Browsing the papers today, I’m noticing quite a bit of confusion between the parallel crises California faces with respect to the budget.  Jean Ross explains the difference pretty nicely between a cash flow crisis and a budget crisis in this post.  The Legislative Analyst identified a cash crisis that arises out of the difference between when payments are due and when revenues enter the state’s coffers.  Because of that disparity, California and most other states must go out into the bond market and sell “revenue anticipation notes” to cover short-term cash needs, to be repaid when the revenue comes in.  The budget crisis exacerbates the cash flow crisis, but the two are not the same thing.  And the Legislative Analyst himself appeared to conflate them by claiming in his report that California faces $17 billion dollars in borrowing needs, but failure of Prop. 1C, 1D and 1E would require $23 billion in borrowing.  Well, so would passage.  Prop. 1C enables the government to BORROW against lottery revenue.  This may not be short-term notes, but borrowing is borrowing, and due to the state’s horrific credit rating, the interest rates will remain high no matter what kind of borrowing it is.  

That borrowing will cost the state money and widen the deficit somewhat, but a decent amount of that is known beforehand, and baked into the cake of any budget deal.  As Ross notes, the Legislative Analyst did not update his projection that the state faces an $8 billion dollar shortfall through July 2010, based on lower revenues than the projection in the February budget.  However, John Chiang today estimated that current revenues through April are $2.1 billion out of balance with budget projections.  According to the Legislative Analyst, this shortfall can be added to the $8 billion, because most of that referred to the next fiscal year.  Doing the math…

Meanwhile, the Public Policy Institute of California just released a poll showing Propositions 1C, 1D and 1E trailing. Those measures would provide $5.8 billion in budget cash in 2009-10. Of particular concern for budget officials is that Proposition 1C is failing badly (32 percent for, 58 percent against), since it would provide $5 billion in cash.

If the ballot measures fail, the state would be looking at a $16 billion deficit (the LAO’s $8 billion plus Chiang’s $2.1 billion plus the ballot’s $5.8 billion). But the LAO number came in March, after which economic indicators grew worse, which means the overall deficit figure could be higher than $16 billion.

Meanwhile, in the above-linked LA Times piece, the Schwarzenegger Administration floats a proposal to significantly address the prison overcrowding crisis:

As the ballot measures lag in the polls, the administration of Gov. Arnold Schwarzenegger has begun revealing the cuts it is weighing as an alternative.

On Thursday, the administration advised law enforcement officials that it was preparing plans to commute the sentences of 38,000 state prison inmates, including all illegal immigrants. It also is considering closing some prisons and sending inmates to county jails, according to a copy of the proposal obtained by The Times.

Under the plan, 19,000 illegal immigrants — 11% of state prisoners — would be turned over to the U.S. Immigration and Customs Enforcement Agency after having their sentences commuted. An additional 19,000 “relatively low-risk offenders” would have their sentences commuted as well.

The Governor tried this late last year and nothing really happened with it.  Some of these ideas are OK and some are horrible – overburdening county jails won’t exactly help either fiscally or from a public safety standpoint.  But if the crisis can actually start a dialogue about our insane prison policies, I’m all for it.

In this edition of “Did you know?” we take a look at Prop. 1C.  Sure, the ballot statement, the legislative analyst’s report, and every public utterance about Prop. 1C to date asserts that it would allow the state to borrow $5 billion dollars against future lottery revenues.  But did you know that, according to Darrell Steinberg, it would actually allow the state to borrow twice that?

Trailing badly in the polls, Proposition 1C would infuse the state budget with cash by borrowing against future California Lottery revenues. The February budget assumed that it would provide $5 billion for the 2009-10 budget. But Steinberg said he now believes the state could borrow $10 billion from the Lottery and use it all in 2009-10.

Consider it something of a “Hail Mary” argument for Proposition 1C.

“In my view we can triage our way through an $8 billion problem,” Steinberg said. “That doesn’t mean that there won’t be some difficult choices. But, you know, we have a $2 billion reserve. There may be other opportunities with federal economic stimulus … If 1C passes, you know, it’s actually a $10 billion one-time securitization. It was just contemplated as being spread across two fiscal years. You could bring the second $5 billion into the budget year.”

What fun things you learn when your proposition trails in the polls!

Let’s go to the summary of Prop. 1C, shall we?

Impact on 2009-10 State Budget: Allows $5 billion of borrowing from future lottery profits to help balance the 2009-10 state budget.

Hm, no mention of future state budgets there.  But yes, the Senate President Pro Tem is correct.  In the analysis by the Legislative Analyst, he mentions that “the state also could borrow more from lottery profits in future years.”  In fact, the $5 billion dollar figure appears nowhere in the text of Prop. 1C.  Here’s the relevant portion of the text:

(2) Notwithstanding any other provision of law or this Constitution to the contrary, the Legislature is hereby authorized to obtain moneys for the purposes of the California State Lottery through the sale of future revenues of the California State Lottery and rights to receive those revenues to an entity authorized by the Legislature to issue debt obligations for the purpose of funding that purchase.

