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Breathing room

November 21, 2005

POOF! THERE GOES NEXT YEAR'S state budget crisis. A booming economy is generating enough new revenue to cover projected expenditures in the fiscal year beginning July 1. If the projections of Legislative Analyst Elizabeth G. Hill hold, it would be the first time in five years that the Legislature and the governor would not have to scramble to cover budget deficits through borrowing and gimmicks.

There's an important caveat in Hill's assessment of the state's fiscal condition: The good news will materialize only if lawmakers keep spending at current levels. With the big bounce in new revenue, there's bound to be pressure to boost the budgets of some favorite programs that have suffered cuts in recent years. Indeed, some way should be found to pay back to schools the money that Gov. Arnold Schwarzenegger "borrowed" but could not pay back this year.

Otherwise, lawmakers need to restrain their thirst for more spending. In the end, Schwarzenegger may have to use his veto power vigorously to keep the state from going into the red again. Indications are that this could be a one-time revenue bump generated by housing and stock sales. California learned the hard way early this decade not to invest one-time money into ongoing programs.

There's another potential problem. Jean Ross of the California Budget Project, a progressive research group, warns that cuts in federal spending now working through Congress could eat up a good chunk of the surplus projected by Hill. The governor has appealed to congressional budget leaders to drop proposed reductions that would unfairly affect California. These could affect Medi-Cal, food stamps and the welfare program.

Further, the old long-term problem still lurks just over the horizon. Without changes in the system, the budget will slip back into the red during the fiscal year beginning July 1, 2007. The state must either make deeper cuts in programs or raise taxes, or both, to eliminate the built-in deficit. That's not likely to happen in the coming election year, but it would be mandatory in 2007.

The good news is the hiatus in the annual budget crisis can give the governor and the Legislature some breathing room to work out the details of Schwarzenegger's new priority -- a major infrastructure bond issue to begin making up for neglect of the highway system, backlogged water projects and the like. There's talk that the administration is considering a bond of up to $50 billion. Such a large bond would be a serious mistake if it relied on general funds for repayment. The state already is bonded almost to the prudent limit of about 6% of general fund revenues in annual retirement costs.

But there's a way. That is to incorporate in the bond measure a variety of self-financing mechanisms. One being discussed is to assess fees to the beneficiaries of water projects built with bond money. Gasoline taxes could be used to finance highway work; California's gas tax is now at about the national average. The keyword should be that the user pays.

It's important that all parties come together quickly to decide the size of a bond issue and the projects to be included -- otherwise it could become trapped in election-year politics. Both the governor and the Legislature need a victory that will appeal to voters. It's a cliche, but this could be a win-win opportunity.

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