LAO: SCHWARZENEGGER’S ASSUMPTIONS FOR FEDERAL AID UNREALISTIC: It is "unclear" whether the governor has complied with the Proposition 98 constitutional guarantee for Education in his budget.

Posted by Kevin Yamamura | The latest on California politics and government from the Sacramento Bee

January 12, 2010 -- The nonpartisan Legislative Analyst's Office on Tuesday deemed "almost nonexistent" the chances that California will receive anywhere near the roughly $8 billion in federal aid and waivers that Gov. Arnold Schwarzenegger is counting on in his budget plan.

In its initial review of Schwarzenegger's budget, which you can read here, LAO said California is likely to fall "several billion dollars" short of the amount the governor relies upon to balance his $82.9 billion general fund spending plan in 2010-11.

LAO excluded the governor's $1 billion reserve from the state's deficit figure, portraying the governor's deficit as an $18.9 billion problem. LAO said the governor's Department of Finance has offered a "reasonable" estimate of the budget gap but warned that lawsuits and overly optimistic revenue assumptions create plenty of "downside risk" in his budget.

In particular, LAO questions about $3.1 billion of the revenues the governor assumes for 2010-11. The nonpartisan office says that the governor may have overstated the extent to which corporate tax revenues will increase. It also questioned the governor's assumption of $892 million in estate tax proceeds, considering that current federal proposals do not restore a state estate tax exemption.

LAO also said the governor's forecast does not describe how the state will receive about $450 million in new revenues, while the state could lose money from a homebuyer tax credit and sales tax exemption for environmentally friendly technology.

The Legislative Analyst's Office, which previously recommended that the governor include additional federal funds as part of his budget, said the federal government should provide California with more ongoing funds, especially in cases such as special education. But it questioned Schwarzenegger's assumption that the state will receive $8 billion ($6.9 billion in direct aid and about $1.1 billion through waivers).

LAO said that while there is a "good prospect" for receiving more money, "the chance that anywhere near all the federal funds and flexibility sought by the governor in his budget package is almost nonexistent. The state is very likely to fall several billion dollars short of the governor's goals."

To deal with that problem, LAO recommended that the Legislature assume less in federal aid. The Analyst also suggested that the Legislature not wipe out entire social service programs but instead focus those services on the most dire recipients and create a prioritized list of "trigger" cuts depending on the amount of federal aid.

LAO did not recommend tax increases out of concern for the economy. But it did suggest that the Legislature extend a reduction in the income tax exemption for dependents, as well as modify or eliminate altogether a series of corporate tax breaks.

Schwarzenegger declared in his State of the State address Jan. 6 that he would protect school funding, but LAO said it is "unclear" whether the governor has complied with the Proposition 98 constitutional guarantee for education in his budget. LAO added that the level of funding provided by the governor may be all the state can afford, and that "education is treated relatively favorably" in the budget.

Legislative Analyst Mac Taylor will comment on his review at 1:30 p.m. today.