Legislative Analyst Elizabeth Hill has had the chance to review the May Revise and the verdict is not good. While Frank Russo notes that she agrees with the revenue projections, her assessment of Arnold’s lottery borrowing plan and his failure to address the structural revenue shortfall are major flaws in the proposal.

In her assessment of the lottery borrowing plan, she notes that not only does Arnold overestimate the likely sales of lottery tickets, but that by doing so his borrowing plan actually puts education at even greater budgetary risk:

While the administration acknowledges that there is no way to know for sure how much the proposed changes would increase lottery profits, its forecast model assumes that such profits would grow from $1.2 billion in 2007-08 to over $2.4 billion at some point between 2013 and 2017. This means that total lottery sales would increase from $3.4 billion to over $7 billion during this five- to ten-year period. In so doing, per capita sales would approach the national average, according to the administration’s assumptions. This assumed increase in lottery sales allows the administration to forecast that debt service will be paid in full each year and public education will receive a distribution of $1.2 billion annually. If, on the other hand, lottery sales and profits did not grow as much as forecast by the administration, bondholders would continue to receive payments, but public education would experience a drop in lottery payments.

If that wasn’t damning enough, she then points out that Arnold’s plan to divert general funds into reserves without first addressing the structural revenue shortfall will lock that shortfall permanently into place:

Under our revenue estimates, the administration’s revenue cap leads to counterproductive results-the required deposit of General Fund monies into a new reserve at the same time that the state faces multibillion dollar shortfalls. The cap also could prevent the state from accessing some of the lottery proceeds intended to help solve the budget problem. As a result, the administration’s reforms could lock the state’s operating shortfall in place and lead to automatic multibillion dollar across?the?board reductions.

The LAO provides an alternative set of solutions, claiming to be able to “maintain state services at their July 1, 2007 level” especially in the area of health care, where destructive cuts are being proposed.

Obviously Arnold’s proposals are nonstarters. And perhaps the LAO’s damning assessment of Arnold’s lottery borrowing plans will help the Legislature turn to the more fundamental and long-term solutions of new revenues. California can no longer maintain the fiction that tax increases can be avoided if we are to stay competitive in the 21st century global economy.

Earlier this week we told you about Arnold’s planned visit to the St. Francis Yacht Club for a party hosted by a European yacht manufacturer. This seemed pretty ironic given the successful Yacht Party ad campaign launched by the Courage Campaign (who I work for) this week, attacking the Republicans as a party favoring yacht owners over everyone else in California.

Amusingly, our cowardly governor did not even show up, as Josh Richman explains:

I waited, and waited, and waited, but Gov. Arnold Schwarzenegger didn’t show today at the St. Francis Yacht Club in San Francisco’s Marina District for an event unveiling a hybrid pleasure-boat engine.

Two of his cabinet secretaries – California Environmental Protection Agency Secretary Linda Adams and California Resources Agency Secretary Mike Chrisman – were there to sign a memorandum of understanding with Austrian Consul General Martin Weiss to have the state cooperate with the governor’s native nation on environmental protection initiatives. Adams said the governor “could not be more proud that we are taking this action today;” Chrisman said the governor “certainly recognizes the importance of this relationship.”

Then the three officials joined Michael Frauscher, managing director of Austrian boatmaker Frauscher, and Steyr Motors CEO Rudolph Mandorfer for a cruise beneath the Golden Gate Bridge on a 25-foot Frauscher 757 St. Tropez motoryacht powered by the world’s first electric-diesel hybrid marine engine – California Chris-Craft will be the world’s first distributor to offer the new Frauscher hybrids – before returning to the dock for sips of chilled sparkling wine. A gloriously beautiful day on the bay, to be sure.

But although Frauscher’s public relations firm had insisted Wednesday, Thursday and through much of this morning that Schwarzenegger had been confirmed to attend – and that the event had been moved from Thursday to Friday to accommodate his schedule – there was no governor. He was in San Francisco, apparently meeting with a certain newspaper’s editorial board, but he didn’t make the yacht event (though many reporters did, with most splitting as soon as it appeared he wouldn’t show).

So – no questions about the “yacht tax” hubbub, just eco-friendly yachts.

Richman updates his post saying that while Arnold’s press officials claiming “we never were committed to doing this, we were never planning to do this,” neither did they respond to Richman’s queries about the event earlier in the week. It sounds as if they couldn’t get out of this Yacht party quickly enough.