Well, that would be interesting to know before voting, wouldn’t it?  That this proposition basically opens up a new state credit card for the potential purpose of endless borrowing?  Borrowing that would have to be paid back, with interest, for the next several decades?

California’s reliance on borrowing to cover the budget deficit has been part of the landscape for 30 years.  Debt service currently costs the state $5 billion a year.  If you think this is a good idea, I invite you to enable it by voting to allow basically limitless borrowing against the lottery.  Surely that won’t be abused.

…by the way, the depiction by Steinberg of $8 billion dollars as a niggling problem not to be trifled with, but $14 billion as simply insurmountable, is another new one.  Considering that Steinberg and the Senate passed a majority-vote fee increase of around $9 billion last year, more than the $6 billion allegedly at stake in the special election, and his description of how to fill the budget gap did not include this, forgive me for saying that his beliefs don’t hold up to scrutiny.

Building off Brian’s post, George Skelton’s discussion of Prop. 1C gets things about right – the choice is between a terrible public policy and deeper debt.  Supporters of the special election will only show you one side of that argument, the expanding budget deficit that would result from failure, wrapping that into a fearmongering message of urgency.  Opposers of the special election prefer to look at the actual policy, which Skelton describes accurately.

Prop. 1C — the “Lottery Modernization Act” — is one of six budget-related measures proposed by the Legislature and Gov. Arnold Schwarzenegger. It is by far the measure with the biggest immediate money impact.

It would authorize significant tweaking and expansion of the state lottery, creating more winners. And it also would allow the state to borrow $5 billion immediately against future lottery revenue.

Those should be separate questions: 1) Should the state expand its gambling operation? 2) Should Sacramento take out a loan for, say, 30 years just to help pay one year’s worth of daily expenses? […]

You could also call it a payday loan. That’s how far Sacramento has fallen.

This is probably the easiest $5 billion the state can pocket, even if it would have to pay back double, including interest.

Put aside the fact that lottery revenues have dropped consistently over the past several years (per capita participation is among the lowest in the nation), and that, even if this scheme of more advertising and bigger payouts worked, you would be balancing the budget on the backs of a lottery-buying constituency composed mainly of the poor.  But borrowing policies like this, as a result of putting off tough decisions and mortgaging the future for 30 years, are why our deficit bursts at the seams relative to other states.  In the long term we will pay far more for this borrowing that could ever be brought in.  The solution from the legislature and the Administration, literally, is to not call it borrowing.  David Crane (Arnold’s economic advisor) initially makes a decent point, then hides behind the word “securitization” to mask the reality.

Crane maintains that both tax increases and government spending cuts slow economic recovery. Government programs are “a way of keeping more people employed,” he says. “In a recession, you want government to be counter-cyclical — the teeter-totter” to a falling private sector.

“The overriding principle is that, at a minimum, you want government to be retaining the same level of expenditures, if not expanding.”

Crane points to President Obama’s economic stimulus package, which is heavy on new spending.

Of course, the feds can run up huge deficits and print money. States can’t. And many California conservatives would rather see state government go belly-up than pay higher taxes.

Part of the distasteful remedy may be the lottery borrowing. Only don’t call it “borrowing” in front of Crane. It’s “securitization,” he insists. Future lottery revenue would “securitize” the state’s repayment of $5 billion in bonds.

This is a semantics game with political consequences. When the “borrow” word is used to describe the lottery proposal, I’m told, voter support for it drops by 25 percentage points.

Of course, it is borrowing – when you issue bonds and promise to pay them back later, you’re borrowing.  But the “securitization” model also masks the fact that California officials will have to go out into the market and find investors to buy debt based on future lottery revenues.  Despite the success of recent state forays into the bond markets, that’s not such an easy sell:

The ballot measure simply gives the state the legal authority to go out into the financial markets and find investors willing to purchase debt backed by a revenue source that has declined since 2005-06.

Before counting on quick cash from the sale of lottery bonds, it is worth reviewing borrowing-related assumptions made in recent budget agreements, such as the $1 billion in proceeds from the sale of EdFund booked as part of the 2007-08 budget agreement, a sale that was never consummated, or the $1 to $2 billion in proceeds assumed in various budgets from proposed, but never sold, pension obligation bonds. Or the $1 billion in proposed, but never issued, bonds for transportation programs that were to be repaid out of tribal gaming receipts. The careful reader may note a pattern here – a pattern that began long before the global meltdown in financial markets that has made obtaining loans more difficult for even the most creditworthy borrowers.

This isn’t a serious funding measure, it’s an accounting trick – a way to take $5 billion off the books quickly and easily with a minimum of pain.  It’s symptomatic of the failed solutions taken by this legislature and this Governor for years, which constantly try to push off solutions and never deal with the consequences (of course, the needy in this state always do).  That anyone would sink money into protecting this status quo speaks to a failure of imagination, and a willingness to delay fundamental reforms that must happen before it’s too late.