The state budget: funny money and quicksand

The Schwarzenegger administration, like others before it, knowingly includes items in its budget proposals that deliberately overestimate revenue and ease the pressure for cuts, loans or new taxes – or all three.

“When the governor proposes these things, there is a huge incentive for everyone, including the Legislature, to go along with it because it saves pain, even though everybody knows it’s a fiction,” said one veteran Capitol fiscal expert and an adviser to three governors. “It’s pretending the budget is in balance when it isn’t.”

The pretense is more than semantics.

By “scoring” dubious revenues, the magnitude of the problem is cloaked. For example, the governor’s latest budget estimates a $19.9 billion shortage on a 2010-11 General Fund draft of roughly $83 billion. The reality is that the gap is probably wider by several billion, says the Legislature’s fiscal analyst, partly because of the scoring, partly because of lawsuits challenging the current-year budget’s provisions and partly because “federal government relief will total billions of dollars less than the governor wants.”

“Accordingly, to balance the 2010-11 budget, the Legislature and governor eventually may have to address a budget problem a few billion dollars larger than the administration identifies,” said the Office of the Legislative Analyst in its January 12 overview.  

Despite the legal hurdles, the Schwarzenegger administration — as others before it — have pushed ahead with their proposals.

“You can’t build the budget on the assumption that you are going to lose and be sued on every issue,” said H.D. Palmer, spokesman for the Department of Finance, which writes the governor’s budget. “Actually,” he added, when the state is challenged legally, it often does prevail.”

The use of funny money is not new. Earlier administrations did the same thing.

One memorable example: The sale of Agnews State Hospital in the Silicon Valley, scored in successive budgets as a revenue producer, finally was sold. “It was a classic. They must have scored Agnews seven times before it sold, and each time it went up and got more valuable,” said one fiscal expert familiar with the issue. The 81-plus acres finally sold for $51 million in the mid-1990s.

The administration several months ago sought to sell off a piece of the State Compensation Insurance Fund to capture $1 billion, a move that fiscal analysts in and out of government said was poorly thought out and unworkable even before the ink was dry on the proposal. Workable or not, the sale can’t go proceed now because of litigation.

“We were ready to go forward and have been prepared to go forward, but there is a lawsuit challenging the ability of the state to do so,” Palmer noted.

The governor, several times, inflated the level of tribal gaming revenues on the General Fund by potentially hundreds of millions of dollars. He fruitlessly sought to privatize the Ed Fund – the repository of student-loan payments – and wildly overestimated its value at $1 billion.  

He sought to privatize the lottery, unsuccessfully, despite expert advice that the move was not feasible, and earlier in his governorship he factored $450 million in revenue into his spending proposal based on the state’s projected share of punitive damage award dollars – money that never arrived. An LAO assessment at the time estimated the state’s potential take at $60 million – less than a one-seventh the figure predicted by Schwarzenegger. But even that estimate was wildly optimistic.

 He sought to sell and then lease back state office buildings, and scored the savings at $300 million; the plan died, but is in the works again this year, probably closer to $200 million In his latest budget, he wants to save perhaps $200 million by releasing imprisoned, undocumented immigrants because the federal government isn’t paying fore their incarceration.  

He had counted on $100 million a year from a hotly contested offshore oil-drilling project that has been turned down by the State Lands Commission, thrice opposed by his own choice for lieutenant governor, Sen. Abel Maldonado, R-Santa Maria, and disliked in the Legislature. The administration would like to see the project reconsidered and approved by the State Lands Commission, or given the go-ahead in a bill approved by the Legislature. Last year, legislation to do that made it through one house.

One plan, to receive upfront a share of tobacco settlement money due to California did work out. It remains an example of successful, creative financing, worth more than $1 billion.

“Some of these revenue proposals have worked out but lots of them haven’t, based on either being too optimistic or too complicated for the state to ultimately pull them off,” said Michael Cohen, deputy legislative analyst.

One former ranking state fiscal expert said the attitude in several administrations, especially as it relates to getting federal money, was “nothing ventured, nothing gained.”

“Basically, the feeling was that if you didn’t go after it, you wouldn’t get it, so what did you have to lose?” said a former budget expert.