Once again, California balances budget with 'tricks'

In dealing with California’s $26 billion budget deficit, Gov. Arnold Schwarzenegger is fond of saying he doesn’t want to just “kick the can down the road” – that is, deal with the problem later or borrow money from the next generation.

But several economists watching the budget wrangling in the Sacramento statehouse say lawmakers are choosing accounting moves – some say “gimmicks” – to provide the appearance of an acceptable budget, without really addressing the structural problems underneath.

“Some of these are accepted practice in other states, others are blatant tricks that have become common in California,” says Philip Romero, dean of business and economics at California State University, Los Angeles.

The California Senate on Friday approved a plan to close the state’s budget deficit. The 80-member Assembly was still arguing Friday afternoon over some measures in the 31-bill package, which combines deep spending cuts, borrowing from local governments, and some time-tested accounting maneuvers.

One “trick” is to bump payroll expenses by one day, from June 30 to July 1, to make them a fiscal year 2011 expense, when revenues might be flowing better. “This is a paper savings of $1.2 billion which in my mind is clearly a gimmick… How are you going to make up for that unless you do it every year?” asks Jessica Levinson, director of political reform for the Center for Governmental Studies.

Another move is to withhold more taxes sooner from state paychecks – even if the money must be paid back, it generates a temporary increase in cash flow.

Yet another device, says Mr. Romero, is to base budgetary calculus on “extremely dubious assumptions.” The current budget plan, passed by the state Senate Friday, approved $100 million in revenue from oil leases to be sold in the Santa Barbara Channel.

“It is more than dubious to assume that environmentalists will allow that policy which would reverse 40 years of no-drilling there,” says Romero, who was chief economist for Gov. Pete Wilson and hired in the early 1990s to restart the California economy, then suffering from the largest state recession since the Great Depression.

Many of these maneuvers pin their hopes on the economy recovering and tax revenue flowing again, although many economists don’t expect a recovery any time soon.

State lawmakers used the same tactic when they closed the $46 billion budget gap in February, he says. They did so by assuming that state voters would pass several initiatives in May that would provide up to $6 billion in revenue.

“It didn’t matter at the time that it was unknown whether voters would approve these,” says Romero. “At that point, the legislators were at wits end and needed to sign a ‘get out of town’ budget.” The measures were defeated by 80-to-20 margins.

One reason for resorting to these accounting “tricks” is the state’s inability to borrow – exacerbated by the lowest bond ratings in state history. That inability is also why cities and local governments are resisting the budget’s other big revenue solution – borrowing from municipal, redevelopment, and transit funds.

“We're going to have another budget problem as early as December or January,” said Esmael Adibi, an economist with Chapman University, to "The Bond Buyer." “The solutions offered here are not really addressing the structural problem.”