California state budget deal has holes, analysts say

The California state budget accord to be voted on Friday relies on $5 billion in federal money, $10 billion in Wall Street loans, and some pretty big assumptions, say some political observers.

California officials are high-fiving themselves over the announcement that they have reached a compromise to close the state’s $19.1 billion budget deficit, ending a record-breaking impasse. The new “accord,” reached three months after the start of the fiscal year, doesn’t raise taxes as Democrats wished, but also doesn’t dismantle the state’s welfare system, as Republicans had proposed.

After a five-hour meeting Saturday between Gov. Arnold Schwarzenegger and Democratic and Republican heads of the state Senate and Assembly, Senate president pro tem Darrell Steinberg told the press, “We have a comprehensive agreement.” More details, he said, would be released Thursday at a hearing and a vote could come as early as Friday.

There is only one problem, say several analysts: nothing is signed yet.

“Don’t count your chickens, yet,” says Robert Stern, president of the Center for Governmental Studies. “The budget still has a long way to go before it is finally enacted.”

"A lot can still happen to derail this,” adds Sherry Jeffe, a political scientist at The University of Southern California.

Details which have trickled into various press accounts include $7.5 billion in spending cuts and the suspension of a corporate tax break valued about $1.4 billion. Alicia Trost, a spokesperson for Mr. Steinberg, says that the so-called “gang of five” also agreed to erase another $1.4 billion by accepting an independent legislative analyst's estimate of incoming revenue, which was that much higher than Governor Schwarzenegger’s. There is also the assumption of $5 billion in federal funds, and $10 billion in loans from Wall Street.

But one unknown is how legislators will respond to the sale of 11 state office buildings, which the state would rent for the long term. Two of the buildings are at San Francisco’s Civic Center, which would bring in over $1 billion immediately, but would cost $30 million annually to rent.

More questions surround what kind of long-term credit the state can arrange, given its falling bond ratings.

The budget plan reportedly relies on bogus economic assumptions and unrealistic expectations about federal aid, says Jack Pitney, a political scientist at Claremont McKenna College in Claremont, Calif. “They debated, deliberated, and delayed – and then ended up faking it anyway," he says. "Never have so many Californians waited for so long for so little.”

One of the biggest reasons why California set an all-time record for budget lateness this year, says Ms. Trost, was that for each of the two previous years, the state has had to close the largest state deficits in American history.

“Both sides have already compromised and cut to deep bone,” says Trost, “which made getting this far harder than ever.” Schwarzenegger has come under criticism for his decision to furlough state workers three days a month, essentially cutting their pay 14 percent.

The California Supreme Court on Monday upheld Schwarzenegger's order to furlough state workers, handing him a victory for his current budget plans. State employee unions have been challenging Schwarzenegger's order since he implemented the furloughs for more than 200,000 state workers in February of 2009. He later expanded it to three days a month, which has translated to a pay cut of roughly 14 percent for government employees.

Furloughs saved the state's general fund $1.5 billion during the previous two fiscal years and an additional $80 million a month in the fiscal year that began July 1, said H.D. Palmer, spokesman for the governor's Department of Finance.

The record budget impasse should create new impetus for the passage of Prop. 25, experts say. The ballot initiative would change the legislative vote requirement necessary to pass the state budget and spending bills related to the budget from two-thirds to a simple majority. It also would provide that if the Legislature fails to pass a budget bill by June 15, all members of the Legislature will permanently forfeit any reimbursement for salary and expenses for every day until the day it passes one.

California is one of three states to require two-thirds of legislators to agree before a budget can be passed. Many analysts have said that is one of the keys to why the state seems so dysfunctional and ungovernable.

“A two-thirds requirement enables a smaller group to hold the larger one hostage and demand concessions,” says David Fiorenza, a professor of public sector economics at the Villanova School of Business in Villanova, Pa. “It becomes more of a political science question than a budget issue. If California voters don’t see now how this measure could help its budget impasses, it would baffle me.”

At the moment Prop. 25 has less than 50 percent voter approval, according to the latest Field Poll of California voters.

“The conventional wisdom is that budget stalemate strengthens the argument for the proposition, but just the opposite could be true,” argues Claremont McKenna's Mr. Pitney. “Voters may think, ‘it’s already too easy for those guys to play games.' This measure would make it even easier.”