LAO: Guv's Deficit Projection OK, Solutions… Not So Much
Governor Schwarzenegger's revised budget may balance on paper, but it's got some serious underlying risks.
That's the new assessment of Legislative Analyst Elizabeth Hill, whose nonpartisan overview of the guv's so-called "May Revise" is hot off the presses this morning.
Hill says her analysts agree that the budget shortfall to solve for the coming year is $15.2 billion. An important note: you're going to see a $17.2 billion problem talked about a lot in other news reports and by the Schwarzenegger administration. But that tacks on the governor's desired $2 billion in stashed away reserve funds. No argument that such a fund would be helpful; but given that's not actually part of the accumulated deficit, we're going to stick with $15.2 billion.
But the LAO analysis raps Schwarzenegger and his team on the knuckles regarding both their lottery bond proposal and their budget reform plan.
First, the lottery. Hill says the governor's $15 billion dollar loan from Wall Street investors, to be paid back over 30 years with future California Lottery proceeds is "overly optimistic." And in language sure to catch the eye of powerful education interest groups, she projects the plan could actually end up hurting public school funding in the future.
The "proposal would create the strong likelihood that distributions to public education from the lottery would fall well short of their current levels --perhaps by $5 billion over the next 12 years combined," says the report.
The reason for this: the governor's budget advisers can only speculate about how changes in the way the lottery is allowed to operate (games offered, size of jackpots) will increase overall revenues. Their model, according to the LAO, assumes that lottery profits will double in the next five to nine years. And as mentioned in a posting last week, the administration admits that investors, not public schools, will be first in line for a share of future lottery revenues. In other words, if the new and improved lottery fails to bring in double the amount of profits it currently has... it will be education, not investors, that take the hit.
And a new little nugget found by the LAO analysis: Governor Schwarzenegger has proposed that if the lottery proposal is rejected by voters in November or is otherwise stymied (by lawsuits, perhaps?), an additional one cent sales tax would be imposed across California. Granted, the governor says the tax hike is an insurance policy only (though even that's not enough for his tax-averse GOP friends in the Legislature). But the LAO says if that sales tax hike is triggered, the timing of the process may not produce as much cash as the lottery bonds; the budget could then be in the red, the report says, by $2 billion. If that wasn't enough, another quirk to the sales tax option: Proposition 98 requires a portion of those new revenues to go to schools and not to the General Fund.
Finally, there's the governor's ideas on budget reform... which, by the way, still has not been introduced as legislation even as the deadline to get it on the November ballot is a little more than five weeks away.
The LAO analysis claims the governor's plan, as much as can be gleaned without the actual proposal, would lock in budget shortfalls. In fact, the LAO says the formula of capping budget spending could mean requirements to deposit cash into a new reserve fund even when a budget shortfall forces spending cuts elsewhere. A similar criticism of the budget reform proposal was released late last week by the folks at the California Budget Project.
Granted, the governor's revised budget is merely a starting point for negotiations with the Legislature over the next few weeks. But it's now clear that current criticisms of many key assumptions in his proposal can't be merely dismissed as being partisan.