So let’s get this straight – Arnold avoided a public appearance because the Courage Campaign, along with the California Nurses Association and Assemblymember Anthony Portantino, helped put an ad on the airwaves calling attention to the Republicans’ Yacht Party nature?

David was right – Arnold IS a coward. And the California netroots, along with progressive groups and politicians like CNA and Portantino, have the power to shame Arnold away from a good party.

While Jeff Denhamn chases Communist ghosts, activism on the loyalty oath continues. In response to recent firings of Quaker teachers who needed to alter the oath, People for the American Way delivered 11,000 petitions to CSU Chancellor Charles Reed’s office calling for the CSU system to conform to case law and the UC system practice of allowing employees to attach an “explanatory statement” to the oath clarifying its relationship to their religious beliefs. The petition text:

“There’s no good reason for Cal State not to let employees express their religious or other objections to signing the state’s “loyalty oath.”

“Please uphold freedom of religion and freedom of speech by adopting a policy that allows employees to add an explanatory statement to the oath that will allow them to sign it without violating their beliefs.

“This is already common practice at the University of California. You should make it the practice of Cal State.”

PFAW Foundation President Kathryn Kolbert explained it this way:

“It is simply beyond irony that a teacher planning an American studies course with a section on the McCarthy era would be required to sign a ‘loyalty oath.’ Our members are engaged around this issue, and we’re committed to seeing it through to the end. This should be a straightforward matter for the University, the protection of religious freedom and free speech. We’re hopeful this issue will be resolved soon.”

There is no reason for the CSU system to not embrace these calls for reform. The loyalty oath is an anachronism from the 1950s, and while CSU cannot refuse to administer it, they are under an obligation to handle it with respect to Californians’ religious freedoms. The recent firings of CSU teachers at the Fullerton and East Bay campuses suggest that CSU needs to change its policies and practices.

You can also sign the petition online – and help ensure religious freedom and civil liberties at the CSU system.

Thank God we have Jeff Denham in the State Senate. Without him California might have already succumbed to the Communist menace that seeks to overthrow our great American way of life by subverting our children and our schools in the service of…

Oh? What’s that you say? The Berlin Wall fell 20 years ago and the Cold War has been over for just as long? Huh. That’s odd. Because even though the State Senate passed Alan Lowenthal’s bill to remove membership in the Communist Party as a firing offense for public employees, Denham has denounced the bill as giving succor to our numerous Communist enemies around the world:

Sen. Jeff Denham, R-Atwater, warned “the Communist Party is not a dead organization … and (is) actively repressing human beings in Cuba and China in brutal ways.

“The state has every right to hold school employees accountable for their political standing, especially if that employee belongs to an organization that favors the violent overthrow of the government,” Denham said during the debate on the bill.

Denham said that it’s also “reasonable that use of public school property should be limited to groups who support our democracy and do not advocate the overthrow of government by force, violence or other possible means.”

I wonder if Denham got the memo that the Cold War is over – or are Republicans really so desperate that they have to turn to red baiting to try and improve their political fortunes?

Or perhaps the Yacht Party believes that only their efforts to overthrow government, by starving it of the revenues necessary to provide the basic services that keep a modern society functioning, is legitimate?

At least the recall is still on the ballot in the 12th district, and voters can decide for themselves whether they want to be represented by someone whose politics are 50 years out of date, or by someone  who actually understands the present-day needs of his constituents instead of spending his time chasing after the Red Menace.

I hate when history repeats itself. This year’s May Revise budget proposal has some ugly similarities with last year’s, particularly when it comes to public transportation cuts. In May 2007 Arnold proposed a $1.3 billion cut to mass transit. Ultimately $700 million was slashed, bringing to a halt transit projects around the state designed to help commuters get out of their cars and avoid the crippling impact of soaring gas prices.

Now, Arnold is proposing to raid public transportation funds again, to avoid tax increases. John Laird’s budget overview makes clear that Arnold intends to cut over $400 million from state assistance to local public transit. This is an act of madness, as Californians are crying out for alternatives to the car. Ridership on local transit systems is soaring, but these systems are also being squeezed financially by rising fuel costs – especially diesel costs (which here in Monterey are just under $5 per gallon).

