California Insider

After taking a closer look at the governor’s revised budget, I am still convinced that, if the Legislature gave him everything he is asking for, the plan would balance the books in the coming fiscal year and allow Schwarzenegger to present another balanced budget next January without raising taxes or cutting programs further.

But that balance, of course, depends on the use of $2 billion in the coming year from the March 2 bond measure and another $3 billion in the fiscal year that begins July 1, 2005. That second budget would also rely on the final year of Schwarzenegger’s property tax shift, the after-effects of the one-time Indian gaming revenue surge he is anticipating, and perhaps one more year of shifts from the Proposition 42 transportation fund. All of those measures would disappear in 2006-07, leaving Schwarzenegger with the prospect of a re-emerging structural gap, somewhere, from this vantage point, in the neighborhood of $3 billion to $5 billion (in an $86 billion general fund). He thinks his proposals to reform spending in prisons, Medi-Cal, procurement and various social programs will generate enough savings by then to keep the budget balanced. But this is clearly a long slog. Without additional revenues and absent an unanticipated economic boom, Schwarzenegger, the Legislature, and the state are in for years of belt-tightening.

Is it doable? Probably. Over the three-year period from 2003-04 through 2006-07, general fund spending could grow from $75.6 billion to about $86 billion, or an increase of about 15 percent. Much of that new spending would not really be “new” but actually the resumption of ongoing spending that has been temporarily suspended through these tough fiscal times. An example: the end of the two-year property tax shift would require the state to spend an additional $1.3 billion on the schools in 06-07, but the schools wouldn’t see any net increase; they would simply be getting that money from the state rather than from local property taxes. Cities and counties, meanwhile, would see a return at that point of revenues they gave up for two years.

When you account for the property tax shift and other temporary measures that will expire, you’re probably left with an adjusted annual growth rate of about 3 percent or so over the three-year period. That might not be enough to keep pace with population growth and inflation. It might not be enough to restore state services to the level many believe is appropriate for California. But it’s not exactly a decimation of government as we know it.

Here is my Sunday column, a special, longer edition that reviews and assesses Schwarzenegger's first six months as governor. My verdict: probably a B for substance, but an A-plus for marketing.