars, and largely due to the lower revenue estimates that we have for the current year and the budget year combined, we’re at $16 billion… If the Legislature did everything that the governor has proposed, we would still — the state would still have a $4 billion budget problem the year after … then about a three, two, and then it goes to a little bit under $1 billion in ’12, ’13, by our estimates.


We were concerned with the approach the administration took because it was an across-the-board approach, taking basically every general-fund program and cutting it by 10%. And we were concerned that it didn’t really set priorities for the state. It has an appearance of fairness, but in many cases, then programs aren’t going to be able to operate very effectively.

So we tried to step back and say … Is there a way to do more targeted reductions, look at what’s not working in state government, things that are duplicative? Are there ways too that we could try to identify more of the core services and maintain core services from the current fiscal year, ’07-'08, into ’08-09? …

For example, in health, our goal was to try to maintain primary care health services. So what sort of reductions could we make and maintain primary care? The governor, for example, proposed a provider rate decrease for the docs, for Medi-Cal. When we looked at it we were concerned since doctors haven’t received — who participate in Medi-Cal — haven’t received a rate increase since 2001. We were concerned that a 10% reduction to that rate would cause more doctors to get out of Medi-Cal, and it would also cause more patients to go to emergency rooms rather than primary care. So we didn’t adopt … the governor’s proposal on that.

Similarly, in higher education, our concern was to try to maintain access to higher ed … We proposed among other things to increase some fees, but then we raised financial aid to pay for the fee increases. The governor had also eliminated part of the Cal Grant program, it’s called the Competitive Grants; we suggested that that be restored …

And then in Proposition 98, which is kindergarten through the community colleges — again, we were trying to maintain current services in education year over year. The governor, actually, year over year, reduces Prop. 98 by $1.1 billion. So we made both some specific targeted reductions in Prop. 98 and some programs that, in our general view, aren’t working very well. But we are also proposing some local block grants to also give districts more flexibility along kind of thematic grounds, so we have one in special ed, and some targeted to really low income students for success in school and the like. So we took about 42 different programs and collapsed them into these four block grants. It actually totals about $42 billion among those programs.

Robert Greene: And do you see that as a viable, long-term approach, or this is just a … to take care of the immediate budget problem the next couple of years …?

Hill: No. In terms of the block grant, we’ve been advocating that for some time. So even if this was a great budget year, we think it would still be a good idea. I think, though, particularly in a very tight budget year, it does give the districts a lot more flexibility …

So basically, we tried to target reductions. We also tried to look [for] other money that could keep a program going … And we came up with about $11 billion in program reductions. The governor had proposed as part of his plan to sell the last increment of the deficit financing bond that voters had approved — Prop. 57 — and so that $3.3 billion has actually already gone out for sale. And we incorporated that in ours also.

Greene: Do you favor that?

Hill: We thought given the current circumstances, it made sense. I mean, the voters authorized it. At the time, say, January, when he proposed it, we were going to be in the red in the current fiscal year. So it made sense to us. and then because in good budget times, we had both reduced fees and reduced taxes, we wanted to apply the same analytical framework that we had applied on the spending side of the budget to tax expenditures. That’s a techie term for exclusions, deductions and credits in the tax code.

Greene: Even that’s technical. We call them loopholes.

Hill: (Laughs) Other folks use that terminology. There’s about $50 billion of those, and so we identified 12, one of which was one that the governor had also identified, related to the yachts, aircraft and recreational vehicles. In some cases, they were rolled back to ones we that had increased in the good times. In other cases, it was just an analytical priority setting … So together we came up with about $17 billion … so that’s what the Legislature is debating.

Schwarzenegger’s budget reform proposal

Hill: Now, the governor also has a budget reform proposal. We had some concerns as to the specifics of his budget reform proposal, but we suggested an alternative …

Greene: I hope you can talk a little bit about that, the robo-budget idea.

Hill: Well, I mean, we’re, as a legislative office and with the Legislature’s appropriation authority being their main constitutional responsibility, we get very concerned when proposals try to diminish the Legislature’s appropriations authority. And we would argue what was just done in special session shows you that in fact that the Legislature can act in special session and make reductions. They’ve “solved” about half of the budget problem by what was done in the special session.

But we do think, given the volatility of our revenue structure in California and also just normal economic cycles, it’s really important to have a healthy reserve. And that’s been difficult to build up in the kind of post-Proposition 13 period, because any time that we have unanticipated revenues, if you will, there’s incredible pressure for spending commitments, additional in any one of a number of areas, or revenue decreases. That’s kind of what we did in the last good times.

So we suggest building on Proposition 58, which was passed by the voters, upping the long-term goal of how much money to put in the reserve. Right now under 58, it’s to a maximum of $8 billion or — and right now I’m not remembering the percentage. We suggest … moving that to $10 billion …

We thought that the governor raised a good point that we have a lot of constraints in our budgeting system — both on revenues and on spending — dictating where money has to go, whether it’s like a new, dedicated fund with the Proposition 63, where we’re taxing high-income earners and devoting it for mental health, or whether it’s Proposition 98 or Proposition 49. We list a number of the propositions that are into play …

To both look at that, and entitlement programs and other kind of automatic spending components would be an important thing to review as we’re thinking about how to reform the state’s budget process.

Closing state parks

Dan Turner: Did you address the governor’s plan to close all those state parks?

