By Kevin Yamamura
Published: Monday, May. 23, 2011 – 12:00 am | Page 1A
Last Modified: Monday, May. 23, 2011 – 6:32 am
Like many cash-strapped families, California paid bills late and ran up its credit cards when the economy tanked.
Gov. Jerry Brown says it is time to straighten up the state’s finances, in part by extending higher taxes – on income, sales and vehicles – worth about $10 billion a year.
Under the governor’s new budget schedule, much of the state’s tax revenue growth over the next two years would help clean up balance sheets rather than buy more school days or restore Medi-Cal cuts.
The state would generally wait to pump more money into programs until 2013-14. Despite significant revenue growth in the meantime, schools and low-income residents would generally have to wait to claw back from the Great Recession.
“Paying off the remainder of this budgetary borrowing should be the top priority of any new revenue received in the coming years,” Brown’s budget says.
Budget analysts and ratings agencies have praised the governor’s new effort to prioritize the so-called “wall of debt.” But his plan will have to overcome opposition in the Legislature, where Democrats are eager to restore unpopular cuts and Republicans spurn additional taxes.
Devoting money to unraveling gimmicks reduces the amount the state can spend on health care, schools, social services and public safety in the short run. That’s one reason lawmakers in the last decade have opted to carry budget debt rather than buy it back, even during the housing boom several years ago.
“The mighty temptation is to use that money (for programs) instead,” said Brad Williams, a former fiscal analyst for the state.
Even Brown’s earlier budget relied on accounting tricks, such as a $2.2 billion payment delay to K-12 schools and community colleges, as well as about $2 billion in internal borrowing.
The governor changed his mind when the state began seeing more income tax revenue than expected, enough to boost the bottom line by $6.6 billion. He didn’t eliminate all the borrowing in his budget, though he has less now.
Brown’s plan essentially proposes waiting two to three years to restore programs – an eternity for term-limited legislators.
Jean Ross of the California Budget Project, which advocates for low-income families, said the state should strike the right balance between paying down debt and providing programs.
“It’s like a family: You pay down the high-interest credit card rates first,” Ross said. “But I think there were some cuts that were very unwise that also will have high costs to society.”
The Brown approach sounds similar to what Republicans have advocated – capping spending growth and diverting any additional dollars to paying down debt.
Republicans want a constitutional amendment to ensure the state sticks to that plan. But they remain opposed to the governor’s taxes and say his new focus on budgetary holes is designed to make the current deficit seem worse than it is.
“It appears he’s overstating the problem to make his case for taxes because, lo and behold, he was blessed and cursed with $6.6 billion in new revenues,” said Sen. Bob Huff, R-Diamond Bar.
Brown identified $34.7 billion in borrowing that the state is carrying. The “wall of debt” portfolio contains a wide range of items, but they basically fall into two categories: loans with repayment schedules and payments that have no due date.
The debt estimate does not include the state’s unfunded liability for pension and health care payouts, which some analysts have estimated in the hundreds of billions, nor does it include $81 billion in bonds the state must pay off.
It includes $7.1 billion in outstanding “Economic Recovery Bonds” voters approved at the behest of then-Gov. Arnold Schwarzenegger to reduce the state deficit in 2004.
Schwarzenegger inherited that deficit from ousted Gov. Gray Davis, but Democrats argue that Schwarzenegger also borrowed to slash the state’s car tax.
Other examples include $5.1 billion in borrowing from special fund reserves, which includes fees paid to state regulatory boards; $1.5 billion in money owed to low-performing school districts; and $1.9 billion in funds borrowed from local governments in 2009-10. All are scheduled to be repaid.
The list also includes delayed payments to various entities that could continue into perpetuity with very little consequence.
In past years, the state has delayed employee paychecks, Medi-Cal reimbursements and pension fund contributions to save money one time. Reversing them would set the accounting straight but result in few program benefits. Even Brown’s plan doesn’t plan to repay them in the next four years.
There is one area where reversing payment deferrals could have a significant impact: K-12 schools and community colleges.
Lawmakers have delayed $10.4 billion in payments to schools, roughly equal to 20 percent of their funding. The amount is so large that districts have taken out short-term loans and exhausted reserves to cover the state’s IOUs.
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