Analysis: California budget outlook: delay a sure thing

SAN FRANCISCO (Reuters) - California is fast approaching the start of its new fiscal year with state leaders having put forth three rival and very different plans for pulling the state government out from its fiscal morass, underscored by a budget shortfall of more than $19 billon.

The plans are so different, and the partisan politics in the state capital of Sacramento so harsh, it's a sure thing the government of the most populous state will once again enter its new fiscal year without a spending plan in place.

"The surest bet in Sacramento is that things will be difficult, delayed and contentious. The stalemate will probably drag on well into the summer," Jack Pitney, a professor government at Claremont McKenna College, said on Tuesday.

In place of concern over whether Governor Arnold Schwarzenegger and top lawmakers will let budget talks drag long past the July 1 start of the new fiscal year, analysts say they are instead focused on whether a spending plan will include substantial changes to the state's financial structure or if it will simply paper over its fiscal woes.

The core financial problem facing California's state government is that it perennially fails to match revenue, largely from volatile personal income taxes, with spending.

Bet on a budget deal that focuses on the immediate task of balancing the state's books and leaves tackling big financial fixes to Schwarzenegger's successor, said Bill Whalen, a Hoover Institution research fellow.

Schwarzenegger is in his final term and will be followed in the governor's office by fellow Republican Meg Whitman, the former CEO of eBay Inc, or Democrat Jerry Brown, California's attorney general and a former two-term governor.

"Are you talking about reconstructive surgery or simply slapping a bandage over the problem? My sense is you won't get much reconstructive surgery," Whalen, a former aide to former California Governor Pete Wilson, said.

THERE WILL BE BLOOD

A budget agreement will not be a fine-tuned plan, but will instead be jury-rigged with bits and pieces from the three budget plans now in play, Whalen added. "Each one has perhaps some design flaws. What you try to do is strip down each one and put together a jalopy," he said.

Pitney agreed: "An elegant, comprehensive solution to the state's budget problems would be the surprise of the decade."

Schwarzenegger's budget plan calls for dramatic spending cuts striking at health and human services to balance the state's books. He has ruled out tax increases, much to the pleasure of the legislature's Republican minority, which has sufficient votes to block Democrats from approving spending plans on their own.

The budget plans of Democratic leaders of the state Senate and Assembly both seek tax increases -- an oil severance tax figures in both plans -- but for different purposes.

The plan unveiled on Monday by state Senate President pro tem Darrell Steinberg aims to raise revenue in order to provide backing to counties so they could assume greater responsibility for safety and social services to reduce the state government's costs in those areas.

Assembly Speaker John Perez's plan would borrow against state recycling and disability insurance funds to soften the blow from spending cuts.

Republican lawmakers oppose both plans because they include tax increases. Meanwhile, Perez's plan has run into flak from Brown and State Treasurer Bill Lockyer, also a Democrat.

Brown's office has doubts about the legality of borrowing against the two state funds and Lockyer has said he needs the attorney general to check off on Perez's debt plan before trying to sell it to the municipal debt market.

Perez's borrowing plan is a "gimmick" and lawmakers aiming to offset spending cuts are certain to come up with more, complicating budget talks, Pitney said.

Cuts, however, are unavoidable with revenue so weak and the state's economic outlook so uncertain, Pitney said. He added that Schwarzenegger's final state budget will be able to borrow from Hollywood: "The title of the movie 'There Will Be Blood' is very appropriate."

(Editing by James Dalgleish)