Governor may call special session to deal with rising deficit

Sacramento Bee
October 7, 2008

By Kevin Yamamura

With the ink barely dry on the current state budget, turmoil in the financial markets and flagging tax revenues will force Gov. Arnold Schwarzenegger and lawmakers to reopen talks Wednesday on the spending blueprint he signed two weeks ago.

They will seriously consider calling lawmakers back to Sacramento for a special session, as the state's current spending plan may already be out of balance due to falling revenues, according to Capitol sources.

The leaders also will discuss California's need for a $7 billion short-term loan, a normal borrowing maneuver that has become problematic in the wake of recent tight credit markets. Further problems arose Monday when U.S. District Judge Thelton Henderson said he expects the state to pay $8 billion to build seven new inmate medical facilities and upgrade other units, adding more pressure to the budget situation.

California relies heavily on personal income tax and sales tax to generate revenues, and state officials fear both sources are significantly weaker than predicted when officials were crafting the current budget. Updated revenue estimates were unavailable Monday.

To deal with lower revenues, sources said the governor could declare a budget-related special session as he did in January, forcing lawmakers to consider another round of spending cuts, accounting maneuvers or tax increases to bridge the gap.

"It's likely that revenues will come in lower than expected," said Schwarzenegger spokesman Aaron McLear. "Obviously we're going to monitor the situation closely and be prepared for any scenario, and that's why he's meeting with the four leaders on Wednesday, so they can continue to work together to go over the revenues and make decisions on what's best."

Revenue indicators for September are discouraging so far. Paul Warren, revenue and tax coordinator for the nonpartisan Legislative Analyst's Office, said personal income tax and corporate tax receipts for September are down slightly more than 10 percent from projections. He said the month is a significant indicator because it is when quarterly tax filers make their estimated payments.

"I think what's been going on with the credit markets makes it more likely the numbers aren't going to get a lot better quickly," Warren said. "So it does seem like we're going to be revenue challenged. The revenues aren't going to come in the way we anticipated in April or May, so (a special session) would be a reasonable thing to do. Obviously, the earlier they come back, the more flexibility they have because as you spend money, you lose flexibility."

Sen. Darrell Steinberg, D-Sacramento, said he would have to wait until after Schwarzenegger meets with leaders before discussing the merits of a special session.

"It would not surprise me, given the continuing troubles in the economy, to see us faced with a current year budget deficit," Steinberg said.

Steinberg is scheduled to take over as Senate president pro tem on Nov. 30, though that timeline never accounted for a potential special session this fall.

Faced with a midyear budget gap last fiscal year, lawmakers in February approved $2 billion in cuts that reduced school funding and Medi-Cal reimbursements. The state also relied on selling bonds and delaying debt repayment to get through June.

Democrats and Schwarzenegger supported tax increases to resolve the 2008-09 budget, but Republicans blocked new taxes by withholding their crucial votes for the budget. Assemblyman Roger Niello, R-Fair Oaks, said raising taxes would be the worst thing to do as the economy suffers even more.

"I'm certainly sensitive to the issues (of state services), but if we indeed have to have a special session because of the utter deterioration in the economy, to solve that problem by raising taxes would be problematic at best," Niello said. "In the face of a weak economy, not only does it exacerbate that weakness but it won't raise the amount of money you anticipate."

Advocates for education and social services said they cannot weather further cuts.

Frank Mecca, executive director of the County Welfare Directors Association, said Schwarzenegger used his line-item veto to cut $70 million from the California Work Opportunities and Responsibility to Kids (CalWORKS) program, placing program administrators under pressure to provide the same level of services with less money.

"It's completely unrealistic, so I can't imagine how in the world we would absorb cuts in another round," Mecca said. "We still haven't figured out the implications from the last round."

Scott Plotkin, executive director of the California School Boards Association, said lawmakers "might as well stay home" if they are planning to make up the latest shortfall with cuts alone. His group and other school organizations believe the state should use tax increases to balance the budget.

"If they come back into a special session because revenue projections are in decline for the current year budget, it probably could only mean bad news for schools unless they're inclined to have a conversation about new revenues," Plotkin said.

Henderson, the federal judge, rebuked state leaders Monday for failing to fund new inmate medical care facilities. The court-appointed receiver, J. Clark Kelso, has requested $8 billion, including $3 billion by July 1.

Henderson did not hold Schwarzenegger and state Controller John Chiang in contempt for failing to pay the money, but he suggested he is likely to force the state to pay $250 million as a first installment.