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.

UPDATE by Brian: You can listen live to Which Way LA live here and then get the archives here or at iTunes. Robert’s going to be on iTunes! I’m excited to hear what Robert has to say.

I will be on Warren Olney’s show on KCRW 89.9 at 7pm tonight to discuss the latest news from the state budget front. The California Legislative Analyst, Elizabeth Hill, has announced that California now faces a $16 billion budget deficit. In her press conference, as reported by the Sacramento Bee, she sharply criticized Arnold Schwarzenegger’s approach to the budget:

In a critical look at Schwarzenegger’s spending proposal, Hill called his administration’s budget-balancing approach “flawed” because it fails to prioritize state programs.

“We recommend the Legislature reject the administration’s across-the-board (cutting) approach,” the report said.

The report lays out an alternative budget that proposes to eliminate nonessential state programs, shift programs to local control and reduce school funding by less than the $4.3 billion the governor suggested. It also recommends closing tax loopholes to add revenue in a “reasonable manner.”

As an impartial analyst, Hill cannot say what is obvious to us all – the bill for 30 years of frivolous tax cuts, such as giving wealthy yacht owners a tax break while threatening to close parks and fire teachers, has come due. Republicans insist on cutting core services of our government, preferring to make it difficult to get a decent education, kicking sick children off of health care coverage, and abandoning our natural heritage instead of making sure all Californians are paying their fair share.

As we enter what is likely to be a nasty recession, the last thing this state should be doing is destroying the kinds of public services essential to a modern society and a developed, robust economy. It is long past time for us to end the structural revenue deficit that has produced this recurring crisis, from the wasteful elimination of $5 billion in VLF revenue at the beginning of Arnold’s term to the various tax loopholes and favoritisms that have plagued us since 1978. California is at a crossroads – will we rise to the occasion, or stand by while Republicans destroy what remains of the California dream?