Fierce budget parley likely despite more cash on hand

The Capitol’s state-budget dance has begun, and the governor hopes that this
year it will be a quick two-step. First, resolve the bonds to face voters in
November. Then, flush with new money from a strong economy, approve a
2006-2007 spending plan of perhaps $127 billion. Above all, keep the bonds
and budget separate.

“That’s because the budget bill is a leverage point that the Legislature can
use against the governor on the bonds. It gives the Legislature control
because of the timing,” says Bill Leonard, a Republican and former
legislative leader who served in both the Assembly and the Senate. “They can
say, ‘We’ll agree to this bill if you adjust your budget.’ So it definitely
makes sense that they [the governor’s staff] want it separate.”

“One should not be predicated upon the other,” said Republican Governor
Arnold Schwarzenegger’s budget spokesman, H.D. Palmer. “We can get a
bipartisan bond package to voters, and we can get a budget out on time.”

But dangers surround this year’s budget–any two-step may not necessarily be
quick.

Although there is an estimated $2.3 billion in extra cash from an improving
economy, the budget fight is likely to be difficult, as usual. In 30 years,
during good and bad times, governors have signed the budget on time only a
half-dozen times. Both of Schwarzenegger’s earlier budgets were signed late.
Although revenues will increase, there are a series of factors that may
erode the expected windfall.

First and foremost is the structural deficit. Schwarzenegger’s January
budget proposal does not eliminate the nagging, year-to-year deficit of $4
billion to $6 billion, although it seeks to reduce it. Even the governor’s
partisans in the Legislature say getting rid of that hole will take two more
years at best, but more likely five to 10 years.

The state could be on the hook for $500 million to resolve federal legal
challenges prompted by the state’s flawed prison health-care system. On
Monday, an administrator appointed by U.S. District Judge Thelton Henderson,
as planned, took direct control of the correctional department’s medical
program, usurping state lawmakers’ authority in this costly, critical area.
Schwarzenegger’s finance director, Mike Genest, visited San Quentin this
week to discuss health-budget issues.

The governor, who tapped education funds to balance an earlier budget, is on
the hook for what education groups say was his promise to repay schools at
least $2 billion. Critics charge that Schwarzenegger reneged on that
commitment, which drew the wrath of the Democratic foes, led by the
California Teachers Association. The issue is all but certain to arise again
as the governor faces re-election.

Lawsuits challenging diversions of money from pension and welfare-to-work
accounts–perhaps $630 million in one and $500 million in the other–could
further drain state resources.

Another wild card is California’s softening real-estate market.

Voter-approved guarantees for public schools and community colleges depend
in part on property-tax revenues, which decline if values drop. The state
must then make up the difference to satisfy Proposition 98’s rules. The UCLA
Anderson Forecast says a housing slump will pinch the economy over the next
two years, and that a combination of a housing slump and spiraling interest
rates could deepen the blow.

Combined, the obligations could easily eat up the $2.3 billion in extra
money.

“We’re waiting to see what happens. We’ll know more when the tax receipts
come in,” Palmer said.

But the governor is hoping to get a bond package on the ballot before the
budget talks begin heating up. Schwarzenegger has asked lawmakers to place a
$30 billion to $35 billion infrastructure-bond proposal on his desk by next
month before Legislative Analyst Elizabeth Hill issues her revised estimate
of the spending and revenue in the governor’s budget blueprint. Hill’s
report, due May 12, is based on tax receipts accruing after the April 15
income tax filing deadline, and serves as the bible for Capitol budget
writers as they launch their final negotiations.

The Republican Schwarzenegger, up for re-election, wants to separate the
bond negotiations from the budget negotiations, fearing that discussions
over one may imperil the other in the Democrat-controlled Legislature. Bonds
or not, election years can be tough on budgets. When former Governor Gray
Davis was up for re-election in 2002, the budget was stalled for more than
two months. Former Governor Pete Wilson was luckier: His re-election-year
budget was only a week late.

One issue dear to many Democrats–funding for the elderly, blind and
disabled–took a hit in last year’s budget, with cost-of-living adjustments
frozen for both the first quarter of this year and next. The payments
average about $825 a month, and for many it is their sole source of income.

Schwarzenegger is viewed as open to negotiation on sensitive cuts, even by
his critics. “My immediate sense is that he’s trying to figure out a way to
do the right thing,” says Ned Dolejsi, executive director of the California
Catholic Conference, which opposed freezing those COLAs. For example,
Schwarzenegger favors providing $1.5 million to help low-income people with
naturalization assistance.

The multibillion-dollar bonds’ debt service could affect the money available
for social needs, added Steve Pehanich, executive director of Catholic
Charities of California.

“The size of the bonds is a concern to social services,” he said. Concerns
over roads, levees, transit systems and water projects should accompany
concerns for social programs. “We expect our legislators to take it
seriously and find the right balance for the common good.”

The governor’s Republican allies are preparing for the fight. What had been
seen as relatively easy budget parley because of the extra money may become
something far different for a spending plan that has $92 billion in General
Fund money. That figure is expected to swell dramatically after the May
revise.

“Unfortunately some of our colleagues will want to expand existing programs
and set up new programs,” said state Senate Republican leader Dick Ackerman
of Irvine. “We will have some additional revenue, but our push will be to
try and reduce the debt and reduce the year-to-year deficit.”