Report Warns of Bumpy Road Ahead for California Budget

California could have to borrow as much as $23 billion to meet its cash needs soon after fiscal year 2009-2010 begins July 1 if voters do not approve three measures on the May 19 special election ballot that would provide about $5.8 billion in additional revenue to help balance the state budget deficit, California's Legislative Analyst's Office warned in a report Thursday, the Sacramento Bee reports (Wiegand, Sacramento Bee, 5/8).

Proposition 1C would let the state borrow $5 billion against future lottery revenue (Halper/Bailey, Los Angeles Times, 5/7).

Proposition 1D would shift funds from First 5, which was created in 1998 when voters approved Proposition 10 to increase the state tobacco tax to fund early childhood health care and education programs.

In fiscal year 2009-2010, the measure would shift as much as $608 million in Proposition 10 revenue to the state general fund for other state health and human services programs for children who are not older than age five.  The measure would shift as much as $268 million to the state general fund in each of the next four fiscal years.

The measure also would eliminate funds for statewide media campaigns and permit First 5 to allocate funding only for direct health and human services.

Proposition 1E would shift $226.7 million from mental health care programs that Proposition 63 funds to the existing Early Periodic Screening, Diagnosis and Treatment Program for low-income children for two years. 

In 2004, voters approved Proposition 63, which increased the state income tax on high-income Californians to fund mental health services (California Healthline, 5/7).

Gov. Arnold Schwarzenegger (R) and the Legislature placed the measures -- and three others -- on the ballot as part of a February budget agreement (Los Angeles Times, 5/7).

Budget Projections

Even if all of the measures pass on May 19, California's budget deficit for FY 2009-2010 is projected at $8 billion.  If the measures fail, the gap will rise by another $6 billion (California Healthline, 5/7).

However, Legislative Analyst Mac Taylor estimates that California could have to borrow $10 billion to $23 billion in the early days of the new fiscal year, depending on the outcome of the special election (Sacramento Bee, 5/8).

The state typically uses short-term borrowing to cover expenses in the first half of the fiscal year when many payments are due because California collects most of its revenue in the second half of the fiscal year (Myers, "Capital Notes," KQED, 5/7).

In recent years, California has sought $5 billion to $7 billion in short-term loans.

The state of the credit markets could significantly raise the cost of the loans for the state by hundreds of millions of dollars because California will not be able to buy sufficient loan guarantees from commercial banks for the full amount of borrowing.

The loan guarantees let the state secure lower interest rates.

Tom Dresslar, a spokesperson for Treasurer Bill Lockyer (D), said banks have told state finance officials that they will provide guarantees for no more than $1 billion in loans.

Federal Guarantees

As an alternative to guarantees from commercial banks, Assembly Speaker Karen Bass (D-Los Angeles) lobbied members of Congress and the Obama administration to federal guarantees for California's short-term borrowing needs.

Congress and the administration have not made a decision on such requests from California and other states (Yi, San Francisco Chronicle, 5/8).

However, Taylor warned against seeking federal assistance, writing, "The difficult decisions to balance the state's budget now are preferable to Californians losing some control over the state's finances and priorities to federal officials for years to come" (Los Angeles Times, 5/7).

What Happens Next

Regardless of the outcome of the special election, Taylor urged state lawmakers to reduce the amount California would have to seek in short-term loans to less than $10 billion by early July (Sacramento Bee, 5/8).

Taylor said that could be done through program cuts or tax increases ("Capital Notes," KQED, 5/7).

However, Bass said that tax increases likely would not win support in the Legislature.  She said, "It's really going to be about devastating cuts."

Bass added that the Legislature would take quick action to resolve the budget situation before July, in part because there will be limited options for closing the budget gap (Sacramento Bee, 5/8).

The San Francisco Chronicle reports that the state could have to delay payments to local governments, service providers, schools and state vendors if the situation is not resolved and the state's cash dwindles (San Francisco Chronicle, 5/8).

Controller John Chiang (D) said, "If you thought things were bad in February, it is nothing compared to what we could see in this upcoming year" (Woo, Wall Street Journal, 5/8).

New PPIC Poll

LAO's report was released the same day as a new Public Policy Institute of California poll showing that none of the budget-related measures on the May 19 ballot is backed by a majority of Californians.

Forty-three percent of respondents said they would vote in favor of Proposition 1D (Zapler, San Jose Mercury News, 5/7).

For Proposition 1E, 41% said they would vote in favor of the measure, and 48% of respondents said they would oppose it (Los Angeles Times, 5/7).

The poll was conducted April 27-May 4.  The margin of error is plus or minus three percentage points (San Jose Mercury News, 5/7).

Opinion Piece

Arguing that approving Proposition 1D "would reduce the state's current deficit by less than 4%," Neal Halfon -- a pediatrician and professor of pediatrics, health services and public policy at UCLA -- and Bruce Fuller, a professor of sociology and education at UC-Berkeley, urge Californians to vote "no" on the measure.

"We shouldn't try to balance the state budget on the backs of young children," they write in a Times opinion piece (Halfon/Fuller, Los Angeles Times, 5/8).

Broadcast Coverage

KQED's "Forum" will include a discussion on propositions 1D and 1E today.  Guests will include:

• Dan Carson, deputy legislative analyst at LAO;
• Delaine Eastin, former superintendent of Public Instruction for California;
• Bruce Pomer, executive director of the Health Officers Association of California; and
• Rusty Selix, executive director and legislative advocate for the Mental Health Association of California (Iverson, "Forum," KQED, 5/8).