Budget Cuts

By Steve Wiegand
swiegand@sacbee.com
Published: Sunday, Dec. 20, 2009 – 12:00 am | Page 24A

Six months into the leanest fiscal year in memory, Gov. Arnold Schwarzenegger and California legislators soon will begin wrestling with a new state spending plan – and a new budget deficit.

And while revenues are in relatively short supply, there is an abundance of aphorisms applicable to the looming budget battle.

Things are never so bad that they can’t get worse.

Lawmakers and the governor spent much of 2009 cobbling together a way to close a $60 billion budget deficit, with the full realization that whatever they did, it wouldn’t be enough to fend off a new deluge of red ink in 2010.

Sure enough, the nonpartisan Legislative Analyst’s Office estimated last month that the state now faces a $20.7 billion gap between what it can expect to collect in revenues and spend over the next 18 months.

That figure includes a $6.3 billion hole for the current fiscal year, which ends June 30, and a $14.4 billion deficit in the 2010-2011 year, which begins July 1.

“And as hard as $60 billion was, closing the (new) deficit is going to be even more challenging,” said H.D. Palmer, spokesman for the governor’s Department of Finance, “for three reasons.”

First, Palmer said, the state can’t rely on another $8 billion in federal stimulus money, as it did this year, although state officials hope at least some aid from Washington will show up.

“Second,” he said, “some of the solutions this year were one-time in nature, and we made that very clear.”

Those “one-time” solutions included budgeting maneuvers such as accelerating the collection of payroll taxes, and postponing the last payday of state workers in the fiscal year until the first day of the next fiscal year.

Third, Palmer said, the state is scraping bottom in cutting some major spending programs because of something called “maintenance of effort.”

That basically means the federal government sets minimum standards for programs such as education and social services that states must meet to be eligible for federal funds.

For example, the state must have enough money available to pay 90 percent of doctors, pharmacies and other providers of Medi-Cal services within 90 days of being billed. If it doesn’t, it risks the loss of billions of federal dollars.

“As we’re putting the budget together, we’re mindful we are close to the bottom in a number of areas” in terms of more cuts, Palmer said.

In addition to the trio of troubles he outlined, lawmakers and the governor also must confront some legal problems.

Among them are lawsuits challenging the legality of $489 million in budget vetoes the governor made in July; disputing his claimed right to furlough state workers; disputing the “borrowing” of $1.7 billion from local redevelopment agencies; and fighting a federal court order to reduce the prison population.

The state already lost one budget-related lawsuit, when an appeals court ruled that the state illegally grabbed about $1 billion in gas-tax money meant for local transportation issues, diverting it to pay California’s general fund bills.

The legislative analyst’s $21 billion budget gap forecast assumes that the state will prevail in the still-active court cases. If it doesn’t, the hole gets deeper.

Necessity is the mother of invention; desperation is the father.

The California constitution requires the governor to produce a balanced budget proposal by Jan. 10, and Schwarzenegger plans to do it Jan. 8.

Just how he proposes to balance it is unclear. The governor has ruled out tax increases since last May, when voters soundly rejected a proposal for $16 billion worth of tax-hike extensions. Most of the state’s major programs can’t be cut significantly deeper without losing billions in federal funds, thus making things worse.

The best guess under the Dome is that Schwarzenegger’s deficit-patching proposal again will include cuts, borrowing, accounting sleights-of-hand and a reliance on federal largesse. In place of direct tax hikes, look for indirect increases, or “loophole closing.”

It won’t be easy.

“The scale of the deficits is so vast that we know of no way that the Legislature, the governor and voters can avoid making very difficult choices,” the Legislative Analyst’s Office understated in its November “Fiscal Outlook.”

We’re all in this together.

Legislators and Schwarzenegger patched the monstrous $60 billion budget hole this year with $31 billion in spending cuts; $12.5 billion in temporary tax hikes; $8 billion in federal stimulus money and $8.4 billion in accounting gimmicks, many of them the it-only-works-once variety.

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