Annual dose of budget reality

One of the more jarring annual ceremonies of Sacramento’s budget negotiation season is the nonpartisan legislative analyst’s springtime cold-water splash on the excessively optimistic fantasies of the proposed general fund. Last week’s report was a classic of the genre.

Legislative Analyst Elizabeth Hill’s bottom line was that California would be left with multibillion-dollar deficits for the remainder of the decade because of Gov. Arnold Schwarzenegger’s reliance on one-time money from privatizing the state lottery and student loan guarantee agency while also seeking to shift voter-mandated spending away from public transit and tobacco revenues.

Hill warned that the current budget leaves California facing a peak $5 billion deficit in two years, followed by shortfalls of at least $3 billion annually until 2011. She said the governor’s $145.9 billion May budget revision overstates California’s projected $2.2 billion reserves by 75 percent because it doesn’t show hundreds of millions of dollars in pay raises set for prison guards.

Hill also said the budget overstates how much tax revenue should be expected from Indian casino expansion, and it does not adequately reflect the likely property tax drop from the housing market slowdown. She even warned that the governor’s plan to divert $830 million in gas tax revenue from public transit might be illegal under state law.

As of now, the governor’s 2007-08 draft budget posits a $1.5 billion operating deficit. But giving credit where due, when Schwarzenegger took office in November 2003, he had to cope with Gray Davis’ record-breaking $16.5 billion deficit, and California was on track to declaring bankruptcy.

While the governor resisted intense pressures to raise taxes, the economy rebounded. State revenues grew 37 percent, but at the same time spending grew 30 percent. Schwarzenegger made serious attempts to reduce outgo each year, but he was hamstrung because some 92 percent of the budget is already set aside under existing laws and spending formulas. The remaining 8 percent of discretionary funds is primarily in Health and Human Services, public safety or transportation.

Now that the legislative analyst weighed in with the annual reality check about which budget assumptions are illusionary, hard bargaining commences between the Republican governor and the hard-agenda legislators from both parties. The final compromise is unlikely to bear close resemblance to what is on the table and will depend heavily on financial legerdemain.

In Sacramento’s partisan political atmosphere, the underlying obstacle to meaningful budgetary reform will not disappear soon: The spending required by law — billions imposed by voter propositions — expands faster than revenues collected from taxpayers. For a year or two, that gap appeared to be closing. But the housing market slump seems to have put that dream on hold. Things will not get better unless the state’s elected leaders start displaying an unaccustomed increase in fiscal discipline.

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