February 20, 2009

Tough Choices, Shared Sacrifice. State of California finally has a buget!

SACRAMENTO – The California Assembly early this morning (thursday morning 6:30 am) moved to close the state’s historic $41 billion budget deficit with a bipartisan vote to approve a combination of spending cuts and new revenues. The fiscal package passed enacts the state budget for the 2009-2010 fiscal year and balances the current 2008-2009 budget, which has seen a steep drop in expected revenues due to the national economic downturn.

It was not a great moment of celebration but one that reflected relief more than anything else after a weekend long ordeal.

Senator President Pro Tem expressed this belief with reporters immediately following the end of a marathon floor session just after 6:30 am.

“I feel a great sense of relief and a sense of accomplishment as well on behalf of the legislature… I think what we’re showing is that we can solve the most difficult of problems on behalf of the people of California. It’s not a celebration. The decisions we were called upon to make over these past couple of months were very difficult and very painful… I really do believe if this was a trial run for my protemship, it was a heckuva trial by fire. If we can do this, we can tackle any of those things.”

His comments were echoed by Speaker Karen Bass and the entire Assembly Democratic leadership team following the conclusion of their floor session shortly thereafter.

“After the last few days of debate it remains clear that this package of cuts and revenues is the responsible way to address the state’s budget deficit and cash crisis,” Assembly Speaker Karen Bass said.

“After the last few days of debate it remains clear that this package of cuts and revenues is the responsible way to address the state’s budget deficit and cash crisis,” Assembly Speaker Karen Bass said. “By passing this difficult budget we keep infrastructure projects moving, keep teachers teaching, keep small businesses getting paid, keep taxpayers getting the refunds they are due and keep California eligible for federal stimulus. Some people may have wanted California to drive over a cliff, but tonight’s action prevents that. We may have taken a rocky ride down the side of that cliff, but the state is intact and ready to get in gear for recovery.”

Governor Schwarzenegger and legislative leaders struck a deal with Senator Maldonado in exchange for providing the third needed vote to pass the state budget. The three Republican votes for the state budget came from Senator Abel Maldonado (R-Santa Maria), Senator Dave Cogdill (R-Modesto), and Senator Roy Ashburn (R-Bakersfield).

Senator Maldonado agreed to give his much needed third vote by negotiating three major concessions. As part of Senator Maldonado’s negotiated deal legislators have agreed to place an open primary on the June 2010 ballot. The proposal would have an effect on congressional and state races in 2012 and beyond possibly helping Republicans win some seats that were lost during the last election cycle. Under the open primary plan proposed the top two candidates in an open primary election would face off in the general election. Candidates would not participate in partisan primaries, but would be able to maintain their party identity on the ballot.

The second concession that legislative Leaders agreed to eliminates the additional 12-cent gas tax, which was estimated to have brought in $2.1 billion through June 2010. As part of the changes, a five percent surtax on income taxes will be replaced by a 0.25 percent increase in each income-tax bracket. The new formula would raise approximately $400 million more in income taxes than the previous proposal. The remainder of the lost gas-tax revenues will be replaced by federal stimulus money and $600 to $700 million in line-item vetoes from the Governor.

The third concession by Senator Maldonado was a constitutional amendment to exclude legislative raises in deficit years. This constitutional amendment will appear on the May 19 special election ballot. Maldonado attempted to eliminate legislative pay altogether when the budget is late; however, legislators believed the idea to be unconstitutional.

An overview of the fiscal package shows the historic budget gap was closed with $14.8 billion in spending cuts, $12.5 billion in new revenues, a conservative estimate of $7.8 billion in federal stimulus funds, and $5.4 billion in borrowed funds. The 2009-10 has a projected reserve of $1 billion.

The reserve will be built up with anticipated federal stimulus funds and additional Legislative actions before the start of the new fiscal year on July 1.

Additionally, there are several modifications of these components that would be “triggered” if California receives at least $10 billion in federal stimulus funds that benefit the General Fund budget ($2.2 billion more than the conservative estimate used in this budget):

· Cuts would be reduced by $950 million.

· Revenues would be reduced by $1.8 billion.

The budget package includes eight provisions that will require voter approval for enactment. Seven of the provisions will appear on the May 19, 2009 ballot.

