State revenue outlook shrinks

By John Hill Bee Capitol Bureau

(Published May 10, 2001)

Legislative Analyst Elizabeth Hill dropped a budget bombshell Wednesday, reporting to legislators that state revenues will be $3.4 billion lower than Gov. Gray Davis predicted in his January budget proposal.

Instead of enjoying a $1.9 billion reserve, the Davis budget plan for the fiscal year beginning July 1 would now leave the state $1.5 billion in the hole, Hill wrote in a letter to legislators overseeing the budget.

Dwindling revenue from a faltering economy leaves Davis' plan in need of major revisions. The new revenue estimates would require cuts in one-time expenditures that Davis proposed for programs such as clean beaches and fiscal relief for local governments. Cuts also may have to be made in new spending contemplated for education, which got most of the new money in the $104.7 billion January budget proposal.

"The number is so deep that it's going to be hard for us not to contemplate cuts or make cuts," said Assemblyman Tony Cárdenas, D-Sylmar, vice chairman of the Joint Legislative Budget Committee. "We don't know where those cuts are going to come from."

Little will be immune, said Dan Howle, chief of staff for Sen. Steve Peace, D-El Cajon, chairman of the Joint Legislative Budget Committee.

"It's going to include programs the governor is very supportive of and would like to get done, but we're in a little bit of a cash crunch here, and you've got to do what you've got to do," he said.

"If anything's got a protective fence around it, it's education. But I still think it'll have to take a share of the cuts."

These grim budget figures don't take into account possible hits on the budget caused by the state's breathtaking expenditures on electricity.

Those effects could be negligible if the state is able to sell bonds to pay for power and replenish the treasury. But considering recent events in the volatile energy crisis, no assumption is safe.

The budget crunch will likely highlight conflicting spending priorities and could lead to more polarization between Democrats and Republicans who have been squabbling over the energy crisis.

"A third of the Assembly has never done a budget," Howle said. "Another third has never dealt with anything other than huge surpluses. Now you're saying we've got to go in and cut. This could be a long, hot summer."

The new revenue projections are a dramatic illustration of the state's faltering economy. Revenues for the fiscal year that starts July 1 are now expected to be $4.8 billion less than anticipated in January, Hill wrote.

That includes a decrease of $3.9 billion in income tax, $500 million in sales tax and $600 million in bank and corporation taxes, offset by some moderate increases in insurance and estate taxes, said Brad Williams, chief economist in the non-partisan Legislative Analyst's Office.

"It's deterioration in the stock market and implications for capital gains and stock options," Williams said, "and also the weakening outlook for the economy as a whole."

The $4.8 billion blow is softened somewhat by unexpectedly strong revenues from last year's tax returns, which helped boost revenues $1.4 billion higher than had been anticipated.

The net effect is $3.4 billion less for the fiscal year that begins July 1. If the Democratic governor's budget were approved as is, the deficit would reach almost $6 billion in the fiscal year that begins July 1, 2002, Hill wrote.

The governor is expected to release his revised budget Monday. The state Department of Finance said Wednesday that it wouldn't comment on the new revenue estimates until then.

One obvious target for budget cutters is one-time expenditures in the January proposal. This includes money for local governments, state building projects, housing initiatives, replacing diesel engines that contribute to air pollution, cleaning up beaches, law enforcement technology grants, flood control, parks along rivers and more.

Even if the state axed $2.5 billion for one-time expenditures that Davis proposed, it would still have to cut an additional $1.7 billion proposed for ongoing programs.

Davis' budget -- which projected an $8 billion surplus -- includes at least $1.9 billion more for education than required under formulas approved by voters in Proposition 98. But considering Davis' commitment to education, most believe it's unlikely the governor would balance the budget by throttling back to the minimum funding level, which would require cuts to existing education programs.

Cárdenas said education, health care and transportation should be protected from cuts.

Assembly Republicans agree about education, but have different ideas about the rest.

On Wednesday, the Republicans released their plan for the revised budget. It includes protecting schools and law enforcement, creating a $4 billion reserve for future electricity purchases, and striking a proposed 1/4-cent sales tax increase.

The sales tax, which went into effect in the early 1990s, was removed this year, but Davis has proposed restoring it in 2002.

