New budget may face complex deficit problems

California’s uncertain financial future will be somewhat
clarified today, with Gov. Arnold Schwarzenegger announcing his new
budget for the approaching fiscal year.

The new budget comes at a time of crisis for California, with
the state facing a $15 billion deficit as well as the recent recall
of former Gov. Gray Davis, and his replacement by
Schwarzenegger.

Fiscal experts have said the current deficit may necessitate
further cuts and increases in fees for state services as part of
the new budget.

Schwarzenegger’s first major state address Tuesday seemed
to confirm that idea, with the governor stating he will be forced
to cut spending.

He added, however, that he will not increase taxes.

According to experts, higher education and health services will
be the two areas hit hardest by cuts in the budget.

“Fees will go up for various things, including tuition in
the UCs,” said Anderson School Professor Daniel Mitchell.

He added that even though the governor promised to put a 10
percent yearly cap on fee increases for higher education,
Schwarzenegger’s ability to maintain such a promise remains
to be seen.

“A 10 percent cap on fees amounts to $100 million in
actual revenues, and the university is likely to be cut more than
$100 million,” Mitchell said.

Higher education in California has already suffered due to the
large budget deficit, with the governor announcing $29.9 million in
mid-year cuts.

The cuts included an unallocated reduction of $15.7 million, a
reduction of $12.2 million for K-12 outreach programs and a
reduction of $2 million for the Institute for Labor and
Employment.

Those cuts, however, might be just the beginning of a much
larger crisis caused by the budget deficit.

“This is an unprecedented situation, and there will be a
lot of repercussions of this deficit, not just this year but
continuing for some time,” Mitchell said.

In order to combat the deficit, the new governor urged
Californians to vote affirmatively for a $15 billion recovery bond
he will be putting on the March ballot.

“Join me in getting out a message that a “˜yes’
vote on these measures on the March ballot is absolutely crucial to
our financial future,” Schwarzenegger said during
Tuesday’s address.

Some fiscal experts are saying that Schwarzenegger will need the
full weight of his charisma in order to pass the bond come
March.

“Usually, bond issues for the state are (drafted) for
specific purposes. The March one is just for making up for past
deficits,” Mitchell said. “It will definitely put a
wrinkle on the state’s ability to borrow funds.”

The passage of the bond is not the only difficulty plaguing the
new governor.

Schwarzenegger drew fire from critics recently by repealing the
tripling of the car registration tax enacted by his
predecessor.

Facing a mostly negative reaction from the state’s
citizens, Davis augmented the car registration tax in an attempt to
ameliorate the state’s budget deficit.

“This massive tax increase was a desperate act of a
government out of control,” Schwarzenegger said.

But experts say with the car tax repealed, California will be
facing an even greater budget shortfall ahead.

A report published by the Legislative Analysts Office, an
independent group responsible for analyzing the governor’s
annual budget, stated California will face a year-end shortfall of
$10.2 billion in 2004-2005 if the license fee rate increase
remained in effect.

Now that the car tax has been repealed, that amount will become
“substantially higher,” the report went on to say.

“The only way to get out of it is to find a new source of
cash,” Mitchell said. “If the recovery bond does not
pass in March, what the governor will do is a whole other
issue.”

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