Budget Deficits Soars Under Schwarzenegger
May 14, 2008

SACRAMENTO, Calif. (AP) — Gov. Arnold Schwarzenegger on Wednesday proposed borrowing on future lottery sales to eliminate a massive deficit in the state's spending plan and avoid unpopular cuts to the school system, state parks and prisons.

The $144.3 billion budget plan for the fiscal year that begins in July is a byproduct of a slowing state economy. Tax revenue has been falling far short of what California needs to keep pace with spending, leading to a $15.2 billion shortfall.

"Our crisis is real, and it is very serious," Schwarzenegger said during a news conference at the Capitol.

The centerpiece of Schwarzenegger's budget relies on a plan to make the state lottery more lucrative and thus more attractive to potential investors.

The Republican governor hopes to raise $15 billion over the next three years by selling bonds based on anticipated lottery revenue. He will use about $5.1 billion of that in the 2008-09 fiscal year to help erase the state's deficit.

The other $10 billion would remain in a reserve fund the governor wants to create to help the state get through rough financial times in the future.

The revenue proposal — which administration officials refer to as "securitizing" the lottery — would require voter approval on the November ballot because the lottery was established through the initiative process.

If it fails, the governor would ask the Legislature to approve a temporary 1 cent increase in the state sales tax to pay for the reserve fund. It would last no more than three years.

Democratic Assembly Speaker Karen Bass praised Schwarzenegger for trying to find new ways to raise money and not reduce the deficit solely through cuts. But she decried a proposed $2.9 billion reduction to health care and social service programs and an $824 million cut to public transit.

State Senate President Pro Tem Don Perata criticized Schwarzenegger's plan to sell lottery bonds as "the worst kind of market speculation," and compared it with the kind of ill-advised lending that led to the housing crisis.

"With this budget, it is kind of 'Hey, California, you can have it all and now gaming interests and gaming revenues will pay for it — the schools, the health care system, public safety,'" the Democrat said. "It's not unlike Countrywide (Financial Corp.) telling people you can have this house for no money down and interest-only payments."

Republican legislators said they disagree with the plan because it links the lottery and sales tax proposals. They have taken a pledge to oppose any tax increase.

"The idea that we use the lottery to pay down debt is a good one," said Assembly Minority Leader Mike Villines, R-Clovis. "Tying it to borrowing is, I think, a mistake, and tying it to a tax is a mistake."

Several states are considering ways to better tap their lotteries. Florida, Illinois, Indiana, Texas and Vermont have expressed interest in cashing in on some of their lotteries' value. Typically that has meant selling all or a portion to private investors.

Bob Greenlee, deputy chief of staff for Illinois Gov. Rod Blagojevich, said Schwarzenegger's proposal could work.

"It's certainly something that makes sense, so long as you can find somebody willing to buy the bonds," he said.

Schwarzenegger's budget proposal backs away from a politically unpopular plan to suspend the state's minimum school funding guarantee. He will boost education funding by about $1.8 billion in the 2008-09 fiscal year, which is still about $4 billion less than schools had anticipated.

The governor's updated budget plan also reverses some other politically unpopular proposals he made in the spending plan he released in January.

He is dropping plans to release 22,000 low-risk prison inmates early, close 48 state parks and reduce lifeguards at 16 state beaches. He will propose boosting fees up to $2 at some of the most popular state parks.

Adding the anticipated $5.1 billion in lottery bond revenue and saving the $4 billion in education spending leaves the administration with some $6 billion in cuts needed to balance the budget.

Schwarzenegger also will propose a surcharge on homeowners insurance policies that would raise $69 million a year for the state's emergency services.

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