$21 Billion Deficit Now, Worse Later

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The headline, rushed online yesterday by news outlets looking for a scoop, makes it clear the state's budget woes aren't getting better. Maybe even worse.

But deeper inside the new in-depth analysis of the Legislative Analyst's Office are examples of a government budget system that's evaporating faster than the polar icecaps.

Legislative Analyst Mac Taylor and his crack fiscal staff have set the marker for the next great deficit debate at $20.7 billion -- $6.3 billion in the current fiscal year and another $14.4 billion gap in the year beginning next July 1.

And Taylor, who's quickly gaining a reputation for telling the ugly truth to power, makes it clear that the current problem really lies at the feet of 120 legislators and Governor Arnold Schwarzenegger. "The vast majority" of the current year problem, says his new summary, "can be attributed to the state's inability to implement several major solutions in the July 2009 budget plan."

Of course, the real question is whether anyone actually thought those solutiuons would ever be implemented, or were the result of a bipartisan unwillingness to make enough tough decisions.

The LAO report says more than $3 billion of the current year problem -- almost half -- is due to missed budget solutions. That includes $1.4 billion of prison spending that wasn't slashed; $900 million for Medi-Cal programs that budget writers thought could be saved, in part, through federal funds; and more than $800 million lawmakers wanted to borrow from public transit funding... denied by the courts. And that doesn't include the highly suspect plan to raise $1 billion by selling off part of the state's workers compensation insurance fund, a plan now all but officially dead.

However, not all of the red ink can be blamed on elected officials. In another example of mysterious ballot initiative workings, the LAO report says the state's shrinking revenues actually translate into an extra $1 billion for public schools, thanks to the complicated system created by voter-approved Proposition 98. In a nutshell: Prop 98 ties school funding, in part, to year-to-year changes in state revenue. But the year-to-year changes projected by this year's budget deal ended up being wrong, making it seem as though revenues are growing faster than projected, thus guaranteeing schools more money. Remember, this is contrary to reality, where revenues are actually declining. Nonetheless, you can expect education advocates to demand that $1 billion ASAP, given the budget reductions to schools over the past two years.

And it's also a bleak future being painted by Legislative Analyst Taylor. His report projects $20 billion deficits for the four years after a new state budget is crafted next year, peaking at $23 billion in 2012-13 when Sacramento lawmakers must find a way to pay back local governments for the tax revenue borrowing in this summer's budget deal.

So what do such big budget holes mean? Here's one example: the report says the projected deficits in the next few years at the $20 billion level assume a freeze of most state worker salaries for another six years (after last being raised in 2007).

As for the budget debate that will begin in January, the Legislative Analyst reports there will be even fewer options than in years past. That's largely because federal stimulus dollars, vital to keeping California afloat, require state funding of education and health care at levels that are pegged to budgets of the past -- funding that Sacramento lawmakers can't cut if they want to keep getting DC dollars.

There's no doubt the winter and spring budget debate of 2010 will be fierce. Look for both liberals and conservatives to demand that now is the time to either tax, or cut, more.

Others will demand a revisiting of costly deals of the past. On Tuesday, California Teachers Association President David Sanchez told reporters that the cuts have to end. "There is no more to cut from our schools," said Sanchez. Instead, he argued lawmakers need to reexamine billions of dollars in tax credits, including some of the credits made available to big business in last year's budget deal. (His comments came before the apparent $1 billion in owed school funding mentioned above.)

"Large companies must pay their fair share," said the CTA leader. And the politically powerful CTA could, if it so chooses, make that point at the ballot box; two separate ballot measures are now on the table to nix some of those business tax breaks, which are worth a few billion dollars a year in lost tax revenues. And the teachers union also has submitted a couple of proposed initiatives to modify the iconic Proposition 13, allowing higher property taxes on commercial property.

[Look for an updated post later with reaction to the LAO report as it comes in..]

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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