Budget Expert, Tax Watchdog Sound Caution Over Lottery Plan

Published July 1, 2008

Lawrence McQuillan, director of business and economic studies at the San Francisco-based Pacific Research Institute, said California Gov. Arnold Schwarzenegger’s (R) plan to borrow money against the state lottery “is like a bridge to take us from where we are today to what we hope will be better economic times down the road.”

Schwarzenegger proposes borrowing $15 billion, using $5.1 billion next year and putting the rest into a “rainy day” fund. He hopes in three years the state will have recovered economically and the rainy day fund will no longer be needed.

Spending Control Is Key

“Politically, it’s brilliant and avoids immediate tax increases,” McQuillan said. “But after three years, if the economy is not booming, there is no nest egg there. If state spending continues at the pace it’s been going and revenues don’t turn out to be strong, we’re back where we started from. It would be just another $15 billion papering over of problems.”

State spending has climbed more than 40 percent, from $99.4 billion to $142 billion, since the 2000-01 budget year, and is projected to top $144 billion in the new fiscal year.

Four years ago the state borrowed $15 billion to improve the fiscal situation but failed to achieve the promised results.

“That’s why it’s important to pair this borrowing plan with actual substantive budget reform,” McQuillan said. “That would be the thing that matters to fiscal conservatives. [Schwarzenegger] wants to pair it with budget reform, but I don’t know if the legislature would go for that.”

‘Everything’s on Table’

Kris Vosburgh, executive director of the California-based Howard Jarvis Taxpayers Association, said Schwarzenegger “seems to be in a state of denial. He has said he would not raise taxes, but he’s talking about doing away with the mortgage interest deduction [on state taxes], doing away with deductibility for dependent children, putting a surcharge on homeowners insurance, and looking at broadening the sales tax to services like dry cleaning and lawyers.

“The governor who came in saying we have a spending problem, not a revenue problem, is now putting everything on the table,” Vosburgh continued.

George Passantino, a budget expert and senior fellow at the Reason Foundation in Los Angeles, said, “The current budget solution is not a whole lot more than business as usual. There’s a structural imbalance and no serious effort to tackle that long-term imbalance.”

Passantino said this is largely because California does no legislative performance review as part of the budget process to determine what the state is getting for its billions of dollars of spending.

As for the lottery borrowing idea, Passantino said, “The lottery would be under the same administration, with no guarantee of improvement.”

Steve Stanek