Budget woes make for long, cold winter

As the size of the state’s budget shortage begins to become apparent, legislative leaders and the administration are looking at ways to close the gap. So far, it’s still up in the air. On Wednesday, despite pronouncements about the urgency of the situation, no major negotiations were under way on $14 billion in red ink.
One option is for Gov. Arnold Schwarzenegger to declare an emergency under voter-approved Proposition 58, which would give the Legislature 45 days to act on any budget proposal he submits. Another is to negotiate a deal that includes cuts, new taxes and borrowings — but the tax piece already has incurred the wrath of Republicans, whose political support is needed for a tax hike. A third is to call a special session on the budget in which majority-vote bills can take effect in 90 days.

For the governor, the shortage is similar to the fiscal emergency he faced in 2004, in which he and the Legislature faced mid-year cuts. The latest estimate on the budget shortage is $14 billion, but that number may go higher as economic conditions deteriorate. Part of that decline stems from the subprime mortgage meltdown, which has yet to reach bottom.

“We are looking at our options. We have not been biding our time this fall. We have been working with the Cabinet, the secretaries to develop a range of options on closing the budget gap,” said H.D. Palmer, a spokesman for the state Department of Finance, which writes the governor’s budgets. The problem, he added, is that revenues are down — they came in $665 million below expectations, according to the latest state bulletin — and the economy is softening in several areas.

“When he (the governor) signed this year’s budget, on that very day he said there was a $6.1 billion shortage. The question is, ‘What has happened since then?’ What has happened is that we’ve taken them down (revenues) as a result in the slump in the housing market and the problems in the subprime mortgage market. There are many things,” Palmer added.

“If you are not building as many houses, you are not buying construction materials; if you are not building houses, you are not buying a lot of big-ticket, durable items, like heating and home furnishings. There were also falls in employment, 31,000 fewer jobs in construction, 13,000 fewer in the financial sector (over a year before),” he said.

There is some irony here: Shortly after his election in the fall of 2003, Schwarzenegger faced a $12 billion to $14 billion shortage, and he proposed several billion dollars worth of cuts as part of the solution. An improving economy later got him — and lawmakers — off the hook and allowed them to avoid deep cuts. The outlook for economic improvement now, however, is not as rosy as it was then.

But the opposition to taxes from legislative Republicans remains the same, even though the Legislature’s nonpartisan fiscal adviser, Legislative Analyst Elizabeth Hill, has included new taxes among the necessary options to balance the books. Republicans, bitterly opposed to tax hikes, contend that the state should cut spending rather than raise taxes — a position that is politically safe in their districts but at odds with the advice of their own adviser.

Sen. Bob Dutton, R-Rancho Cucamonga, has asked the governor to invoke a provision of Proposition 58, the 2004 voter-approved initiative that authorizes the governor to call lawmakers in to focus on budget deficits. Under Proposition 58, the governor would submit a specific plan to fix the budget, and the Legislature would have 45 days to act on it. If lawmakers can’t meet the 45-day deadline, they would be barred from acting on any other measures until the governor’s proposal is resolved.

The fiscal emergency declaration is similar to a special session, except that in calling for a special session on the budget, the governor does not need to submit a specific bill. In addition, although lawmakers by law are compelled to return to the Capitol at the behest of the governor, they cannot be forced to take action. Special sessions currently are under way on water and health care reform.

“By any reasonable definition, a budget deficit that has grown from a projected $6.1 billion to $10 billion over the course of just a few months is a fiscal crisis,” said Dutton, a member of the Senate Budget Committee. Dutton, who was referring to Hill’s revised deficit estimate last month of $10 billion, has urged the governor to declare a fiscal emergency under Proposition 58.

The request raises suspicions of Democrats, who note that Republicans have made similar requests in the past, at least in part to gain political leverage. Democrats, too, have broached the issue — and were ignored by Republicans.

“In August, we called for a bipartisan budget reform panel, and we haven’t got much interest in it so far,” said Alicia Trost, a spokeswoman for Senate Leader Don Perata, D-Oakland, “The main problem is that we have to fix what is fundamentally wrong with the budget. We have to consider everything, and already we have the (Assembly Republicans) saying taxes are off the table.

“Everything should be on the table, and we have to consider everything.”

“We all did all the tricks. Our numbers are down from last year. We are going to have to make the tough decisions this year. Whatever that deficit figure is, it doesn’t do it justice,” Trost added.