Saturday, August 30, 2008

A State Without a Budget: Day 61 - TWO FROM THE SAC BEE — It may all come down to a whole lot of borrowing – again + Democrats' shift could crack budget impasse

It may all come down to a whole lot of borrowing – again

Democrats' shift could crack budget impasse

By Dan Smith - Capitol Bureau Chief - The Sacramento Bee

Saturday, August 30, 2008 –Politicians at the Capitol like to say budgeting for the state is no different from budgeting for a household: In tough times you either have to raise more money or cut expenses.

But in the end, they do what a lot of families do. They run up the credit card.

Deadlocked a record 61 days over a proposed $103.4 billion general fund that is at least $15.2 billion in the red, legislators once again are tempted to borrow.

They are privately discussing taking as much as $2.5 billion from cities, counties and transportation projects this year, despite voter-approved rules that require repayment within three years, with interest.

"The people of my district don't want tax increases," said Sen. Abel Maldonado, R-Santa Maria. "Of course, they don't want to cut education either."

"So they want what we've been doing for the last four or five years – they want us to borrow," said Maldonado, whose house defeated a budget proposal Friday that would have raised taxes and disappointed education advocates. "I'm for looking at restructuring our debt and borrowing. I think it's the way to go. I think it's a way for us to move forward and come back next year."

Gov. Arnold Schwarzenegger has called the idea "fiscally irresponsible," saying it would do nothing to narrow the state's ongoing gap between spending and taxing.

But even his plan, which raises the state sales tax for three years, includes about $741 million in other borrowing from special state funds. And in February, he and lawmakers agreed to sell the remaining $3.3 billion in "economic recovery bonds" approved in 2004 to close part of the budget gap.

In the Legislature, discussions over borrowing local government and transportation money seem to have been born of political necessity.

Democrats are seeking permanent tax increases. Schwarzenegger has offered his temporary tax increase followed in three years by a tax cut. Legislative Republicans have shown little willingness to vote for any tax increase, permanent or temporary.

Assemblyman Roger Niello, R-Fair Oaks, acknowledged the borrowing plan is "in the discussion," but is not favored by Republicans.

"It is absolutely not our first option," he said. "We don't want to do it. But the budget has to be resolved."

Advocates for road-builders, construction unions and local governments say the plan would cripple road projects and probably force local governments to borrow from banks at interest rates driven up by the credit crunch. Moreover, new payback rules approved by voters would force the state to repay the principal and all the interest within three years, creating a looming bill that exacerbates the state's ongoing budget problems.

"It's a legal approach, but from a financial and political standpoint, it's totally irresponsible," said Paul McIntosh, executive director of the California State Association of Counties.

Cities and counties, he said, may have to pay as much as 19 percent interest on bank loans to cover their losses. All of it would have to be made up by the state.

Transportation projects would slow, leaving more construction workers unemployed in an economy that is already struggling, said Jim Earp, executive director of the California Alliance for Jobs, a coalition of infrastructure construction companies and related labor unions.

"By taking that money out of circulation, we've created a huge funding hole and thrown a lot of people out of work," Earp said. "All they're really doing is driving themselves deeper into debt without taking care of the structural deficit."

The borrowing program under discussion envisions the state repaying the money from higher lottery proceeds, based on predictions that modernization of the games will increase interest and the state's take.

Schwarzenegger's proposal, meanwhile, would borrow against future lottery proceeds, using the money to repay current debt.

Other budget proposals under consideration also amount to borrowing, if somewhat indirectly. Republicans and Democrats are considering a plan to restrict the losses businesses can write off for two to three years, but it would include a method for the companies to recoup the losses – and then some – in later years.

Schwarzenegger's plan also would essentially borrow from taxpayers by raising the sales tax by 1 cent on the dollar for three years, and then paying them back by reducing it by 1.25 cents permanently.

In both cases the state would gain revenue in the short term, but lose money in future years.

Lawmakers also have pondered borrowing more money from two funds voters set aside for mental health programs and early childhood education and health. Those measures, however, have tighter restrictions that would probably require voters to sign off on any borrowing.

Local government and state budgets have been intertwined for decades. But the idea of the state using local coffers to escape budget messes took hold in 1993, when Gov. Pete Wilson and lawmakers shifted billions in local property taxes to schools from cities, counties and special districts. The fiscal gymnastics allowed the state to meet its legal obligation to schools by using what was essentially local money.

After more raids on their funds, local government advocates teamed with Schwarzenegger in 2004 and agreed to a ballot measure that would block the takings but allow limited borrowing.

Voters in 2002 approved a special transportation fund fueled by the sales tax on gasoline for road projects, but lawmakers twice borrowed from it to cover other state expenses. In 2006, voters tightened the loophole, requiring repayment with interest.

Schwarzenegger supported both measures to tighten the rules, and he remains opposed to any talk of borrowing from local government and transportation this year.

"It is like a family taking credit cards and overextending and then getting another one to pay all of the debt off," the governor said last week. "It doesn't solve any problems. It isn't a solution. It is a disaster."


Saturday, August 30, 2008 – The near-record political stalemate over the deficit-ridden state budget may – repeat, may – have moved a notch closer to resolution Friday even though the Senate rejected a new Democratic version.

The new version is based on Republican Gov. Arnold Schwarzenegger's latest proposal and hinges on a 1-cent increase in the state sales tax for three years. But Republicans continued to oppose it unanimously, and any budget needs votes from at least two GOP senators.

Despite being rejected, it represents major movement by Democrats because it embraces – at least momentarily – Schwarzenegger's "reforms" to prevent future budget problems, including his authority to cut spending in midyear that Democrats dislike.

The chief difference between the Democratic senators and Schwarzenegger now appears to be the form of the sales tax boost. The governor wants to not only end it after three years but then reduce the sales tax slightly below the current level so that it constitutes a long-term tax cut. Democrats would merely end the 1-cent increase after three years.

Pointedly, when asked about the Democratic move during an appearance in San Diego, Schwarzenegger described it as "very courageous" and urged Republicans to vote for it, although his aides said later he was not endorsing it as a final budget.

Republican senators, however, denounced the budget. Tom McClintock of Thousand Oaks quoted Democratic presidential nominee Barack Obama's promise that "I will cut taxes … for 95 percent of all working families, because, in an economy like this, the last thing we should do is raise taxes on the middle class."

But another Republican, Bakersfield's Roy Ashburn, hinted anew that he might vote for a sales tax-based budget if, as Schwarzenegger's can, it could be viewed as a long-term tax cut. It's widely believed that Ashburn and Santa Maria Republican Abel Maldonado could be persuaded to vote for such a budget if Democrats are willing.

All in all, therefore, the Senate may be edging toward some budget deal that could then be dumped on the Assembly, where Republican opposition to any kind of new taxes appears stronger. Democratic senators have been openly worried that a "borrowing budget" – one that relies on shifting funds from local governments and transportation funds rather than taxes – might emerge from the Assembly and put them on the spot.

Schwarzenegger uttered his praise of the Senate Democrats' budget while appearing with local government officials to denounce more borrowing. "Let's fix the budget problem once and for all," Schwarzenegger said.

The budget machinations are occurring as the Legislature churns toward what had been scheduled to be its annual adjournment Sunday, the constitutional deadline for most legislation to be passed.

The budget, however, is not subject to that deadline. If there's no breakthrough this weekend, the multi-sided stalemate will continue indefinitely.

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