Analysis: California budget wins approval but no applause

SACRAMENTO/SAN FRANCISCO Wed Jun 29, 2011 10:22am EDT

SACRAMENTO/SAN FRANCISCO (Reuters) - California is taking a first step to shedding its reputation for fiscal sloppiness, adopting an on-time budget for the first time in years.

If a compromise is something that no one likes, California has achieved one: Governor Jerry Brown, both political parties and even investors have plenty to complain about in the spending plan.

But the bottom line is the Golden State's government has a budget with smaller holes than usual in place before its fiscal year starts on Friday. An important bonus is that the state economy is improving -- especially for the rich who pay its main source of revenue, personal income taxes.

Voters using the much-maligned initiative process can claim they set the circumstances for progress.

Proposition 25 passed last November, allowing the legislature to pass a no-tax-hike budget with a simple majority, which the Democrats have in both houses.

That robbed the legislature's Republican minority of its ability to hold any budget hostage, and left them with a veto on tax hikes, which they used.

To a mix of consternation and satisfaction on all sides, the budget avoids tax hikes, is balanced if the economy improves, and will force even deeper cuts to popular programs if the state's economic hopes fail. And, it is ready before the start of the new fiscal year.

Many attribute the success to a simple change in Prop 25: it cut off legislators' pay when they failed to pass a balanced budget by a mid-June deadline.

"You have to feel that the public got a special thrill out of that and the reaction it caused," said Field Poll chief Mark DiCamillo. Californians did not want cuts of the magnitude in the budget -- but they didn't want higher taxes, either.

"They wanted something for nothing, and they are going to get the 'for nothing' part," DiCamillo said.

The budget awaiting Brown's signature closes a roughly $10 billion shortfall with spending cuts, some fees, some one-time moves and, most importantly, with $4 billion in better-than-expected revenue.

NO GUARANTEES

Critics say state leaders will flinch at carrying out school spending cuts if strong revenue fails to materialize.

"It's happened so often," said Mayor Chuck Reed of San Jose, the third biggest city in California.

"It just seemed very convenient to come up with $4 billion," said Jay Goldstone, chief operating officer of San Diego, California's second biggest city. "I've not see that kind of improvement that would generate that kind of money."

The state government started this year with a shortfall of more than $25 billion. Brown and lawmakers pared it roughly in half with deep spending cuts, other moves and improving revenue before the budget plan.

More big changes are in play in the state, thanks to other initiatives in recent years. Voters approved redistricting by a citizen-led committee which is creating many more competitive races. State primaries will act as first rounds of the general election, so the top two vote getters, no matter what party, will face off in the final.

Jack Pitney, professor of government at Claremont McKenna College, said the budget plan did not address long-standing roots of pain -- the types of structural changes both major parties have called for.

But he predicted the budget would be popular because it hit a lot of voters' goals.

"It doesn't involve the kind of deep cuts people were talking about a few months ago, lets tax increases lapse and allows people to hit the beach without having to worry about the budget," he said.

(Editing by Jackie Frank)

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