In response to my commentary yesterday, Governor Schwarzenegger’s office sent over a list of what they felt were "inaccuracies" in my piece.  Immediately below, in burgundy, are the critiques I received.  Immediately below that, in green, are my comments on their input.  I appreciate the Governor’s office taking the time to respond, and hope that you will take some time to review this dialogue…

FROM THE GOVERNOR’S OFFICE

"…his plan will still leave California with a $7 billion deficit next year."

INACCURATE: The Governor’s proposed budget compromise leaves the state with a reserve of $1.046 billion at the end of 2008-09 and $1.446 billion in 09-10.  What’s more, the borrowing proposal legislative Republicans have floated would leave California with a deficit of more than $9 billion in both years.

"From my read on the plan, the Governor would balance the budget by issuing $3.3 billion from the Economic Recovery Bonds approved by voters in 2004…"

INACCURATE: The agreement for sale of $3.3 billion in ERBs is not included in the Governor’s compromise budget proposal. That agreement, in fact, took place earlier this year related to the 2007-08 budget. 

"…$5 billion in borrowed funds from the lottery (they call it ‘securitizing’ – a fancy word for borrowing)…"

INACCURATE: “Borrowing” suggests that the state would ultimately have to repay a loan. Securitizing future Lottery revenues would not require the state ever to pay back a single penny—there would be no further debt incurred.

 "…I understand that his budget proposal for 2009-10 would not transfer even one penny from the General Fund to the budget reserve…"

INACCURATE: The stronger budget reserve would be created—which is an enormous win for fiscal conservatives—and funds would flow into the reserve, then back out to help address the $15.2 billion deficit, as the budget Stabilization Account is designed to do.

"…the Governor is paving the way for higher spending and higher future deficits…"

INACCURATE: In fact, had the Governor’s budget reform mechanism been in place for the past 10 years, spending in the 2008-09 budget year would be nearly $13 billion lower.  A borrowing budget like the one that legislative Republicans have discussed would leave California with greater than a $9 billion hole in the 2009-10 budget year—about $10.5 billion worse off than the Governor’s proposal.

"…we can do much better than the Governor’s ‘compromise budget’ introduced last week." 

IMPOSSIBLE TO SAY: Legislative Republicans have not formally offered their own plan, outlining their proposed cuts, increased revenues, borrowing, etc.

JON FLEISCHMAN’S RESPONSE TO THE CRITIQUES FROM THE GOV’S OFFICE

Governor’s Budget will still leave California with a $7 billion deficit next year:

Response: Governor’s budget looks balanced on paper in 2008-09 and 09-2010.  But when you look at the Governor’s own write-up, the 2008-09 budget reserve is made up from additional $2 billion in spending reductions, reductions the Democrats have already rejected including deeper cuts to the aged, blind and disabled. 

The 2009-10 reserve is even more suspect because the 2009-10 budget relies on $6 billion from lottery funds to cover the projected General Fund shortfall. (See the discussion below on whether lottery funds are borrowing)  If the lottery measure fails at the ballot, the Governor’s budget will be short in 09-10, as acknowledged by the Department of Finance (Page 2 of the August 2008-09 Update – “In the absence of these two components, the only alternatives to solving the state’s budget problems will be massive program cuts and/or major tax increases.”)

In addition, the Governor’s proposal continues to have a shortfall even after $6 billion in lottery funds and $4.8 billion in increased sales taxes.  The Governor proposes to cover that gap by suspending the scheduled payment on his past borrowing instruments and suspends the scheduled transfer into the rainy day fund created under Proposition 58 ($1.509 billion as identified on Page 17 of the Department of Finance “August 2008-09 Update-Proposed Compromise”).   Thus the Governor’s reserve is made up of either missed payments on his Economic Recovery Bonds or missed payments into the reserve.    

Economic Recovery Bonds:

Response: It is true the Governor does not balance the 08-09 budget using the Economic Recovery bonds.   The $3.3 billion in bonds were issued just a few short months ago to shore up the 2007-08 budget.  These funds were “borrowed” by the Governor without legislative participation as allowed under existing law.  This appears counter to his assertion that borrowing was a bad solution for the state.

Securitizing – A fancy word for borrowing:

Response: It is just inaccurate on its face to say the state would not be required repay lottery funds.  The Governor’s securitization scheme proposes to sell a portion of future lottery profits to bond investors in exchange for a series of upfront payments.  The repayment of these bonds would take 30 years.  Lottery proceeds are state funds. 

Budget reserve:

Response: Yes, I was mistaken when I state that not a single penny would be transferred into the reserve.  It is true that the Governor proposes to suspend the schedule General Fund payment into the reserve to balance the budget.  However, he is proposing to put the funds borrowed by securitization of the lottery into the reserve but then proposes to spend the entire $6 billion to balance his unbalanced budget.  So in short, he funds the reserve with borrowed funds but then spends the reserve.  So much for the rainy day fund providing spending restraint. 

Governor’s Reform Would Have Resulted in Lower Spending:

Response:  While I appreciate the Governor’s staff speculation on what California spending would look like if his reform was in place.  Their analysis appears to rely on the fact that they would have convinced the Democrats to reduce programs in those years when there were not enough revenue to cover program costs.   

But let’s look at how his budget reform works this year.  His 09-10 budget projects a shortfall of over $7 billion so he borrows $6 billion from the lottery, fills the reserves and spends it.  No restraint in spending here. 

In conclusion, while we may have some back a forth over the issues above, the bottom line is that the only responsible way for state government to respond to massive increases in spending (40% in five years) is to respond in kind, with massive decreases in state spending.  When economic times are tough, state government needs to be able to adapt, and shrink.  By putting a tax increase on the table, the Governor is allowing Democrats a false hope that taxes may be increased in response to their overspending.

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This entry was posted on Tuesday, August 26th, 2008 at 12:00 am and is filed under Blog Posts.