Hill: Yes. Basically what we suggest is rather than closing the state parks that we raise fees as we did before — we rolled back fees during the David administration at the parks … Currently it’s $2.80, the average admittance fee. Our recommendation would raise that by about a dollar, though we would leave it up to the Department of Parks to figure out how to allocate the money. And then we take $13 million of the money raised by the $1 increase so that you don’t have to close any of the 48 parks the governor has proposed.

And then it generates about $12 million additional, and we’re very concerned about the state of maintenance at the state parks. And so we recommend in our budget analysis to take that $12 million and put it into maintenance …


Turner: Are you recommending a wide-scale prison release?

Hill: Well, we have a couple of proposals that I should mention. The governor has his early release proposal, and our concern … is that it creates kind of a hole, if you will, where someone commits and offense, is immediately early released and then is on summary parole, so doesn’t serve essentially any time at all. So it creates in our view a public safety problem …

There are a number of crimes that are so-called wobblers, and we identified ones that are for lower-level, non-violent, non-sexual offense type crimes. And we’re recommending converting those wobblers into misdemeanors. And the misdemeanors would mean that these offenders would go to jail and probation rather than to state prison …

In contrast to the summary parole proposal, we suggest what we call earned discharge, so that offenders would basically have to earn their way off parole rather than the summary parole. It doesn’t save as much money as the administration — it’s about $100 million savings under our proposal, and theirs is between $200 and $300 million.

And then the third piece … is to realign state parole for low-level offenders from the state to the counties. County probation is currently serving the same type of offender for the most part … This would move about 71,000 offenders from the state to the county. We didn’t want to move the responsibility without the money, so we identified three pots of existing money that could be reallocated to generate $495 million that would go down to the counties to ensure that they have the services in place. And that’s about $12 million higher than what the state is spending for those 71,000 offenders. And so that $12 million we suggest could be used as a way basically to reward counties which are able to reduce recidivism, or if they need, say, additional money related to having services in place to help offenders transition …

California Vehicle License Fee (VLF)

Turner: What would happen if we pulled a Gray Davis and restored the car tax, not that this governor’s going to do that?

Hill: If you went back to 2%, you would raise $5 billion.

Greene: It’s only five?

Hill: Well, we spend six because of some interactions and Prop 1A and what has happened with inflation. But you would raise $5 billion and the Legislature could allocate that either to the state or to locals.

Turner: Why aren’t you proposing that? Is it just because you know it’s a political non-starter?

Hill: You know, I think when we looked at it, we felt that from where we saw it, being able to use the same analytical framework on the spending and the revenue side was our first consideration. And then we were concerned with rate increases, less so with the VLF, but say with sales tax and corporate tax and income tax, that at the margin that could affect investment decisions and job-related decisions. I wouldn’t really put the VLF in that category.

Turner: Then why not propose that?

Hill: Came up with $17 billion without it.

Turner: (Laughs) OK.

Hill: There are certainly many other people that can offer their solutions. This is the one we offered.

Another revenue bump in April?

Greene: Are you expecting a surprise in April and May?

Hill: You know, at this point, I’d be delighted if it didn’t get worse, to be honest. I mean, it’d be great if there was a surprise, but when I look, when we look at the economic data that we’re still seeing everyday — the housing slump is continuing, in our economic forecast we have it continuing throughout 2008 … We’re estimating corporate profits will be down about 3% in 2008, and we just see softness on all major taxes …

I did just get some information yesterday on the personal income tax and the corporate tax for February. It actually seemed to hold pretty well. February’s not a large revenue collection month, but I was pleased to see it holding, so that was a bit of stabilizing news, at least.


Hill: The only part of transportation that’s affected in our alternative budget is that $100 million comes from gambling tribes each year to transportation to pay off a loan that transportation made to the general fund. And we’re suggesting on a one-time basis that that $100 million stay in the general fund to help with this balance …

But the state highway account receives what’s called the gas tax, or the excise tax on gasoline. And right now we have a situation where statute requires that the state highway account goes first for rehabilitation and maintenance. And we’re projecting a $3 billion annual shortfall in rehabilitation and maintenance going forward. And the only money that is there right now for capacity building is Prop. 42, which is the sales tax on gasoline that moved out of the general fund from the voters to transportation that can be used for capacity, and that’s a billion and a half. That’s the only amount that’s available for capacity building … Now on a one-time basis, the bond money that was approved by the voters in November of ’06 is available, and about half of that will be gone after this year.

So there will be a little bit more still remaining probably for the next two years after the budget year.

Greene: What did you say the projected shortfall was?

Hill: $3 billion a year. That’s for rehabilitation and maintenance.

Turner: Is that because people are buying less gasoline?

Hill: It’s a combination. The gas tax hasn’t been raised since about 1991. The gas tax is also on gallonage, so it’s not adjusted for inflation. And then when we have either more fuel-efficient cars or alternative-fuel cars, then there’s not money coming into the account. So you have that kind of on the revenue side.

And then on the spending side, most of our infrastructure was built in the ‘60s. And so, with this many vehicle-miles travelled and just the useful life of the … it’s just deteriorated more so that it takes more money to rehab it.

So, going forward, I’m really concerned on the transportation. I mean, we mention that if the Legislature wanted to address the $3 billion shortfall, it’d take about a 10-cent raise in the gas tax …

Greene: The excise tax is a flat fee per gallon or is a percentage?

Hill: It’s actually a flat fee per gallon, and it was Prop. 111 that raised it the last time.

Greene: When was that?

Hill: I think it was in 1990 … It stepped up in a couple of increments, so the voters passed it and then it triggered a couple of changes.