That’s the overall assessment of Legislative Analyst Elizabeth Hill, who certainly doesn’t sugar coat her office’s assessment of Governor Arnold Schwarzenegger’s 2006-07 state budget in a report out this morning.

You can read the entire report here. Hill is releasing her broad overview of the budget today at the monthly luncheon of the Sacramento Press Club.

The report is pretty lengthy… so for now, the bottom line:

* Hill projects that state revenues will be even better this year and next than the governor’s estimates. In fact, the report states that if Schwarzenegger’s budget were adopted as proposed, the state would be sitting on a surplus of $2.6 billion. That’s a whopping $2 billion more surplus than the governor’s advisers thought they’d have at the end of the coming budget year.

* Nonetheless, the LAO projects an operating deficit will again return in 2007-08 of almost $4 billion, and nearly $5 billion in 2008-09. For those of you who aren’t die-hard budget watchers, the governor’s budget has its own operating deficit for the coming year; the only reason it doesn’t show up is because of some serious one-time revenue that has filled in the gap.

* Hill says the governor’s budget for the coming year “would still leave the state with large structural budget shortfalls and an enormous amount of outstanding financial obligations.”

* With the current infrastructure debate often turning to the issue of selling bonds– and how much debt the state can afford every year– here’s an interesting nugget: the LAO estimates that even though Schwarzenegger has proposed paying off some existing debt next year, the state will still have $20 billion in outstanding budgetary debt as of July 1, 2007. And the report estimates that the annual cost of paying off that debt will rise from $3.7 billion in 2006-07 to more than $5 billion in 2008-09.

And that’s before any infrastructure bonds are even sold.