Tuesday, January 15, 2008


Robert Durell / Los Angeles Times
Legislative Analyst Elizabeth G. Hill is looked to from both parties for unbiased advice on fiscal issues.
smf opines: The legislature and the governor ignored Ms. Hill's warning that AB1381
was unconstitutional. This is a chance to see if the lesson was learned.
In fairness, it may be a bit late for a legislative or budget analyst
we may have to send this poor sad puppy straight to the puzzle palace!


Matthew Yi, San Francisco Chronicle Sacramento Bureau

Tuesday, January 15, 2008 04:00 PST Sacramento -- Despite deep cuts in Gov. Arnold Schwarzenegger's proposal to bridge the state's $14.5 billion deficit, nearly half of his budget-balancing plan involves borrowing money, deferring debt payments and counting future tax revenue, according to a report released Monday by the nonpartisan legislative analyst's office.

The governor is proposing to issue $3.3 billion in bonds, delay a scheduled early payment on debt worth $1.5 billion and shift $2 billion of tax revenue that would otherwise be counted in the 2009-10 fiscal year to the coming fiscal year, which begins July 1, the report says.

Legislative Analyst Elizabeth Hill questioned the shifting of revenues from one fiscal year to another.

"In our initial review, we have not yet been able to determine whether this proposal is a reasonable change in accounting practices or merely a convenient way to generate a one-time revenue bump," she wrote in her 23-page report released Monday.

H.D. Palmer, spokesman for the governor's Department of Finance, defended Schwarzenegger's plan, saying the $2 billion accounting change would simply bring the state's system of accounting in line with accounting principles largely used by publicly traded firms.

But some economists on Monday called it an accounting gimmick that wouldn't help solve the state's fiscal mess.

"This shows that even with the magnitude of the cuts that the governor has proposed, you can't solve the deficit with just the spending side of the budget," said Jean Ross, executive director of the California Budget Project.

Sen. Tom McClintock, R-Thousand Oaks, said that such accounting methods plus additional borrowing would only exacerbate the problems plaguing the state budget.

"It sets in motion events that will require even more painful cuts later precisely because of borrowing and accounting gimmicks," he said. "The first law of holes is very important. If you're in one, stop digging. That means stop borrowing, stop Enron-accounting ... and start dealing honestly with the budget."

Just how the governor and the Legislature will solve the fiscal crisis could have immediate impact on California's credit rating.

Fitch Ratings, a credit rating firm in New York, on Monday changed California from "stable outlook" to "rating watch negative," which is a warning to banks and investors that the state has identifiable risks that could potentially lead to lowering the state's current credit rating of "A+."

Most Republican lawmakers favor budget cuts over tax increases. And the governor's proposed spending plan has plenty of cuts across the board, including those that would result in closing 43 state parks, releasing tens of thousands of prisoners and taking billions of dollars from public schools.

But Democrats argue that slashing the budget alone will not be adequate to bridge the deficit.

Assembly Speaker Fabian Núñez, D-Los Angeles, reiterated Monday that all options need to be considered, including closing tax loopholes and eliminating tax credits.

The legislative analyst's report "is more evidence that we should focus on a real and comprehensive approach that makes sure California's expenditures balance with revenues, and that our priorities balance with our values," Núñez said in a written statement.

The analyst also argued that another way to shave the budget deficit would be to cut this year's education budget to the minimum level required by Proposition 98, which sets school funding levels according to the state's revenue.

And with the state tax receipts faltering as a result of the slumping housing market and the overall economy, the state's Prop. 98 obligation is expected to be about $1.5 billion less than what was already approved when the governor signed the budget in August.

Hill said she believes the cuts are possible without hurting classroom instruction by either eliminating or delaying unspent education budget items.

But that's a significant chunk of the budget to overcome, said Kevin Gordon, an education lobbyist.

"There's no doubt that when (the legislative analyst) recommends trying to absorb $1.5 billion hit in the middle of the school year, that's going to send chills down the spine of every educator in this state," he said.

The legislative analyst's report also called the governor's proposal for a spending cap and to potentially expand his powers to make mid-year spending cuts "flawed," arguing that the Legislature should maintain the power to control the state's purse strings.

Department of Finance's Palmer disagreed.

"We think that the Legislature's role would actually be strengthened if the cap were adopted," he said, noting that under the terms of the proposal, the Legislature would be called on to identified areas of priority when cuts would need to be made.

