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December 19, 2007 > Schwarzenegger says he will declare fiscal emergency

Schwarzenegger says he will declare fiscal emergency

By Aaron C. Davis

SACRAMENTO (AP), Dec 14 _ Gov. Arnold Schwarzenegger on Friday said he would declare a fiscal emergency in California so he and state lawmakers can start cutting programs before shrinking tax revenue from the collapsed housing market leaves the state with up to a $14 billion shortfall over the next year-and-a-half.

The emergency will likely mean cuts to schools, colleges, prisons and aid programs for the poor, elderly, and out-of-work that have already spent nearly half their promised funding for the year.

Schwarzenegger said he would issue the declaration next month, triggering a special session and a constitutional mandate for the Legislature to rip open the current budget and either cut costs or increase taxes within 45 days.

The announcement comes as the state's budget outlook has deteriorated significantly, but before the full effect of the housing market crash and credit crisis can be calculated.

Last month, the state's nonpartisan fiscal analyst predicted that falling employment in housing-related sectors and a drop in sales and property taxes could cause California's deficit to hit $10 billion over the next year-and-a-half. Schwarzenegger, whose staff has been busy readying his budget proposal to be presented in January, said Friday the budget hole could be $10 billion to $14 billion.

The low end of his estimate is a gap larger than the state's entire budget for its 172,000-inmate prison system, while the high end is equivalent to state spending on both prisons and all the University of California campuses in one year.

Privately, Schwarzenegger and his aides have told lawmakers and interest groups that his January budget will reflect a shortfall closer to $14 billion, but he has not yet publicly released any proposals. The state's current total budget is $145.5 billion for the fiscal year that began July 1. General fund spending for day-to-day operations is $102.3 billion.

Budget analysts, Wall Street bond raters and lawmakers on both sides of the aisle said Friday that it's far too soon to tell if Schwarzenegger's estimate of a $14 billion shortfall is accurate, but given the potential for a budget crisis, his call to action seemed prudent.

``This is a serious step for a serious problem,'' Assembly Speaker Fabian Nunez, D-Los Angeles, said in a statement. ``We look forward to seeing the specific proposals the governor is constitutionally required to put forward in declaring a fiscal emergency.''

But it's still unclear how big the deficit may be. Some Democrats said they were still hopeful the problem may not be as bad as Schwarzenegger says.

In his first two years in office, Schwarzenegger established a record of first saying the deficit was worse than others believed, only to later announce he'd found new revenue or other schemes to help close the gap once opponents caved to his cost-cutting demands.

On the other hand, the state's economy _ which relies disproportionately on taxes on its richest residents and revenue from stock options and capital gains _ now appears to be in a downslide similar to the one after the dot-com crash. If that is true, it may not be possible for Schwarzenegger to underestimate the state's revenue crash.

``It was about this time of year in the last fiscal crisis under Gov. Gray Davis that they started leaking word of a $10 billion gap,'' said David Hitchcock, a credit analyst with Standard and Poor's in New York, referring to the state's economic downturn in 2002. ``The following May the gap had grown to $35 billion.''

Jean Ross, executive director of the California Budget Project, a nonprofit group that advocates for funding for the poor, said her research shows that the state's current downturn appears to be widespread and could be devastating to social service programs, which depend on funding from both state and local governments. Both are affected by foreclosures and falling property tax revenue.

``Given the continued weakness, it's reasonable to expect that the gap would have widened from the $10 billion projection,'' Ross said. ``But how one defines the gap depends on a lot of assumptions and historically the analyst and the (governor's) Department of Finance use somewhat different assumptions.''

Nearly $2 billion of Schwarzenegger's most dire deficit estimate could be a difference in calculations.

If his budget is similar to previous ones, Schwarzenegger may be counting a planned $1.6 billion payment to the state's rainy day reserve fund which he could legally put off this year if income is too bad. He also may be including additional funding for higher education that is not legally required but that he told colleges he would pay.

``Governors inevitably want to see improvement in the budget between January and the May revise because that makes it much easier to close negotiations,'' Ross said. ``Schwarzenegger wouldn't be the first governor to try to build in some ability for the situation to appear to improve.''

If Schwarzenegger declares a fiscal emergency in January, he's required under Proposition 58, the balanced-budget measure voters approved in 2004, to introduce a plan to begin to correct the problem and to call the Legislature into special session to act on his recommendations. But because the fiscal year is almost half over, lawmakers likely could only cut a fraction of the projected deficit.

If legislators don't pass a budget bill within 45 days once a special session is called, they would be prohibited from acting on any other legislation or adjourning until they agreed.

Schwarzenegger said he was hopeful an emergency declaration could focus lawmakers on budget reform.

``What we have to do is fix the budget system. The system itself needs to be fixed, and I think that this is a good year, this coming year, to fix it,'' Schwarzenegger said in Long Beach, where he was promoting his plan for health care reform.

A special session also could allow the Legislature's Democratic majority to make most decisions about where to make spending cuts. Unlike the state's normal budget bill, which requires a two-thirds majority to pass, only a majority vote is needed to enact cuts within 90 days.

A tax increase would still need a two-thirds majority, which would require Republican support.

Senate Republican leader Dick Ackerman, R-Tustin, said he was optimistic the Legislature could agree on cuts, but was adamant Republicans would not support tax increases _ a prospect already being raised by Nunez and other top Democrats.

``We are in crisis mode and we support the governor's use of Proposition 58. It gives him and the state a tool to force people to deal with the budget.''

Ackerman said the largest parts of the budget are the most obvious places to cut.

They are also certain to be the most controversial.

``The majority has to come from (education) and health and welfare ... There's a lot of money wasted in K-12 and it's time we take a look at that.''

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