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California faces $19 billion budget deficit despite massive cuts

California has come face to face with its annual budget dance. This year’s cover charge is $19.1 billion in needed cuts, and all parties are still huddled in the corner trying to decide if the music will be foxtrot, two-step, shimmy, or sway.

California has come face to face with its annual budget dance.

This year’s cover charge is $19.1 billion in needed cuts, and all parties are still huddled in the corner trying to decide if the music will be foxtrot, two-step, shimmy, or sway. The state controller is tapping his foot with one eye on the clock – July 1 – after which the state could eventually turn off the lights, or issue IOUs, as it has done in the past.

Democrats have two plans – one to borrow billions and the other to raise taxes and shift some programs to counties. Senate Democrats unveiled their plan on Monday to give counties greater control of state programs – predicting a $3 billion to $4 billion savings in the budget gap. The state would approve a tax on oil production, permanently extend the state’s higher vehicle license rate fee, and delay corporate tax breaks. It would also give counties greater authority to seek local tax hikes from voters.

Even the two Democratic plans “appear to be very far apart,” says Dan Walters, the leading political writer in the state.

“The two Democratic versions of the budget are very much at odds, even if they both agree on rejecting Gov. Arnold Schwarzenegger’s slash-and-burn approach. … It’s a three-way stalemate,” he wrote in his Sacramento Bee column on Tuesday. “Nothing will happen until Democrats in both houses are in sync on whether to borrow or tax their way out of this year’s version of the chronic deficit.”

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Governor Schwarzenegger’s solution includes massive – and unpopular – program and budget cuts, and he backs state Republicans who have vowed to give no ear to any taxes. Analysts say that Schwarzenegger does not want to leave office on a down note, but that he may have no choice in this matter at the moment.

“It has been a California tradition that lame duck governors leave huge deficits for their successors to deal with,” says Robert Stern, President of the Los Angeles-based Center for Governmental Studies (CGS). “Will Schwarzenegger carry on this tradition or will he provide bold leadership and bite the bullet? Will the Republican legislators go along with him? My bet is that everyone in Sacramento will punt until next year when the economy is expected to improve,” he says.

One good sign, says Jack Kyser, president of the Los Angeles Economic Development Council, is that state economic fortunes are projected to turn around soon.

“But the bad news is that the recovery is going to be slow and local government finance always lags behind the overall economy by a couple of years at least,” says Mr. Kyser.

Other creative ideas are floating around, including electronic, ad-bearing license plates for all vehicles to raise money. That, and the idea to shift programs to the counties is not inspiring to a population that has lost trust in its politicians.

“In California budget politics, ‘creative’ does not mean ‘innovative’ – it means ‘sneaky,’ ” says Jack Pitney, Professor of American Politics at Claremont McKenna College. “Cutting spending and raising taxes are the only genuine responses to the budget problem. But since both are unpopular, legislators will seek ways to put off tough choices and slough off obligations.”

“Realigning functions is a clever way for one set of politicians to force another set of politicians to take the blame for raising taxes, says Pitney.”

The past two years have been particularly gruesome for California because of the wider economic downturn. But California’s tax structure is always volatile because it leans on agriculture and manufacturing when the state economy is based on services.

Two groups are hovering in the wings with major plans to redesign state government itself so that this doesn’t happen every year.

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One, called “Bay Area Council,” is a bid to amend California’s constitution.

The other, “California Forward,” consists of bipartisan business and political leaders who have spent two years holding focus groups across the state to find citizen-driven solutions to end the structural problems that plague the state.

“One of the biggest problems with California government has been that counties are not flexible in shifting their revenues around from what is not needed to what is needed,” says Robert Hertzberg, former speaker of the state Assembly and now co-chair of California Forward.

But as bleak as it appears in Sacramento at the moment, some analysts say there are reasons for optimism. Gov. Arnold Schwarzenegger is supporting a legislative proposal to reform the pensions of state workers and head off a future fiscal calamity. Pension reform was among the priorities he targeted in January, the beginning of his final year in office.