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State Pushes Problems Into Future

Across the nation, lawmakers raise taxes or cut programs to resolve budget shortfalls. But in California, big-time borrowing is the answer.

August 01, 2004|Evan Halper | Times Staff Writer

SACRAMENTO — The tobacco state of Virginia is raising cigarette taxes tenfold. Illinois will make do with a workforce smaller than it had in 1983. And New Jersey will force its millionaires to share more of their wealth with the state.

Virtually every state facing a major budget shortfall this year has made painful policy choices. Except California.

A year ago, amid the lingering effects of economic recession, state governments across the country were coping with deficits, shortfalls and financial angst of all kinds. But now, as other states are making their way back into the black, California continues to push its problems into the future with borrowing.

Corina Eckl, a state budget expert for the National Conference of State Legislatures, said no other state budget relied on as much borrowing as California's.

"When you look at the numbers, California stands alone. We are not seeing widespread pushing forward of budget problems," she said. "Most states are trying to resolve them in their entirety in fiscal 2005."

The $105.4-billion spending plan signed into law Saturday by Gov. Arnold Schwarzenegger includes a budget shortfall now expected to total as much as $17 billion over the next two years.

Even though the governor hopes to enact a sweeping reorganization of state government in the coming year that could save billions, the state's lingering debt looms like a long hangover, with today's spending causing pain years into the future.

The reason is simple: The state is making few sweeping spending reductions to keep the bills from piling up. And there is no plan to bring in more tax money to pay them in full. So California continues its credit card binge.

"Other states are going to be laughing at us for the way we have handled things," said Michael Bazdarich, a senior economist with the UCLA Anderson Forecast. "It's worrisome."

The budget Schwarzenegger signed is balanced with at least $15.6 billion of borrowing. The biggest chunk of that is $11.2 billion from the deficit bond package voters approved in March. The rest will come in several billion dollars of IOUs to various programs and a $920-million loan to make the payment into the pension fund for state workers.

"By 2006, this state is going to be in a deep, deep hurt unless this state has a tremendous recovery," said state Sen. Bruce McPherson (R-Santa Cruz).

The situation has also prompted continuing concern on Wall Street.

John Hallacy, managing director of municipal research at Merrill Lynch, said he was still waiting to see the governor summon lawmakers into the small smoking tent outside his office to extract far-reaching budget reforms. "We haven't seen anything come out of that tent yet other than smoke," he said.

An Assembly Republican staff analysis of the budget underlined that point: "This budget," it says, "contains none of the major reforms sought by the administration this year."

Some Democrats feel the same way. "This is a budget that turns today's problems into tomorrow's problems and compounds them with interest," said state Sen. Debra Bowen (D-Marina del Rey).

But Schwarzenegger said he had a solution in the works.

On Tuesday, his administration will formally unveil a controversial proposal for a top-to-bottom reorganization of government that projects savings of tens of billions of dollars by 2010. But opposition to the plan is already beginning to form among a number of powerful interest groups, including public employee unions and the environmental lobby.

The governor's task force estimates that it has found ways to save $32 billion over five years. But many of the proposals have been rejected in the past and most of the projected savings would not be expected to materialize for some time. The task force projects that if all recommendations are adopted, only $6 billion will be realized by June 2006.

Critics of the proposal charge that it was put together in a secret process that included significant input from business groups while largely locking out activists for other interests.

The administration abandoned far less ambitious reforms in the draft budget it presented in January after running into intense political opposition.

Even so, administration officials say they are confident that an improving economy, together with projected savings from the overhaul and other reforms, will end projections of never-ending budget shortfalls.

"Those projections aren't going to happen," said Department of Finance Director Donna Arduin. "They assume the budget doesn't get balanced next year."

At this point, however, few in the Capitol are confident that the administration's reorganization plan -- called the California Performance Review -- will lead to the kind of savings its organizers are talking about.

Senate President Pro Tem John Burton (D-San Francisco) said most of the plan stood little chance of ever being enacted.

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