Same budget hole, but with a smaller shovel

Gov. Arnold Schwarzenegger will unveil his quickly assembled roadmap to solve the state’s budget crisis Thursday. But the proposal is notable for what is not expected to be in there. Schwarzenegger’s focus on budget reform that held up the last round of talks will be gone from the post-May 19 budget plans, as will the prospect of going to voters to help the state out of its immediate financial woes.

There is expected to be lots of blood in the governor’s proposal, with most of the solutions coming from deep cuts to social services.

But the Legislature’s ability to cut programs is also more limited than it was last time around – in part because of federal restrictions on stimulus dollars that preempt cuts to certain state-funded programs, including Medi-Cal and education.

For example, in a regular budget year, the state would have the ability to reduce or suspend the money guaranteed to schools under Proposition 98, as long as there was a two-thirds majority supporting that suspension. But tweaking Proposition 98 is not a viable option this year because it would place billions of federal dollars at risk.

Democrats estimate there is only about $40 billion worth of budget programs eligible to be cut – about 43 percent of the overall general fund budget.  The rest is guaranteed automatic money that can not be touched. The net effect, they say, will be deeper cuts in a smaller set of programs to solve the next budget problem.

Those cuts will most likely come in the areas of health and human services and public safety.

Schwarzenegger spokesman Aaron McLear said the governor would be looking to balance the budget “primarily through cuts to government spending. I would not expect the governor to support any kind of revenue increases, whether by two-thirds or majority vote,” he said.

McLear said there would be some small exceptions to that rule. The governor is likely to revise his plan for a new $100 million fee for emergency response to help firefighters, a plan that he unveiled during the last rounds of budget talks. But the governor would not back a plan like the one passed by Democrats in December that mixed billions in cuts with billions of dollars in new revenues.

Democrats concur that cuts will be a centerpiece of the next budget deal. But they are also looking at deferring various state payments, new borrowing and other ways to find bits of new revenue to help the state out of what the governor says could be a $21 billion hole.

That $21 billion is slightly inflated. It still assumes the state maintains a $2 billion budget reserve. But the premise that the budget gap may only be $19 billion instead of $21 billion offers little solace.

Both Assembly Speaker Karen Bass, D-Los Angeles, and Senate leader Darrell Steinberg, D-Sacramento, have said that painful cuts will be the centerpiece of the next budget – particularly if the measures on the May 19 ballot fail. The budget deficit is estimated to be about $13.4 billion (with no reserve) if the measures pass, and $19.3 billion if they are defeated.

Timing is also an issue. The state could be facing a cash shortage as early as July, placing additional pressure on political leaders to act quickly. The state’s legislative analyst, Mac Taylor, says the state could need as much as $23 billion in short-term borrowing throughout the year to meet its current budget obligations. But, he warned, tight credit markets and a large amount of public debt will make it difficult for the state to secure those short-term loans.

The longer the stalemate continues, the harder it will be for lawmakers to dig out from the problem. The amount of money the state can save from making cuts – or earn from new revenue programs – diminishes the amount of money the state would see from those cuts or new revenue proposals.

Just because the governor and legislative leaders are not talking about new revenues does not mean there is a shortage of new schemes to bring new revenues into the state.

First among them is borrowing up to $2 billion from local governments and additional money from transportation projects. Voters recently altered state budget rules, and placed limits on state lawmakers’ ability to borrow money from locals and transportation projects. But local governments are already rallying to preempt state raids on their budgets. Eva Spiegel of the League of California Cities said, “We are geared up for that to be one of the options” unveiled this week, but that taking money from cities “would be completely devastating. Locals can’t be the answer to bailout the state.”

Democrats may also reprise the so-called “single flip” that was part of their December budget package. That could save the state more than $1 billion in sales tax money that currently goes to fund local governments, and could effectively amount to a 0.25 cent sales tax increase without a two-thirds vote.

There is also a proposal passed by Democrats last year that would lower various taxes and replace them with a host of new fees. Democrats argue the package could be passed without a two-thirds majority, therefore bypassing the need for Republican support. Republicans and anti-tax groups challenged that notion, and are ready to go back to court if Democrats go that route again.

Among the fee proposals currently circulating is a new fee on alcohol. A measure by Assemblyman Jim Beall, D-San Jose, was killed earlier this year, but the concept could be revisited in budget talks. A fee of “10 cents per drink” could bring as much as $1.4 billion in new revenues, according to Beall’s projections.

Another idea is a new sales tax that could cover golf courses, professional sporting events, ski lift tickets and other forms of recreational activities. Many Democrats are also advocating for a new oil severance tax – a levy on every barrel of oil that is pulled out of the ground in California.

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