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Pillars of State Budget Look Shaky

Billions in borrowing and the hike in the car tax are under attack in the courts. But the finance director calls concerns overblown.

October 02, 2003|Evan Halper and Jeffrey L. Rabin | Times Staff Writers

SACRAMENTO — The budget agreement that California lawmakers adopted two months ago while struggling to plug a $38.2-billion shortfall is beginning to unravel.

About $1.2 billion that budget makers were counting on from American Indian gambling taxes and state work force reductions has so far failed to materialize. An additional $2 billion in borrowing has been blocked by a judge. And legal experts say the linchpin of the entire budget -- a $10.7-billion bond sale -- could, for the same reasons, go down in court.

State officials say they are confident they will win the lawsuits, but bond analysts and others are less sure. If the state does lose, the governor -- be it Gray Davis or one of the candidates seeking to replace him in a special recall election Tuesday -- could be embroiled in a fiscal crisis as severe as last year's and be forced to find other ways to raise revenue or lower expenses.

State Finance Director Steve Peace said the concerns are overblown. He argued that the blocking last week of what he called a relatively minor bond sale by a Sacramento County court -- which set off much of the anxiety about other anticipated revenue streams -- is not a sign that the budget is falling apart.

"Every budget has implementation uncertainty in the beginning," Peace said. "This budget is actually in good shape."

In the first quarter of the fiscal year that began July 1, state coffers received $430 million more than expected, a significant boost of cash to help keep the books balanced, he said.

Yet investors and lawmakers have been jolted lately by other parts of the budget. After the bond sale was blocked, the rating agency Standard & Poor's advised investors that if other borrowing runs into trouble, the state could find itself having "liquidity concerns" by fiscal year's end. In effect, California would be in danger of running out of money again.

Consider that:

* A Sacramento Superior Court judge last week blocked as unconstitutional a $2-billion bond sale.

The state had been planning to sell the bonds to cover its annual payment to the government employee pension fund -- a technique that would have freed up general fund money to pay down the deficit. At the urging of the Howard Jarvis Taxpayers Assn., the judge refused to permit it, citing a 19th century provision in the California Constitution that prohibits borrowing more than $300,000 over several years to pay routine government expenses without voter approval.

Administration officials had argued that the pension payment was not routine, but something the state is obligated to pay, thus the debt restrictions shouldn't apply. The case is on appeal.

But the court proceedings have delayed the bond sale and will cause the state to dip into budget reserves to make a $550-million pension payment that was due Wednesday.

* The Pacific Legal Foundation, a Sacramento-based property owners- and taxpayers-rights group, is suing on the same constitutional grounds to stop $10.7 billion in bonds that the state wants to sell to pay off last year's deficit. The "deficit bond" debt would be repaid over the next five to seven years. The longest amount of time the courts have allowed the state to borrow for routine expenses has been two years.

Administration officials say they are confident that the maneuver will pass legal muster because the Legislature must appropriate the bond repayments each year with a two-thirds vote, and the state has dedicated half a cent of sales tax upfront to paying back the bond.

"We have 100% confidence the deficit bond sale will go through as planned," Peace said.

Critics say it will be stopped in court as unconstitutional, just as the pension bonds were. And budget experts agree that the critics may have a good case.

"I'm skeptical of how Peace's argument is going to play in court," said Kim Reuben, a budget analysts at the Public Policy Institute of California.

* Reopening American Indian gaming agreements was anticipated to produce $680 million. So far, tribes have expressed little interest in sharing more revenue with the state. Larger tribes now contribute about $130 million.

Only three of 61 California casino tribes have agreed to share revenue -- 3% to 5% -- in return for more slot machine permits. But none of this money has arrived in state coffers, and analysts are skeptical that it will amount to much more than $2 million.

* The budget calls for $1.1 billion in cuts to the government payroll. So far, only about half that amount has been saved through eliminating 19,000 jobs that were vacant and reopening employee labor contracts. But officials acknowledge that thousands of the eliminated positions may have to be reinstated if they are for services considered essential, such as emergency room nurses.

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