Prison costs swell deficit
$544 million added to state budget gap
Greg Lucas, Sacramento Bureau Chief
Friday, October 31, 2003
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URL: sfgate.com/article.cgi?file=/c/a/2003/10/31/MNGHJ2NFRM1.DTL

Sacramento -- California's budget mess will grow by $544 million because of cost overruns in the state's prison system, $90 million of the problem stemming from pay and benefit increases Gov. Gray Davis gave to state prison guards.

Adding this year's projected prison spending deficit to the state's existing cash shortfall means Gov.-elect Arnold Schwarzenegger must close a gap of at least $8.5 billion. The shortfall could reach nearly $24 billion, depending on court rulings and whether Schwarzenegger delivers on one of his key campaign pledges. "If these numbers turn out to be true, then the big and ugly pile of fiscal messes that the governor-elect is going to have to clean up just got bigger and uglier by half a billion dollars,'' said H.D. Palmer, a Schwarzenegger spokesman.

Although California's network of 33 prisons has operated in the red since 1997, its current deficiency is nearly eight times bigger than last year's. "We've had deficiencies for a number of years now,'' said Terry Thornton, a spokeswoman for the Department of Corrections. "A lot of things are mandated but not funded. A lot of costs keep rising. The budget doesn't cover everything, unfortunately.''

Thornton would not release the department's projected deficit, saying it was still an estimate. But legislative and Davis administration sources said the shortfall is $544 million. The shortfall is composed mainly of $170 million in higher pension payments, $50 million in overtime costs and $140 million in efficiencies ordered by the Legislature that didn't save as much as lawmakers predicted.

A lucrative contract reached with the politically connected California Correctional Peace Officers Association in February 2002 is responsible for an additional $90 million. That contract boosts the top salary of a guard with seven years experience from $54,888 to more than $73,000.

A July 2002 audit predicted the contract would cost the state at least $518 million by 2007. The Department of Corrections pegs the annual costs at $300 million. After the contract was signed, the prison guard union contributed nearly $1.1 million to Davis' successful re-election campaign. The first check -- for $251,000 -- was written one month after the contract was ratified.

Davis insists there is no connection between the two actions. The cost of the contract was not included in the budget because the spending plan was premised on saving $185 million by renegotiating contracts with various state employee groups. The prison guard contract has yet to be re- opened.

Like other state bureaucracies, the prison system was asked to help reduce the budget shortfall by finding ways to cut operating costs by 16 percent, or more than $800 million. The department's plan included some staff reductions and contracting out various functions, like package deliveries to inmates.

Davis has yet to act on the proposal. Although the prison system's operating deficit darkens the state's already bleak fiscal picture, it's small potatoes compared to the potential effect of two lawsuits challenging debt the state wants to issue to erase $12. 6 billion of the $38 billion shortfall it had last year. A $1.9 billion bond to meet the state's pension obligations has already been declared unconstitutional by a court. The state is appealing the ruling.

Another lawsuit is pending against the $10.7 billion deficit reduction bond which was central to legislative approval of the budget signed by Davis on August 2. The new GOP governor could try to settle those lawsuits and go forward with those bonds or repackage the debt as general obligation bonds. General obligation bonds require voter approval, which is always iffy and makes investment banks skittish.

During his campaign, Schwarzenegger repeatedly pledged to reduce the increase in vehicle license fees that accompanied passage of the budget. Doing so will cost the state $4.2 billion in revenue. He also promises to find money to replace the lost fee revenue, which is earmarked for cities and counties.

"I can guarantee we will not take money away from them,'' Schwarzenegger said on Oct. 16. "They need the money. I am a strong believer in local government. They should have enough funding and I will make sure of that.'' Nor is it likely the state will collect $680 million from Indian tribes that operate casinos by renegotiating their gambling compacts.

On the plus side, the state netted $262 million more than it thought from the sale of its rights to money from a settlement with tobacco companies. And, through Oct. 1, tax revenue is more than $500 million above state estimates.

E-mail the writer at glucas@sfchronicle.com


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