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January 16, 2007 > Analysts dispute Schwarzenegger's balanced-budget claim

Analysts dispute Schwarzenegger's balanced-budget claim

By AARON C. DAVIS

SACRAMENTO (AP), Jan 12 _ Budget analysts, Wall Street bond-raters and state lawmakers are casting doubt on Gov. Arnold Schwarzenegger's claim that his proposed spending plan for next fiscal year could wipe out California's chronic budget deficit.

On Friday, the state's nonpartisan legislative analyst blasted Schwarzenegger's plan in unusually forceful terms.

``We believe that the fiscal benefits of many of the budget's key proposals are overstated,'' Legislative Analyst Elizabeth Hill wrote in her annual critique of the spending plan, kicking off months of negotiations in the capital. ``While any budget is subject to risks and uncertainties, we believe that the number and magnitude of these risks is unusually high.''

Schwarzenegger on Wednesday released his proposed $143.4 billion budget for the fiscal year that begins in July, calling it ``prudent and realistic.''

Hill, as well as Wall Street analysts briefed by the governor's team, said Schwarzenegger's budget relies on uncertain property tax revenue increases and income from a rebounding housing market in the second half of the year.

It also spends more than it appears to, said Richard Raphael, executive managing director and head of state ratings for Fitch Ratings in New York.

``Overall, it does make significant progress and does reduce spending, but not as much as it appears on the surface,'' Raphael said.

By Fitch's calculations, the state's general fund spending increase will actually be about 5 percent, not 1 percent as the governor said.

The state's debt load, he said, also could nearly double in the next five years if lawmakers and voters go along with plans Schwarzenegger announced Tuesday to borrow an additional $43.3 billion dollars to build schools, prisons, dams and other projects. And Schwarzenegger's proposal to ensure health care for all Californians also could add significant risk to the state's budget, Raphael said.

``The issue long-term is risk. And for one, we haven't seen any specifics on health care,'' he said.

Mike Genest, the governor's finance director and chief architect of the 2007-08 budget plan, released a statement attacking Hill's critique. Mostly, he said, it was out-of-date and overly pessimistic.

``We believe that this budget is built on realistic and solid fundamentals that will take the state to a net operating deficit of zero next year,'' he said.

He said much of Hill's analysis was based on data from November.

``We had the benefit of having critical data on revenue that the analyst didn't have. ... So what we have here is a case of comparing old apples to new oranges,'' Genest said.

Several lawmakers, however, said Hill's analysis was sobering. Assembly Speaker Fabian Nunez, D-Los Angeles, called her report a ``reality check.''

Legislative Republicans, who have been critical of state spending practices, also reacted favorably to Hill's analysis.

``Lawmakers should take to heart her warnings about funding new ongoing programs this year and resist the temptation to create costly new budget commitments that California simply cannot afford,'' Assembly Budget Committee vice chairman Roger Niello, R-Fair Oaks, said in a statement.

Assembly Budget Chairman John Laird, D-Santa Cruz, said that in the verbal jousting between the governor's office and the analyst's office, he backed Hill.

``We rely on Liz Hill's analysis, which is usually objective and solid. I think she points out we have challenges in the rosy projections and in some risks and differences of policy priorities,'' Laird said.

Specifically, Hill questioned revenue and spending assumptions she said Schwarzenegger was counting on to balance the budget.

The governor's budget assumes the current economic slowdown in housing and other sectors will continue through the first half of the year, but then begin to rebound.

That and other factors were part of a revenue estimate in the governor's plan that is $641 million above her office's November forecast. Schwarzenegger's budget also counts on a 10 percent increase in local property tax revenue that would offset state education costs.

To balance the budget, Hill said the governor's plan was going out on a limb by attempting to pay for $600 million in student busing costs from a fund composed of excess gasoline sales tax revenue.

Democrats have said they will fight to keep paying for the bus funds through education formulas and to keep the gas tax money going to public transit agencies.

Acting Education Secretary Scott Himelstein said he did not foresee any future problems stemming from the decision to fund school busing out of the transportation budget. He said it simply was a way for the governor to meet his goal of eliminating the deficit.

``There's no reduction in service or programs by doing this,'' he said. ``The intent is to fund school transportation out of these dollars. There's no impact in our view on the amount of money school districts receive.''

The governor's plan also assumes that the Legislature will immediately approve gambling compacts that it refused to approve in September. The deals could bring more than $500 million to the state, but they still face heated opposition from unions, card clubs, the horse racing industry and the antigambling lobby.

Schwarzenegger's plan also bets the state wins appeals in two court cases in which it already has lost at the superior court level. Those two cases could take $1.1 billion out of the governor's balanced-budget equation.

Genest disputed that criticism, as well.

``If we put together a budget on the belief that we were going to lose every lawsuit that's been filed against us, then the state budget process would come to a screeching halt,'' he said. ``We look forward to continuing to work with the Legislature to adopt a balanced budget that does not raise taxes and gets us to a goal that both Republicans and Democrats share _ a net operating deficit next year of zero.''

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Associated Press Writer Juliet Williams contributed to this report.

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On the Net:

Legislative Analyst's Office, www.lao.ca.gova

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