By Kevin Yamamura
Published: Sunday, Nov. 21, 2010 – 12:00 am | Page 1A
Last Modified: Sunday, Nov. 21, 2010 – 9:30 am

As Gov.-elect Jerry Brown confronts a $25.4 billion shortfall, few in the Capitol think he’ll be able to wipe out the state’s long-term budget problems in his first year, or even his second.

The state, for example, could eliminate funding for welfare-to-work, prisons and California’s two university systems and still fall short of balancing its spending plan.

Most expect Brown will spend the next four years just as Gov. Arnold Schwarzenegger did the last three – swimming in red ink.

What shouldn’t happen, fiscal experts say, are budget deals that continue to paper over the problem with temporary fixes or gimmicks with the idea that the economy will rebound and bail everyone out.

“I’m not saying we haven’t done tough things,” said Schwarzenegger’s former finance director, Mike Genest. “But when you stack them up against what’s left in the $25 billion problem, we didn’t do enough. None of the experts think we can keep delaying this. It’s time to pull the bandage off, whatever that may mean.”

Because the last three budgets relied heavily on temporary patches, California’s structural gap between revenues and expenditures continues.

That imbalance will persist unless Brown and state leaders impose permanent government reductions and ongoing revenue hikes, according to Legislative Analyst Mac Taylor. He suggests that if state leaders chip away at the permanent problem each year, the state could free itself of deficits by 2015-16.

Rapid rebound unlikely

Unlike the federal government, California is required under its constitution to balance its budget each year. During recent downturns, state leaders have relied on ephemeral solutions to tide them over until the next economic rebound.

Politically, lawmakers and the governor have found it easier to sell temporary tax hikes or spending cuts to powerful interest groups, using economic woes as a justification. But the economy is unlikely to bail out the state as it did during the housing and technology booms.

“What’s different now is that most economic forecasters are not predicting that type of rapid bounce-back,” Taylor said. “If you can’t count on the economy to save you, you need to make your budget actions (permanent). That’s a hard decision. It’s easier to reduce somebody’s benefits for two years knowing they will return after that period.”

California faces an immediate $25.4 billion deficit, according to the analyst. The deficit has two parts. The state’s current budget has a $6.1 billion hole, while the 2011-12 budget faces a $19.3 billion gap.

The $6.1 billion problem emerged mostly because lawmakers and Schwarzenegger relied on unrealistic assumptions when they enacted their record-late budget last month.

And the $19.3 billion gap exists because California has a structural imbalance between how much money it receives and how much it spends. That shortfall will recur for the foreseeable future unless lawmakers and Brown make long-term changes.

Brown described the overall deficit Tuesday as “an enormous, unprecedented gap,” and said he hopes to gather ideas on how to proceed, though he has not yet offered specifics.

“There’s no one overwhelming challenge other than the fact that there’s a gap of $25 billion, which is large, and not a lot of people have many good ideas on how to deal with it,” Brown said.

The analyst recommends that the state solve the $25.4 billion problem with $10 billion in permanent changes to state government and $15.4 billion in temporary solutions of the sort California has used in the past.

One-time fixes, tiny steps

Persuading the Legislature to pass $10 billion in permanent budget changes would be a monumental task, judging by its recent performance. To solve the last two budgets, they enacted $8 billion to $10 billion in temporary tax hikes. They relied on $14 billion in stimulus aid from the federal government. They attempted to sell off state property. They used accounting tricks. They furloughed state employees.

Temporary budget solutions are easier for interest groups and lawmakers to accept, notes Fred Silva, a former legislative budget aide and adviser with the think tank California Forward.

“The advocates,” he said, “… want to say to their clients, ‘OK, I know this year was hard, was really tough, but we’re going to set ourselves up to really benefit next year.’ ”

Lawmakers and Schwarzenegger also approved a handful of permanent measures with relatively minor savings in the near term. They eliminated automatic cost-of-living adjustments for social service programs, which may save about $400 million in 2011-12 and as much as $3 billion by 2015-16 – assuming the COLAs are not restored.

They also reduced pensions for future state employees and increased contribution requirements for existing workers. They eliminated some Medi-Cal benefits, including adult dental care, and moved elderly and disabled patients into managed care.

Such changes could help the 2011-12 budget avoid about $2 billion in additional costs.

Besides that, Taylor notes, state leaders agreed to cut education funding last year and suspended the Proposition 98 guarantee this year. Though the state must eventually push education funding back to higher levels, the recent cuts save the state money in the short run.

It will likewise be difficult to find permanent ways of boosting revenue – as opposed to accounting shifts, borrowing and asset sales.

Voters’ conflicting wishes

Brown pledged during the campaign that all new taxes must receive voter approval. In the last two years, voters rejected an extension of the temporary tax hikes, as well as an $18 annual vehicle surcharge to pay for state parks.

“I think Gov. Brown has recognized as well that the appetite for new revenues just isn’t there,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “I think the solution has to come almost exclusively from the spending side.”

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