These proposed cuts are going to make it difficult for local systems to maintain their current levels of service, and will certainly make it hard for them to expand service to meet rising demand. It’s hard to escape the conclusion that Arnold wants to drive commuters back into their cars.

Almost exactly a year ago I denounced Arnold’s proposed cuts and, sadly, the words are as true now as they were in 2007:

Underneath the green veneer, Arnold is still the same conservative Republican who seeks to destroy the environment. What explains Arnold’s desire to destroy public transportation? It’s two interrelated factors. The first is that Arnold simply is not an environmentalist. He is fixated on the automobile as a form of transportation. He thinks more freeways are the solution, not more public transportation. The screaming demand of millions of Californians for public transit don’t register with him.

The second is that Arnold is in the pockets of Big Oil. They have donated well over a million dollars to his various funds since November 2006, even though he isn’t eligible for re-election in 2010. As their gouging of Californians continues, the oil companies know that a backlash is coming. They want to prevent that at all costs, want to ensure that they hold the line in California lest they set a trend for the rest of the nation.

If Arnold destroys California’s public transit systems, Californians will not have any alternative but to pay the exorbitant costs at the pump. The middle class will sink further into financial ruin.

Arnold’s public transportation cuts are a catastrophic disaster for the state of California. Not only will they make global warming worse, not only will they make our environment more polluted, more prone to fire, and mired deeper in drought, but his cuts will ruin family budgets, eventually causing lost jobs and further destroying the state’s middle class.

Gas was at $3.50 when I wrote that. We’re now at $4 and climbing fast. Arnold’s attack on public transportation is nothing short of an attack on the California economy and on the wallets of every Californian. It is the height of hypocrisy to claim to protect those wallets by not raising taxes and to then force voters to shell out more money in gas purchases. Higher taxes would help lower the cost of transportation for Californians, growing the economy and leaving more green in family budgets at the end of the month.

Arnold’s budget is flawed in many respects. This seems one of the most obvious – and one of the easiest targets for a counterattack.

The AP has gotten a hold of the governor’s May Revise speech and therefore the major budget proposals that are to be unveiled tomorrow. The key elements are described below and over the flip I provide some analysis of each proposal.

• Arnold will float bonds using the state lottery as security. $15 billion over 3 years will be raised but $10 billion goes into “rainy day fund”
• If that fails, 1% sales tax hike to last no more than 3 years
• Prop 98 suspension abandoned; instead COLA will not be paid
• State parks closures abandoned; instead fees to rise $1 to $2
• $6 billion still left to cut or balance out somehow.”

Overall thoughts: Here we go again. Arnold Schwarzenegger came to office in the recall of Gray Davis in 2003 promising to solve our state’s budget problems once and for all. Instead he immediately blew a $6 billion hole in the budget with the Vehicle License Fee cut and then borrowed to close the rest of the gap – costing the state around $3 billion in annual debt service.

Now that Arnold’s solution has predictably failed, he is predictably offering more of the same. Borrowing against the lottery is a problematic concept for many reasons, the main one being it avoids the core issues of our budget. It’s yet another one-time fix that does nothing to solve the structural revenue shortfall that has plagued our state for 30 years.

It is significant that Arnold seems to be backing away from his most significant cuts – especially the K-12 cuts. Obviously the details released tomorrow will be key, and we should fully expect higher ed to take another crippling blow. But this does indicate that the activism many of us have launched against the primary schools cuts has had an impact.

And of course, there’s still $6 billion left over – $6 billion that the Yacht Party will insist come in the form of destructive cuts that damage the economy, $6 billion that Democrats will – we hope – insist come in the form of wise, long-term revenue solutions.

Finally, Arnold seems to be gambling that the economy will make a quick recovery and that the current woes are just a dip and not the opening stages of a deeper recession. That, I think, is a major and probably reckless gamble to make.

Thoughts on the specific items are below.

Borrowing against the state lottery: this seems to be at the core of Arnold’s new plan. As described by the AP:

The governor will propose raising $15 billion over the next three years by selling bonds based on anticipated lottery revenue. He will use about $5.1 billion of that for the 2008-09 fiscal year to help erase the deficit, administration officials told The Associated Press on Tuesday.

The other $10 billion would be left in a reserve fund the governor wants to create as part of a budget-reform proposal. It would be intended to ease the effect of year-to-year revenue fluctuations.

