State Pushes Problems Into Future

SACRAMENTO —  The tobacco state of Virginia is raising cigarette taxes tenfold. Illinois will make do with a workforce smaller than it had in 1983. And New Jersey will force its millionaires to share more of their wealth with the state.

Virtually every state facing a major budget shortfall this year has made painful policy choices. Except California.

A year ago, amid the lingering effects of economic recession, state governments across the country were coping with deficits, shortfalls and financial angst of all kinds. But now, as other states are making their way back into the black, California continues to push its problems into the future with borrowing.

Corina Eckl, a state budget expert for the National Conference of State Legislatures, said no other state budget relied on as much borrowing as California’s.

“When you look at the numbers, California stands alone. We are not seeing widespread pushing forward of budget problems,” she said. “Most states are trying to resolve them in their entirety in fiscal 2005.”

The $105.4-billion spending plan signed into law Saturday by Gov. Arnold Schwarzenegger includes a budget shortfall now expected to total as much as $17 billion over the next two years.

Even though the governor hopes to enact a sweeping reorganization of state government in the coming year that could save billions, the state’s lingering debt looms like a long hangover, with today’s spending causing pain years into the future.

The reason is simple: The state is making few sweeping spending reductions to keep the bills from piling up. And there is no plan to bring in more tax money to pay them in full. So California continues its credit card binge.

“Other states are going to be laughing at us for the way we have handled things,” said Michael Bazdarich, a senior economist with the UCLA Anderson Forecast. “It’s worrisome.”

The budget Schwarzenegger signed is balanced with at least $15.6 billion of borrowing. The biggest chunk of that is $11.2 billion from the deficit bond package voters approved in March. The rest will come in several billion dollars of IOUs to various programs and a $920-million loan to make the payment into the pension fund for state workers.

“By 2006, this state is going to be in a deep, deep hurt unless this state has a tremendous recovery,” said state Sen. Bruce McPherson (R-Santa Cruz).

The situation has also prompted continuing concern on Wall Street.

John Hallacy, managing director of municipal research at Merrill Lynch, said he was still waiting to see the governor summon lawmakers into the small smoking tent outside his office to extract far-reaching budget reforms. “We haven’t seen anything come out of that tent yet other than smoke,” he said.

An Assembly Republican staff analysis of the budget underlined that point: “This budget,” it says, “contains none of the major reforms sought by the administration this year.”

Some Democrats feel the same way. “This is a budget that turns today’s problems into tomorrow’s problems and compounds them with interest,” said state Sen. Debra Bowen (D-Marina del Rey).

But Schwarzenegger said he had a solution in the works.

On Tuesday, his administration will formally unveil a controversial proposal for a top-to-bottom reorganization of government that projects savings of tens of billions of dollars by 2010. But opposition to the plan is already beginning to form among a number of powerful interest groups, including public employee unions and the environmental lobby.

The governor’s task force estimates that it has found ways to save $32 billion over five years. But many of the proposals have been rejected in the past and most of the projected savings would not be expected to materialize for some time. The task force projects that if all recommendations are adopted, only $6 billion will be realized by June 2006.

Critics of the proposal charge that it was put together in a secret process that included significant input from business groups while largely locking out activists for other interests.

The administration abandoned far less ambitious reforms in the draft budget it presented in January after running into intense political opposition.

Even so, administration officials say they are confident that an improving economy, together with projected savings from the overhaul and other reforms, will end projections of never-ending budget shortfalls.

“Those projections aren’t going to happen,” said Department of Finance Director Donna Arduin. “They assume the budget doesn’t get balanced next year.”

At this point, however, few in the Capitol are confident that the administration’s reorganization plan -- called the California Performance Review -- will lead to the kind of savings its organizers are talking about.

Senate President Pro Tem John Burton (D-San Francisco) said most of the plan stood little chance of ever being enacted.

Regardless of the recommended overhaul, budget troubles loom. And closing the gap for good would require some bold policy decisions. Every year the state puts off dealing with it makes it harder. There are fewer one-time cuts and other fiscal Band-Aids available to make it into the next year.

Other states have been faster to respond. Across the country, many governors and lawmakers began two years ago to build bipartisan support for politically unpopular policy decisions needed to at least begin balancing the books.

In New York, Republicans last year defied their own party’s governor to join with Democrats in overriding his veto of $2.5 billion in sales and income taxes. Ohio’s GOP-dominated Legislature joined with a Republican governor to approve $3 billion worth of tax increases over two years. New Jersey raised taxes on the wealthy and put new surcharges on tires and plastic surgery.

Arduin, the California finance director, is critical of those tax increases. The strategy will only backfire for those states by worsening the business climate, she said. “It’s good for us,” she said, “because it will send more jobs this way.”

But experts say the alternative is to cut spending -- a technique also used nationally but avoided in Sacramento.

Michigan is dropping 45,000 Medicaid recipients from the rolls. Mississippi, a state that already had extremely limited health insurance for the poor, blocked more people from the program to bring its budget into balance. Florida, where Arduin oversaw the budget before coming to California in October, long ago began reining in a number of government services.

Illinois enacted an early retirement program intended to reduce the size of its state workforce to a level lower than it was 20 years ago.

Brad Williams, an economist with California’s nonpartisan legislative analyst’s office, said such reductions have gone a long way in helping other states close their budget gaps. “We are pretty far behind,” he said of California’s ongoing budget imbalance. “This problem is something we have in front of us that others don’t.”

During California’s last budget crisis, in the early 1990s, the state responded much more quickly, raising taxes and cutting programs.

“Here, there is less of all that,” Williams said. “There is just a much, much greater desire to preserve what we have at the cost of the future.... We would say it is better to make those hard decisions now.”

The budget signed Saturday does bring spending down by making cuts to local government, public universities and schools. But most of those reductions are short-term and will face state officials again in 2006. They came with guarantees from the governor that spending in those places -- which account for more than half the state’s general fund -- will go back up significantly in two years. They are guarantees that Schwarzenegger and lawmakers may be unable to back away from.

“The political pressure is going to be intense to spring back and provide the money that was cut,” said David Hitchcock, a director of public finance ratings at Standard & Poor’s in New York. “Schools and local governments are planning and budgeting on the assumption that if they just get through the next couple of years, the money will be there.”

With schools and local government protected from cuts in fiscal 2006-07, the only major area left to cut would be healthcare and social services. Cutting a few billion dollars in that area could eviscerate a number of programs. The budget hole for fiscal 2006-07 is projected to be much larger than a few billion dollars.

Economists -- much like Democrats and Republicans -- disagree on whether the state needs more taxes or less spending. But they agree that letting the problem fester will come back to haunt taxpayers.

Bazdarich of the UCLA Anderson Forecast said a tax increase was the last thing California needed to get its economy on track. But he said four years of budget neglect had made it extremely likely. “The longer this thing goes on, the more likely they are to solve it with a tax increase,” he said. “Businesses are already feeling beat up in this state. The next round of tax hikes will hurt the economy.”

The budget hangover presents more problems. As other states once again begin investing in new transportation projects, education initiatives and programs to attract business, California will be struggling to just get into the next year.

“If we want to attract the next biotech revolution, we have to offer workers a nice place to live with schools they will want to send their kids to and transportation and airport systems that work,” said Stephen Levy, director of the Center for the Continuing Study of the California Economy, in Palo Alto.

“A state that is paralyzed at how to find the money to do these things is probably sending the wrong signal,” he said. “We don’t have any room to fall further behind.”