May 8, 2001

Power purchases drain California's surplus

BY DION NISSENBAUM Mercury News Sacramento Bureau

SACRAMENTO -- California will soon hit another energy crisis milestone: It will burn through the last of its $6.6 billion budget surplus in its costly four-month scramble to keep the power flowing.

What began as a short-term proposal to siphon $500 million from the surplus to avert blackouts has become a multibillion-dollar juggernaut that has lawmakers drawing up contingency plans to shave billions from the state budget.

When the budget surplus has been drained, Gov. Gray Davis plans to tap other programs -- from anti-tobacco campaigns to highway construction -- to keep buying energy this summer.

State leaders are struggling to wrap up a bond plan that would restore the borrowed money and insist no programs will be pared because of the energy crisis.

But with the price of electricity climbing toward $100 million a day, some lawmakers are growing increasingly concerned that the bond revenue could come too late to avoid some cuts. Davis estimates the state will spend more than $18 billion on power in the next 12 months.

``The reality is that we're going to run out of money unless we raid all of the funds that we have,'' said Assemblyman Juan Vargas, D-National City, a member of the energy and budget committees. ``They had the `Summer of Love' in the '60s. This is going to be the `Summer of Hell' in California.''

Tapping general fund

When California hastily jumped into the power-buying business in January, state leaders reluctantly tapped the state general fund to pay for electricity. The state started purchasing power because its two largest utilities were in such precarious financial condition that electricity generators were hesitant to sell them power, for fear they wouldn't get paid.

Lawmakers agreed to set aside $500 million to get the program running under the assumption that the state would repay that money by quickly selling bonds.

``No one should believe that there is any appetite in the Assembly for coming in here every day and opening up the checkbook of the state and acting like that's problem-solving because it isn't,'' Assemblyman Fred Keeley, D-Santa Cruz, said at the time.

But that is exactly what state leaders have done. And now, after weeks of repeatedly writing $500 million checks every few days, California has just about depleted its $6.6 billion budget surplus.

On Monday, the Democratic governor's top financial adviser informed lawmakers that the administration has spent nearly $6.2 billion in state money and will need an additional $500 million next week to keep buying energy.

``We all can see a tidal wave about to engulf us,'' said Assemblywoman Carole Migden, D-San Francisco, chairwoman of the appropriations committee.

Davis is set to unveil his revised budget on Monday, but -- in light of the energy crisis and slowing economy -- state lawmakers are already preparing for the worst. State Sen. Steve Peace, D-La Mesa, head of the budget committee, has directed his staff to look for $2 billion to $4 billion in cuts from the $104.7 billion state budget.

Plan gone awry

It wasn't supposed to be this way. As the energy crisis ate away at the state's economic bounty, Davis and lawmakers wrestled with long-term solutions, but so far have failed to enact a comprehensive plan.

Efforts to lock in long-term state contracts to buy electricity -- meant to drive down the price of power -- have fallen far short.

The bond issue intended to help the state buy power started at $10 billion, but has ballooned to $13.4 billion.

And the refusal this week by Assembly Republicans to back the unprecedented bond sale derailed efforts to secure $4.1 billion in short-term loans that could have cushioned the blow on the state budget and delayed sale of the bonds for at least three months. The state will have to keep borrowing from its general fund to buy electricity until at least mid-August, six weeks after the new state budget is supposed to be in place.

Treasurer's warning

Democratic state Treasurer Phil Angelides castigated Republicans for thwarting his plan to line up short-term loans and said it placed the state budget ``at great and continuing risk, and does serious harm to essential services from education to public safety to health care.''

GOP lawmakers were prepared to vote for a smaller, $8 billion bond plan that called for the state to write off about $6 billion in taxpayer money to resolve the crisis, something Democrats were unwilling to do.

The delay in selling the bonds will force the state to turn to hundreds of state programs with unused money in their budgets to pay for power. Among those that could be tapped: anti-tobacco campaigns, highway funds, and tire recycling programs.

The money in those funds should cover the power buying for the rest of the year and is expected to be repaid before it has any serious effect on the programs, said Sandy Harrison, a spokesman for the governor's finance department.

``If we get the bonds in three months, then we would be able to repay without any direct impact'' on the budget, he said.

But with each passing day, the state spends more and more of a shrinking piggy bank. State Controller Kathleen Connell predicts that the state could run out of money to borrow this fall.

That gives the state a short amount of time to sell the bonds to repay the state budget. And there is already concern on Wall Street that California might have to offer a high interest -- at an added cost of billions to utility ratepayers -- to find takers for the largest municipal bond offering in U.S. history.

-------------------------------------------------------------------------------- Mercury News Staff Writers Noam Levey and Jennifer Bjorhus contributed to this report.

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-- Martin Thompson (mthom1927@aol.com), May 09, 2001