Prop. 57 may only offer short-term relief

Budget and legislative experts are saying Proposition 57,
heralded by Gov. Arnold Schwarzenegger as a way to aid the
fledgling California economy, would only serve to repay past debts,
and will not have much of a long-term impact.

“Proposition 57 provides a onetime infusion of cash to
take care of this and last year’s budget deficits,”
said Jean Roth, executive director of the California Budget
Project, an independent organization which analyzes state policy
issues.

“In the short term, the new money means eliminating a
little bit of the pressure on the budget as far as cuts are
concerned, but in the long term, it does nothing,” Roth
added.

According to Joseph Hurd of the UCLA Anderson Forecast, the
proposition is the right path to avoid difficult and disruptive
budget cuts for the moment.

“But we still have to slow spending or increase
taxes,” he said.

Even with Proposition 57 passing, the state still might be in
for a budget crisis in years to come.

“Within a year or two, it will be obvious if this plan is
successful by where the spending cuts are taking place,” Hurd
said.

Hurd is guessing that areas such as health care and education
will be most affected.

“It will be a lot harder for students to get Cal
Grants,” he added.

In the wake of a new budget report released by the Legislative
Analysts Office, an independent organization responsible for
evaluating the state budget, California seems to be heading toward
even more fiscal difficulty.

In the report titled “California Fiscal Outlook 2003-2004
through 2008-2009,” the LAO projected a $7 billion deficit in
2005-2006.

According to legislative staff, Gov. Schwarzenegger will use
over $13 billion to pay for past and present deficits, which will
leave around $1.7 billion in unallocated funds to be used to cover
the deficit expected in 2005-2006.

“Honestly speaking, it looks like there will be a deficit
the next fiscal year as well,” said Christopher Thornberg,
senior economist at Anderson Forecast.

If that deficit occurs, Hurd said he thinks there is a
possibility that Schwarzenegger might have to retract his promise
and increase taxes.

But if a deficit does not occur, the selling of bonds, cutting
of the budget and slowing of spending might just accumulate to pay
back those bonds, Hurd added.

But Proposition 58 might be successful in preventing another
serious deficit.

“The Legislature is not allowed to go home until they
agree on a balanced budget, a very balanced budget,” said
John Riley, the director of the business economics program at UCLA
and an economics professor.

Proposition 58 proposes much stiffer requirements for a balanced
budget, Hurd said, which would help prevent overspending.

Different state programs, such as higher education, might still
benefit from the recent passage of the proposition, since they will
have a reprieve from potential further cuts used to repay past
debt.

“If the proposition for the $15 billion would not have
passed in March, the governor would have been under a lot of
pressure to make additional cuts,” said Steve Boilard, a
higher education expert at the Legislative Analysts Office.

“And while not all the cuts would have been to higher
education, that area would have certainly been affected,” he
added.

Thornberg said he thinks the governor should perform a complete
reform of the tax system in California instead of cutting programs
or trying to pass bonds.

“You can borrow money, but keep in mind that when you
borrow, that’s only taxes deferred, not taxes avoided,”
Thornberg said.

“We need to raise taxes or lower spending ““ there is
no third way. I don’t think that a reduction in spending is
an option,” he added.

Other economists speculate that if taxes are not raised now,
they will be raised later ““ essentially passing on the burden
to the next generation.

“The state was in a disastrous financial position and the
spending caps were ridiculous. So we’re going to have our
children pay for it,” Riley said.

Proposition 13, which was passed in California in 1978 with
overwhelming voter approval, cut then-notoriously high property
taxes by 30 percent, while also limiting the rate of increase for
property taxes ““ a policy which is still effective to this
day.

At the time, 50 percent of state revenues were based on the
property taxes but Proposition 13 made the revenues more cyclical
and unstable, thus decreasing state revenues, Hurd said.

“The state needs a complete reform of the taxes to
completely reinvestigate this issue,” Thornberg said,
referring to Proposition 13.

The inability of Proposition 57 to offer much of a future impact
might be due to the peculiar nature of California’s more than
$13 billion budget deficit.

The state’s budget problem started in June 2001, with a
slight shortfall for that fiscal year.

But the accumulation of debt began in the 1990s, when the state
was getting used to “money flowing in so fast and hard”
from capital gains that it increased spending, Hurd said.

By fiscal year 2002, the state was facing a much bigger budget
crisis, to the sum of $12 to $13 billion.

Fiscal year 2003 brought in another $12 to $13 billion
shortfall, and there was substantial borrowing by then-Gov. Gray
Davis, in an attempt to keep the fiscal crisis under wraps,
Thornberg said.

But the current bond measure will yet again only provide
short-term relief, Riley said.

“(This) solution is only temporary,” he said.