Other states cut back

California borrows

State's new spending plan will close the budget gap, but with $17 billion of debt

August 01, 2004|By Evan Halper | Evan Halper,LOS ANGELES TIMES

SACRAMENTO, Calif. - The tobacco state of Virginia is raising cigarette taxes tenfold. Illinois will make do with a work force 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, as economic recession gripped the nation, 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 relies 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 spending plan signed into law yesterday 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. 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 University of California, Los Angeles 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 that voters approved in March. The rest will come in several billion dollars of IOUs to various programs and a big 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, a Republican.

There is continuing concern on Wall Street.

John Hallacy, managing director of municipal research at Merrill Lynch, said he is 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, a Democrat.

But Schwarzenegger said he has a solution in the works.

On Tuesday, his administration will formally unveil a 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 is not expected to materialize for some time. The task force projects that if all recommendations were adopted, only $6 billion would 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.

Other states have been faster to respond.

Across the country, many governors and lawmakers began two years ago to build bipartisan support for politically unpopular policy decisions needed to at least begin balancing the books.

In New York, Republicans defied their party's governor last year to join with Democrats in overriding his veto of $2.5 billion in sales and income taxes. Ohio's GOP-dominated Legislature joined with a Republican governor to approve $3 billion worth of tax increases over two years. New Jersey raised taxes on the wealthy and put new surcharges on tires and plastic surgery.

The California budget signed yesterday brings down spending by making cuts to local government, public universities and schools.

But most of those reductions are short-term cuts and will face state officials again in 2006. They came with guarantees from the governor that spending in those places - which account for more than half the state's general fund - will go back up significantly in two years.

They are guarantees that Schwarzenegger and lawmakers may be unable to back away from.

"The political pressure is going to be intense to spring back and provide the money that was cut," said David Hitchcock, a director of public finance ratings at Standard & Poor's in New York. "Schools and local governments are planning and budgeting on the assumption that if they just get through the next couple of years the money will be there."

The Los Angeles Times is a Tribune Publishing newspaper.

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