Sacramento Report

Finally a Bond Deal

After several fits and starts Governor Schwarzenegger and legislative leaders finally reached a deal to place a package of infrastructure bonds on the November, 2006 ballot. During floor sessions that began on May 4th but continued well past midnight, the State Assembly and Senate approved four bond proposals totaling $37.281 billion. Broken down by subject area, $19.925 billion will go to transportation projects, $10.416 to K-12 and college education, $4.09 to flood protection projects, with $2.85 to be spent on affordable housing. As part of this compromise the Legislature approved a separate appropriation for $500 million in levee repairs and changed the sales-tax allocation to guarantee that the entire sales tax on gasoline sales will go to transportation projects. Governor Schwarzenegger signed the four proposals at separate events held in the days immediately following the legislature's action, clearing the way for the proposals to go before the voters for approval.

Both the Governor and Democrat leaders hailed the agreement as a triumph of bipartisanship. Interestingly, the two candidates for the Democrat nomination for Governor - Controller Steve Westly and Treasurer Phil Angelides - rushed to endorse the plan as well. Since the Governor first announced his bond proposal back in January during his State of the State Address, political commentators have assumed that Schwarzenegger viewed a bond deal as a means to reinvigorate his credentials as a bipartisan political reformer. The unwillingness of both Westly and Angelides to challenge Schwarzenegger on any of the bonds indicates their sense that the public supports the proposals. This development complicates whatever political critique the eventual nominee will mount against the Governor in the fall.

The November ballot promises to be one of the more competitive election cycles in recent years. In addition to what will likely be a relatively tight race for Governor, four other constitutional offices - Lieutenant Governor, Treasurer, Controller, and Attorney General - as well as Insurance Commissioner will be open. Besides Schwarzenegger, the only incumbents seeking statewide office will be Secretary of State Bruce McPherson and Supervisor of Public Instruction Jack O'Connell. Open seats generally produce tighter races. Beyond the candidates, several other provocative ballot measures appear likely to qualify. Sponsors of an initiative to restrict the application of eminent domain powers have submitted signatures sufficient to qualify. Signatures have also been filed for a measure to require parental notification when a minor seeks an abortion. Along with the bonds, this menu of initiatives and open offices will crowd, complicate and intensify the public debate.
Hot Summer, Cool Budget?

The so-called May revise - the annual adjustment to the Governor's January budget proposal to reflect any discrepancies between projected and actual tax receipts - brought good news for the Schwarzenegger Administration. California has collected $4 billion more in revenue this fiscal year than analysts had expected back in January. These forecasts also indicate that the state will collect an additional $2 billion over previous projections during the 2006-07 fiscal year. (California runs on a July-June budget cycle.) Together, this $6 billion bump in receipts smoothes the way for a relatively clean budget process this summer. (The California Constitution requires that the Legislature approve a budget by June 15th and that the Governor sign a budget by July 1st each year. In practice the Legislature typically runs into July in its budgeting process, with July 15th - the first date in the new fiscal year on which state bills come due - as the first deadline of practical significance.)

With this improved revenue position, the Governor's revised budget proposal looks to direct nearly $5 billion more to education. In a "Prop 98" deal that he reached with the California Teachers Association, Schwarzenegger now proposes to spend $55.1 billion on education during FY 2006-07 out of a total budget of $94.3 billion. That number comes in at $2.0 billion more than what the January budget had provided. His deal with the CTA commits Schwarzenegger to spending an additional $2.8 billion more on schools over the following seven years. The revised budget also would raise debt payments by $1.6 billion and add another $1.6 billion to the budget reserve during FY 06-07. (Prop 98 establishes the budget baseline for education funding.)

Schwarzenegger's budget choices indicate a belief on the part of the Administration that the newfound revenue represents a one-time windfall to the state rather that a lasting increase in receipts. His budget therefore avoids creating new and ongoing funding obligations. Instead, the educational increases described above have been cast as a correction of previous education spending shortfalls. Allocating $3.2 billion to one-time debt reduction and reserve payments likewise avoids increasing any budget baselines. This approach contrasts with how Governor Davis and the Legislature treated the dot-com windfall during the early years of this decade, when a flood of one-time capital gains receipts was dedicated to new spending programs that continue to obligate the state long after the market correction reduced these payments.

The CTA deal should ease the political path to a budget deal. While the legislative leadership will look to shift some spending to Democrat priorities the higher revenue means that tax increases and spending cuts can both be avoided. That suggests a relatively painless budget process.

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