The highlights of the spending cuts, revenues and borrowing contained in the package as well as economic stimulus items also approved are:

Spending cuts:

· Prop. 98 Education

Ø Prop. 98 NOT suspended, but funded at minimum guarantee level.

Ø Major reductions in current and budget years totaling $8.6 billion, but actual level of programmatic cuts is much less with deferrals, swaps, and other changes making up the remainder.

Ø Current-year adjustments:

o Programmatic cuts: $2.65 billion.

o K-12 cuts split 50-50 between revenue limits and categorical programs (categorical cuts are across-the-board).

o No cuts to four cate-goricals: Special Ed., Economic Impact Aid, K-3 Class Size Reduction, and School Lunches.

o Deferral (current-year to budget year): $2.8 billion.

o Counting current-year appropriation toward Prop. 98 “settle-up” $1.1 billion.

o Using Public Transit Account (rather than General Fund) for Home-to-School Transportation: $618 million.

Ø Budget-year adjustments:

o Programmatic funding: about the same as current year (no COLA).

o Cuts again split 50-50 between revenue limits and categoricals.

o Same categoricals protected as current year (Special Ed., EIA, CSR, lunch).

Ø Long-term stability for school funding:

o Governor proposed to not recognize $9.3 billion owed to schools as Prop. 98 “maintenance factor” which would have been a permanent reduction, compromise package restores the $9.3 billion over a period of years.

· Health and Human Services

Ø CalWORKs and SSI/SSP COLAs suspended.

Ø DDS: 10% cut in rates, if other options not achieved (3% rate cut in December package).

Ø Prop. 10: ½ of state and local commission funds diverted to pay for state children’s health programs for 5 years.

Ø Prop. 63: Funds diverted to pay for EPSDT for 2 years.

Ø Other smaller cuts to county administration, technology.

Ø “Triggered” cuts (if federal funds don’t come):

o CalWORKs: 4% grant cut (Governor proposed 10%).

o Medi-Cal: Eliminate certain optional benefits (primarily dental).

o SSI/SSP: Monthly grant reductions of $20 to $35.

o IHSS: Cap on state participation in wages of $9.50, plus benefits, and share-of-cost for prospective clients.

· Higher Education

Ø Adopts Governor’s UC and CSU proposals:

o No funding for “compact.”

o 10% across-the-board cut.

o Reduced costs for retirement contributions.

Ø Not cut: Governor’s proposed cuts to CalGrants (including competitive grants and “de-linking” with fee increases).

Ø “Triggered” cuts (if federal funds don’t come): Additional cut of $75 to $150 million each to UC and CSU (offset by increase in CalGrants, if segments increase student fees).

· State Employees

Ø Assumes savings associated with furloughs, eliminates two state holidays, and makes changes to overtime rules.

· Transportation

Ø Cuts funds for public transit operations, but does not suspend Prop. 42.

Revenues:

· $12.5 billion (reduced to $10.7 billion, if federal funds “trigger” pulled).

Ø Length of time for taxes depends on passage of spending cap, if cap fails, taxes in place in 2008-09, 2009-10, and 2010-11.

Ø Sales tax: Increased by 1 cent, through 2011-12.

Ø VLF: Increased to 1%, through 2013-14, if cap passes (2011-12, if cap fails).

o Separate 0.15% raise to pay for local law enforcement programs (saves General Fund $600 million).

Ø Personal Income Tax Surcharge .25%

o “Triggered” down to .125%, if federal funds become available.

Ø Dependent Credit Exemption (Personal Income Tax) reduces size of credit to the level of personal credit, for up to 5 years, if cap passes (2011-12, if cap fails).

Borrowing:

· $5.4 billion:

Ø $5 billion from lottery securitization (requires voter approval in special election in May or June).

Ø $400 million in loans and transfers from various special funds.

Spending Cap:

· Limits spending to rolling 10-year trend in revenues, amounts above the 10-year trend would go into the “rainy day fund.”

Ø Allows adjustment of the spending limit to accommodate new tax increases.

Ø Money can be removed from the “rainy day fund” when revenues fell below a “current-service” level budget.

Ø Reduces the annual deposit from 3% to 1.5% (other 1.5 dedicated to education).

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