"All this does is put a new burden on the backs of Californians" already coping with higher energy costs, said Assemblyman George Runner, R-Lancaster, a member of the Assembly Budget Committee.

Republicans say an electricity reserve could avoid the need to do another bond sale for power purchases next year.

"This is the time to make sure we are putting money aside and that we're not going to have to turn back to taxpayers or ratepayers and put an additional burden on them," Runner said.

-- PHO (owennos@bigfoot.com), May 10, 2001

Answers

I can see surcharges cropping up all over the place . . .on Californians' future tax bills. How else is California going to pay these astronomical costs?

-- R2D2 (r2d2@earthend.net), May 11, 2001.

Headline: California Power Rescue Plan Rests on Many 'Ifs' [excerpts]

Source: Los Angeles Times, 11 May 2001

URL: www.latimes.com

The success of Gov. Gray Davis' plan to end California's energy crisis rides on assumptions that, if wrong, could lead to billions of dollars in runaway costs for taxpayers. Davis, who signed a historic $13.4-billion bond measure Thursday to finance the plan, has refused to release key data and presented a single model for how California will buy electricity--and pay for it--over the next 15 years.

If Davis and his cadre of financial advisors are right, the state will emerge from the most ominous period of the crisis in less than two years, flush with cash and the prospect of electricity rate cuts. By then, the hope goes, the power suppliers Davis has vilified will be reined in. If his predictions are off by modest margins, which even many state officials and energy experts say is likely, the state may have to employ tactical blackouts to control costs, siphon money that could be used for other services, go deeper in debt or raise electricity rates above the record increases of this year.

The governor's plan largely rests on these crucial assumptions: that consumers will conserve a record amount of power at peak usage times, that energy prices will drop precipitously, and that the state will lock in far more contracts for long-term power. But those three assumptions could prove faulty, according to government financial records and interviews with state officials, Wall Street analysts and energy experts.

Davis is banking on that troika to quickly tame the wild prices of last-minute power--which hit an apparent record of $2,000 for a megawatt-hour Wednesday. Such purchases so far have put the state on the hook for $6 billion and pushed major utilities to the brink of ruin.

Davis' plan assumes that the state will reduce peak demand by 2,484 megawatts--enough to supply nearly 2 million homes--through three programs run by the California Independent System Operator, which keeps power running to homes and businesses across the state.But Cal- ISO managers say they will be lucky to achieve a fraction of that savings this summer…

Officials at another state agency in charge of a similar conservation program, the Public Utilities Commission, also said they are not sure about hitting targets on which the bond plan is based. PUC Senior Analyst Robert Strauss said he has no idea how many businesses will agree to curtail electricity consumption in exchange for cheaper power rates this summer. The program is only a month old, he said. "We're in a new situation that we don't have good experience with," Strauss said. "Who's going to sign up for these programs? We don't really know." Another program that Davis hopes will conserve 1,600 megawatts has attracted interest from just two businesses since March. "It's pretty ambitious to think we're going to get 1,600 megawatts by June in that program,"…

Beyond Davis' assumptions about conservation, the success of his hard- fought bond measure relies heavily on how much the state will pay for electricity during the next two summers. If the price is higher than forecast by Davis, the bond money could be consumed more quickly, potentially forcing the state to borrow more, dip into tax funds or raise customer rates again…In his effort to push his bond legislation through the Capitol, he has suggested that about 50 such contracts will be signed to produce half of the peak demand the state needs…So far, the administration has fallen far short, achieving final agreements on only 28 contracts as of Thursday

"I think the operative word is uncertainty," said Paul Patterson, an energy analyst with Credit Suisse First Boston. "There are too many pieces, [and] all you need is for one or two of those not to work out substantially and things change." …

…Some wondered about who would provide the additional power that Davis had incorporated into his plan. Others questioned whether investors would buy the bonds with so many assumptions built into the measure. During the briefing, the governor's advisors said one option being considered is to refuse to pay the highest prices for power and "accept some sort of rolling blackout scenario."

…Democratic state Controller Kathleen Connell, whose staff has attempted to analyze the governor's report, is warning that rising power costs could tear through the bond funds and possibly expose the state's general fund. Connell accused the governor of tailoring his assumptions and numbers to neatly fit his goal of assuring the public- -and Wall Street--that an end to the crisis is near…

-- Andre Weltman (aweltman@state.pa.us), May 11, 2001.