"The Legislature would have the first crack at crafting the kinds of spending cuts to be made," he said.

Hill also said that the spending cap is not needed because most of the cuts could already be made if policymakers could agree.

But Palmer said the governor believes "fundamental reform" is needed.


BUDGET ANALYST CRITICIZES SCHWARZENEGGER'S PLAN: Governor's proposal cuts too deeply, report says. Bond rating agency warns of possible downgrade.

By Evan Halper, Los Angeles Times Staff Writer

January 15, 2008 SACRAMENTO — The state's chief budget analyst warned Monday that Gov. Arnold Schwarzenegger's proposals for closing a $14.5-billion budget gap fail to properly prioritize how the state should spend its money, use questionable accounting methods and would be unnecessarily disruptive to schools and community colleges.

Legislative Analyst Elizabeth G. Hill, whom Democratic and Republican legislators look to for unbiased advice on fiscal issues, is particularly critical of the governor's plan to spare almost no agency or program in calling for state spending to be cut immediately by 10%.

"It reflects little effort to prioritize and determine which state programs provide essential services or are most critical for California's future," Hill wrote in a report released Monday morning. She also said the proposed spending plan cuts too deeply into state services, and she called on the Legislature to offset some of the governor's suggested reductions by raising fees and taxes or by scaling back existing tax breaks.

The report is the Legislature's first assessment of the proposed budget that the governor unveiled Thursday. That blueprint, which covers the next 18 months, would rely on a series of deep reductions in government services to bring the state's books into balance.

An emergency proclamation the governor signed last week forces the Legislature to cut spending immediately. If legislators fail to act on the budget within 45 days, they will be required by law to stop all other legislative business until they do so.

Soon after Hill released her report, a major bond rating agency put the state on notice that it was at risk of a downgrade. Fitch Ratings, expressing concern that the Legislature would balk at the steep cuts advocated by the governor, said failure to take action to balance the budget soon could lead to a downgrade of California's rating on approximately $43 billion of outstanding debt.

Administration spokesman H.D. Palmer said the Fitch warning "is as clear a statement as I have seen that there will be consequences for inaction."

Palmer defended the governor's wish to cut across the board as a rational approach that allows the state to avoid eliminating any government services altogether and achieves its goal without burdening Californians with big tax increases.

"It is designed to protect essential services by spreading these reductions as broadly as possible," he said.

Hill's report, meanwhile, also takes aim at a proposal in the governor's budget to raid $2 billion in projected tax revenue next year that normally would be reserved for the fiscal 2009-2010 budget. She asks whether the plan is "a reasonable change in accounting practices or merely a convenient way to generate a one-time revenue bump."

Palmer said the federal government and other states already use the accounting method in question.

The governor's proposal to cut school funding by $4.4 billion -- more than $300 per student -- "has several shortcomings," Hill wrote.

Hill said the governor and legislators should take back $1.5 billion in extra cash that schools were allocated this year above what they are guaranteed under the state Constitution. That would automatically lower the amount guaranteed to schools next year without requiring legislators to suspend the spending formulas approved by voters.

School groups were skeptical that Hill's plan would be any better for them than the governor's, saying that both would cut too deep and ultimately hurt students.

"Either way you go about it, there is blood on the floor," said Kevin Gordon, a lobbyist for hundreds of school districts.

Hill was also critical of Schwarzenegger's proposal to put a cap on spending in years when state revenues soar and save that money in a rainy day fund. She described the plan, which would also give the governor unilateral power to make program cuts when the state budget falls out of balance, as a power grab.

It "represents a serious diminution of the Legislature's appropriation authority," she wrote.

Administration officials said the proposal would allow legislators first crack at making the cuts, giving the governor authority to act unilaterally only if lawmakers failed to reach a consensus.

And legislators should be prepared for the state's finances to get worse before they get better, Hill said. The economic forecasts that the administration used to make its revenue projections are already 2 months old, she noted, and there has been a lot of bad economic news in the meantime.

Reaction to her report in the Legislature was mixed. Democrats applauded Hill's rejection of across-the-board cuts and her call for more revenue. Republicans embraced the report's call for swift action but reiterated that they would block any proposal that included new taxes.

Assembly Budget Committee Vice Chairman Roger Niello (R-Fair Oaks) said: "Raising taxes to pay for Sacramento's poor spending choices is not the answer."

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