San Jose Mercury News: California's Calendar of Doom

California's Calendar of Doom
By John Woolfolk and Sharon Noguchi
San Jose Mercury News
Posted: 04/08/2011 03:00:00 PM PDT
Call it the Calendar of Doom -- California's countdown to budget meltdown.

With more than $15 billion of red ink still washing over the state's checkbook even after the Legislature trimmed the deficit by $11.2 billion, the clock is ticking to bridge the gap. The choices -- extending taxes or slashing funding for K-12 schools, universities, public safety and other programs -- are ugly. But so is inaction, which could jeopardize the state's credit and ability to pay bills.

"The options are only getting more and more difficult," said Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California.

First up on the calendar is the governor's revised budget, expected to be released May 13. Thwarted by Republicans to get a measure before voters in June to extend a series of taxes imposed two years ago, Brown says he may have to deliver an "all cuts" budget next month. That would force schools to shorten their year, universities and colleges to raise tuition further and state agencies to cut health and social service programs more.

"The prospect of even deeper cuts is almost hard to imagine, given where we already are," said Jean Ross, executive director of the California Budget Project, a nonpartisan public policy research group.

Because the cuts are so unpalatable, many doubt lawmakers would even approve them. So Brown is still weighing putting a tax measure on the ballot later in the year.

"The governor believes this is an issue that needs to go to the people and that people ought to weigh in on it," said H.D. Palmer, spokesman for the state Department of Finance.

But here's where the calendar really gets nasty. The state's fiscal year starts July 1, so a tax measure approved later would not deliver revenue for the full year.

Budgeting in the dark
In addition, the secretary of state needs months to stage a statewide election in an odd-numbered year when none are scheduled. And strategically, it will be tougher persuading voters to raise taxes -- which are set to drop July 1 -- than to maintain current rates.

Besides, off-year special elections aimed at fixing the budget have never fared well. Voters sank five of six budget-related measures in a special May 2009 election. The only one that passed barred raises for lawmakers in years when there's a budget deficit.

Brown wants an election because he vowed as a candidate that he would not allow new taxes without a vote of the people. But one idea he floated last week was passing a budget that keeps the taxes for now, with a vote on them later in the year.

If voters eventually reject the taxes, they would disappear and cuts would be imposed. His office said last week that the idea still would require two-thirds approval in the Legislature.

The stalemate in Sacramento has left school officials cursing the calendar and budgeting in the dark.
"We'd like somebody to make a decision. Even a bad decision is better than no decision at all," said Rick Hausman, chief business officer of the Cupertino Union School District.

Another ugly red circle rings May 15, when school districts must issue layoff notices to teachers and counselors for the coming school year. And they must draw up their 2011-12 budgets by June 30. After that, it would be a scramble to hire back employees if a budget deal provided more money.

Once school begins in August, classes are set, so it would be disruptive to reassign students, teachers and classrooms.

The worst scenario for schools, though, is if legislative gridlock triggers the unprecedented cuts, predicted to be much as $1,000 per student. Many school officials say they simply don't have the tools to cut their budgets that much.

While schools are anxiously watching as the budget drama creeps toward the new fiscal year, so is everybody who does business with the state.

Failure to approve a budget on time could produce a cash crunch later in the year. The state could be forced to pay bills with IOUs, jeopardizing its already weak credit rating. That would increase borrowing costs for road construction and other infrastructure projects.

Uncertain cash balance
It's unclear how long the state can muddle through with available cash until a deal is reached and avoid the embarrassment of 2009, when it issued $2.6 billion in IOUs to pay vendors in July and August. The controller's office wouldn't hazard a guess, noting that revenue figures are constantly being updated.

Despite strong income-tax collections, the "state's cash position actually worsened by $370 million in March," Controller John Chiang said Friday

Failure to approve a serious spending plan on time, one that departs from recent efforts to close budget gaps with temporary fixes, could erode California's meager credit, already lowest among the 10 largest states.

"We're watching it very closely," said Doug Offerman, a state credit analyst with Fitch Ratings.

Voters in November approved Proposition 25, which allows California lawmakers to pass budgets with a simple majority vote. But the measure kept in effect the two-thirds requirement for new taxes and also docks legislators' pay every day the budget is late.

Yet Janis Hirohama, president of the League of Women Voters of California, one of Proposition 25's backers, said the state still seems "in this 'Groundhog Day' scenario of the same thing over and over again."

But Ross, the director of the California Budget Project, seemed slightly more optimistic.

She noted that although last year's budget was approved a record 100 days late, "We're still early in the process. There's still time for negotiations."