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Schwarzenegger to propose lottery borrowing to ease deficit

By Judy Lin -
Published 12:00 am PDT Wednesday, May 14, 2008

Gov. Arnold Schwarzenegger will propose borrowing against state lottery income to help close a projected $15.2 billion deficit when he updates the state's budget today, according to administration officials.

Backpedaling from his earlier plan, the Republican governor will not seek to close 48 state parks, ask for early release of 22,000 inmates or give schools less money than they are guaranteed by the state constitution.

Advocates who were briefed on the governor's plans late Tuesday, however, said most of Schwarzenegger's proposed cuts to health and welfare services will remain in a $101.8 billion spending plan for the fiscal year that begins July 1.

Instead of leasing the state lottery system as previously proposed, Schwarzenegger will suggest the state borrow cash from Wall Street by promising future game revenues to investors. According to the Governor's Office, the governor will propose borrowing $15 billion secured by lottery income over a three-year period.

The Legislature and voters would have to approve the ballot measure, which would require that the money be used for a rainy day fund. Of every $1 that went into the rainy day fund, 40 cents would be used for education and 60 cents would be used for other programs.

Failure of the measure would trigger a 1 percent sales tax increase that would expire either on June 30, 2011, or when the rainy day fund contained $15 billion. The governor will also propose a $2 billion reserve.

"We feel the proposal offers the long-term solutions to the budget problems that we have," said Schwarzenegger spokesman Aaron McLear. "It fully funds education, keeps parks open, all without raising taxes."

To prevent state parks and beaches from closing, the administration will propose fee increases at the most popular parks.

Citing changes in federal student loan regulations, the Schwarzenegger administration also will postpone the sale of EdFund, the state's student loan guarantor program, to the 2009-10 budget. The governor still hopes to generate $500 million by selling the nonprofit in 2009 or 2010.

Under the lottery plan, the state would initially sell $5 billion in bonds in 2008-09 to help offset the deficit. Because of the state's precarious financial situation, administration officials said they would automatically deduct that money from the rainy day account.

To reshape the lottery in a way that generates more money, Schwarzenegger will urge the Legislature to pass a bill by Sen. Dean Florez, D-Shafter. Florez's Senate Bill 1679 would let the Lottery Commission modernize ticket terminals and give it more flexibility in handing out prizes.

Assembly Speaker Karen Bass said Schwarzenegger's proposal "sounds risky, almost like a Rubik's Cube budget, not a long-term, structurally balanced budget."

"We're going to put this under a microscope and make sure we protect education and the most needy Californians," Bass said.

Marty Hittelman, president of the California Federation of Teachers, said he believes the governor needs more than lottery borrowing to keep education whole.

"I think he was genuinely trying to protect education, but I don't think he has the tools unless the Republicans give him the tools," Hittelman said. "In other words, revenue sources to fund education and vital services."

Kevin Gordon, a school funding expert and consultant, credited the outcry from education groups over the past several months for Schwarzenegger's revised plan for school funding. He noted that Democrats vowed to protect education early on, and that Republican lawmakers recently said they opposed any suspension of Proposition 98, the minimum funding formula for schools.

"The education community welcomes the governor to the party," Gordon said. "It's going to be very hard for any one of these power centers to move backwards from education. … I think people underestimated just how strong the reaction from the education community would be."

While Gordon said the governor's revised proposal leaves schools "much better off than where we were headed," he noted that school advocates are less certain about his November ballot proposal.

Schwarzenegger's initial plan to create a rainy day fund and allow automatic budget cuts in bad years drew heavy opposition from education groups, among others. It remains unclear, Gordon said, how the revised ballot plan would affect schools, "but a number of people in the education community are encouraged that the governor is moving in the right direction."

While Schwarzenegger is not expected to propose general tax increases, he will revise a proposal for a surcharge on residential and commercial property insurance to boost the state's emergency response services.

Property owners would be assessed a fee based on the location of their property. Properties at higher risk of natural disasters would be charged about 1.4 percent of their property insurance. Those in lower-risk areas would be charged 0.75 percent.

The rates average about $12.50 a year and $6.75 a year respectively, according to McLear.

Since January, when the governor proposed cutting 10 percent from most state programs, California's fiscal health has deteriorated. The Legislature in February enacted midyear changes, reducing a projected $14.5 billion deficit by roughly $7 billion.

But administration officials said they now expect revenues from income, corporate and sales tax to drop by $6 billion in the next fiscal year. They said the state's liability for funding education will go up by $1.5 billion due to declining property tax collections.

Other expenses, they said, will bring the deficit to $15.2 billion - more than Schwarzenegger predicted in January before the midyear cuts.

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