The Great State of... Emergency?

It's not just beauty that's in the eye of the beholder. Today's legislative hearing on California's mounting deficit included a lesson on the gray areas of state government -- specifically, the vagueness of a "fiscal emergency."

You'll remember that three and a half years ago, voters approved two ballot measures championed by Governor Arnold Schwarzenegger. Proposition 57 authorized the sale of bonds to help pay off accumulated debt. Proposition 58 required (ostensibly) balanced budgets while also banning any future borrowing to pay off debt.

Of the two measures, Prop 57 was the sexier and simpler to understand, which made it easy to miss one of the more interesting provisions in Prop 58: the new power of the governor to declare... and the Legislature to solve... a fiscal emergency.

Here's the exact language now enshrined in the state constitution (emphasis added):

If, following the enactment of the budget bill for the 2004—05 fiscal year or any subsequent fiscal year, the Governor determines that, for that fiscal year, General Fund revenues will decline substantially below the estimate of General Fund revenues upon which the budget bill for that fiscal year, as enacted, was based, or General Fund expenditures will increase substantially above that estimate of General Fund revenues, or both, the Governor may issue a proclamation declaring a fiscal emergency and shall thereupon cause the Legislature to assemble in special session for this purpose. The proclamation shall identify the nature of the fiscal emergency and shall be submitted by the Governor to the Legislature, accompanied by proposed legislation to address the fiscal emergency.

The underlined passages above were at the heart of a wonkish but illuminating discussion during this morning's hearing.

It began when Sen. Bob Dutton (R-Rancho Cucamonga) wondered aloud whether the new predictions of $10 billion in red ink are a sign of a "fiscal emergency." Dutton posed this question to Legislative Analyst Elizabeth Hill, the main witness testifying before the Senate Budget Committee.

The ever-cautious Hill politely sidestepped the chance to speculate, saying instead that recent economic data is inconclusive. But she was not cautious when assessing Prop 58 and the definition of a fiscal emergency.

"It's really left to the governor's discretion," said Hill.

Later in the hearing, it became clear that Schwarzenegger's advisers themselves may not be sure what merits a formal declaration of fiscal doom and gloom. "There is a substantial debate within the administration as to what's that tipping point," said deputy finance director Vince Brown.

This is not merely a philosophical debate. If the LAO's projections are accurate, state lawmakers will return to Sacramento in 2008 to face one of the most severe budget problems since Prop 58 was enacted by voters.

Deputy finance director Brown told the committee that the Schwarzenegger administration hopes to have a clearer sense of the fiscal picture once new data arrives in about two weeks.

[update 4:29pm -- As the governor's budget team points out, that data will include things like revised property tax estimates from local officials, data that the LAO didn't have when estimating the depth of the hole. The data could make things better... of course, it could also make things worse.]

But legislative Republicans may already be beating the drums for the fiscal emergency declaration. In part, that's because they've always believed that the state's financial problems stem not from a lack of revenue but rather an overabundance of spending on state programs.

And GOP committee members suggested today that waiting until the governor proposes a new budget on January 10 will be too late. "More money [will have] gone out the door," said Sen. Dennis Hollingsworth (R-Murieta), "in that period of time that you've delayed."

For their part, Democrats focused on a different kind of fiscal pressure. "One of the questions," committee chair Sen. Denise Ducheny (D-San Diego) told reporters afterwards, "is do we keep pre-paying debt?"

Ducheny was referring to the governor's push in recent years to pay back the Prop 57 deficit bonds earlier than the law requires. She and fellow Democrats suggested that given the multi-billion dollar shortfall, a less aggressive repayment plan might be more fiscally responsible.

All of this, however, comes back to the governor. Not only is he the only one with the power to declare an emergency, but he's also the guy in the crosshairs... still stuck in the middle of the annual partisan battle about the appropriate size and scope of state government.