| By Dan Walters -- Bee Staff Writer Sunday, Nov. 25, 2001 Last spring, when the first hints of a potential state budget crisis surfaced, Gov. Gray Davis, characteristically cautious, minimized their significance. Administration officials talked about a $4 billion to $5 billion downturn in revenues -- serious, certainly, but not catastrophic -- and made only minor adjustments in spending. They turned aside warnings from the Legislature's budget adviser, Elizabeth Hill, and other number crunchers that the problem could be twice as big, or even greater. This fall, the roles are reversed. While Hill pegs the state's budget deficit at $12.4 billion over the rest of the 2001-02 fiscal year and all of the following year, the administration now says it could be as much as $14 billion. There may be a purely political explanation for why Davis is portraying California's budget crisis in dramatic terms, perhaps starker than warranted by the facts. And it may have something to do with a previous crisis, the one involving electric energy, that has not yet been resolved. Early this year, when the state was still enjoying huge budget surpluses and California utilities were out of credit for power purchases, Davis stepped in. The state's general fund financed many billions of dollars in power purchases, even when spot-market prices spiked into stratospheric levels. Technically, the power purchases were a loan from the general fund to a special power purchase fund, and more than $6 billion in debt is still outstanding. The general fund was to be reimbursed by a $12 billion-plus bond issue, which would also finance long-term supply contracts. The bonds would be repaid over many years by utility ratepayers. The power bonds have never been issued, however, and their sale has been suspended indefinitely because the state Public Utilities Commission has so far refused to approve a "rate agreement" specifying how ratepayers would pay for the bonds and the long-term contracts. PUC President Loretta Lynch, a Davis appointee, has complained that the contracts would saddle consumers with unjustifiably high prices for many years. Whether Lynch is truly bucking Davis on the issue, or indirectly helping him seek renegotiation of the embarrassingly rich contracts, is unclear. Does the governor really want the PUC to approve the $43 billion-plus in long- term contracts, which could become an even greater political liability for him as he seeks re-election next year? There's even a possibility that one or more of the contract negotiators hired by the state could be indicted for having cozy economic ties to suppliers. Or would Davis leverage the PUC's holdout to aggressively seek renegotiation of the contracts -- even if he had to admit that he had made a big mistake by signing them in the first place? Davis is apparently torn between those two courses. The one thing he can't do is merely allow the situation to fester, because the failure to issue the power purchase bonds and reimburse the state's general fund would become a political liability unto itself. Officially, the state's power purchase debt has nothing to do with the budget crisis because it's considered to be a loan rather than an expenditure. But Davis and state Treasurer Phil Angelides, in pressing for legislative and PUC approval of the bond issue, have portrayed it as critical to solving the state's budget woes and preventing reductions in critical education and public safety services. Therefore, they could be impaled on their own rhetoric if the bonds are not sold. If Davis chooses not to seek renegotiation of the long-term contracts, but rather to pressure the PUC to approve the long-pending rate agreement, he would do so by citing the $6 billion general fund debt and the critical need for repayment. He'd enlist school officials and public employee unions in the campaign to "roll" Lynch and the PUC and for that purpose, he'd need to make the budget crisis appear to be as bad as possible, perhaps even worse than the facts justify. That may be why he's saying we face a $14 billion deficit. Politics are, if nothing else, complicated. -------------------------------------------------------------------------------- The Bee's Dan Walters can be reached at (916) 321-1195 or dwalters@sacbee.com. -------------------------------------------------------------------------------- |
| Dan Walters: Why Would Davis make the State Budget Seem So Terrible? |