The revenue proposal – which administration officials refer to as “securitizing” the lottery – would require voter approval because the lottery was established through the initiative process.

As I explained above this is a clever way to avoid the basic issues here – ride it out another year or two and dump the problem onto the 2010 gubernatorial race. Borrowing the lottery funds is designed to ease the need for the most destructive cuts without raising taxes, and the rainy day fund seems to be a clear sweetener for Republicans to along with this scheme.

Schools: The AP describes the education budgeting as follows:

The budget the governor will release Wednesday backs away from some of the less politically popular proposals in the $141 billion budget plan he released in January, including a proposal to suspend the minimum school-funding guarantee, Proposition 98.

Instead, the budget proposal will include a $1.8 billion increase in funding to schools over 2007-08 levels. Schools still will lose about $4 billion in anticipated revenue because Schwarzenegger’s plan would not include program cost-of-living increases.

This does not necessarily take the 20,000 pink-slipped teachers off the hook. Losing the $4 billion in anticipated COLA revenue will still cause problems for many school districts – and as I indicated above, higher ed is likely to face major cuts anyway even if K-12 is somehow spared the worst. In any case, teachers are being forced to balance the budget on their backs.

Here again Arnold has chosen quick fixes over long-term solutions. California’s educational system was once the envy of the nation. 30 years of tax cuts have reduced CA to nearly the level of Mississippi, and while the January proposals were bad enough, major reinvestment in all levels of public schools are needed for California to ease widening inequality, provide prosperity and jobs, and thrive in the 21st century.

The devil is in the details here, so until we see those, schools don’t seem out of the woods just yet.

Parks: The proposed park closures were always a rather idiotic idea. Although parks should be free of charge, as California’s natural patrimony, it makes far more sense to raise fees than to close parks. Outright closures would have blown an even bigger hole in the parks budget, so this is clearly the more intelligent plan.

Remaining cuts: Even with Arnold’s lottery borrowing scheme there will be $6 billion left in the deficit. Obviously a restoration of the VLF would close that for good, but expect bitter fights over that last $6 billion between Democrats who will want to provide some sensible ways to close the gap with new revenues, and Republicans – Arnold included – who will prefer destructive cuts to sensible tax solutions.

Overall the May Revise doesn’t appear to be the cataclysm that some expected, but even if Arnold’s lottery plan is embraced – which is far from certain – the basic issues remain, and we’re likely to be debating this well into the fall.

The first major change in the May Revise budget has leaked to the SacBee – Arnold Schwarzenegger’s plan to release 20,000 low-risk offenders from prison has been dropped in the face of legislative opposition:

Gov. Arnold Schwarzenegger has dumped his plan to release about 22,000 lower-risk inmates from prison before they complete their terms, The Bee learned Monday.

The revised budget he will present on Wednesday will jettison the plan, which would have freed prisoners doing time for crimes such as drug possession and car theft who had less than 20 months to go on their terms.

The governor had sought the change as part of a 10 percent, across-the-board general fund budget cut to deal with a multibillion-dollar deficit.

His plan was unlikely, however, to win support in upcoming budget negotiations. Not a single legislator in the state had expressed support for the idea.

It’s unfortunate that this plan is being dropped, as most of these inmates targeted for release are not particularly violent offenders. California’s prison population has grown too large for us to handle capably or safely, and the cuts were one of the low-hanging fruit in finding savings within the current budget.

Obviously this raises the question of what cuts will be proposed in tomorrow’s budget revise. If Arnold is willing to abandon the early release plan is it too much to hope that he’s going to abandon the destructive schools cuts too? Yeah, probably is. Those cuts will likely remain, and are probably going to be augmented by other damaging cuts to core public services, especially as Arnold’s now got to find $1.2 billion in the budget that was otherwise going to have been saved by the early release.

The other major question surrounding the May Revise is what, if any, new revenues Arnold will propose. I don’t hold out much hope that Arnold is going to propose major new revenues, as his Republican predecessors Pete Wilson and Ronald Reagan did. That’s not Arnold’s style. There may be a few revenue solutions here, but they will likely be small in proportion to the much larger cuts that he is going to insist upon.

Democrats have a short amount of time now to make their case to the public. New Speaker Karen Bass understands that the budget is her top priority – let’s hope she will be able to provide the budget leadership that has been sorely lacking from Democrats these last 30 years.