California's structural budget deficit for 2008-09 has grown to $17.2 billion due to the current economic slowdown, according to estimates in the budget revision released May 14 by Governor Arnold Schwarzenegger.
To close the gap, the Schwarzenegger administration is proposing budget cuts, some new revenues, reforms in the state lottery, and some additional borrowing. The governor also pulled three controversial proposals that had been in his January budget. Funds for K-14 schools will not be reduced below the Proposition 98 guarantee, prisoners will not be released early, and no state parks will close.
The governor continues to strongly push his budget reform proposal. Governor Schwarzenegger told the press corps at a Wednesday afternoon briefing: "Since January, I have traveled up and down the state to shine a spotlight on the need for budget reform and to hear about the people's ideas and concerns. And I heard time and again that the people of California want us to live within our means. They don't want us to raise taxes, especially now, when times are tough. And they want us to fix the budget system, so we don't have to go through this pain every time the economy cools off."
The proposal to securitize the lottery and the additional health-and-welfare budget adjustments may be the most controversial elements of the plan. The governor's plan (which requires voter approval, as it would amend the voter-approved lottery and change the way lottery revenues are disbursed) calls for the modernization of the lottery to boost performance and returns on this asset. With this modernization, the state will be able to raise cash upfront by selling future lottery revenues with no risk to the state, the governor said.
This cash, estimated at $5 billion in 2008-09 and $15 billion overall through 2011, will in turn be used to establish a "rainy day" fund. According to Mr. Schwarzenegger, establishing such a fund is the long-term solution that will get California off the broken budget rollercoaster once and for all. He believes this rainy day fund will protect all of California's priorities, so that the state is never again subjected to the feast-or-famine budget cycle that threatens funding to education, law enforcement, human services and other programs.
Cal-Tax President Teresa Casazza's reaction to the May revise:
"We support the governor's work toward getting the state's fiscal house in order without increasing the burden on California's taxpayers, who already are struggling to pay their bills in these tough economic times. The governor wisely rejected the tax increases on homeowners, seniors and struggling businesses, suggested by the legislative analyst and others.
"An economic rebound in the private sector is the key to increasing state revenue. Budget reform also remains vital. We need to change the system that led to the chronic structural budget deficits, so it doesn't happen again. If we don't create a rainy day fund to establish a cushion in tough economic times, many problems will remain even when the economy rebounds."
Other items of interest in the May budget revision:
Commission to Study the Tax Structure. The governor said he will, by executive order, establish a bipartisan commission of gubernatorial and legislative appointees to study ways to "modernize" state tax laws. Most of those advocating such a commission want to see the tax system produce more revenue.
Insurance Surcharge. To fund an expanded emergency preparedness program, the budget proposes surcharges on all residential and commercial property insurance, based on ZIP codes and set at two levels based on differing risks:
The plan would result in an average cost of $6.75 per household.
Sales Tax Revenues From Gasoline. With the run-up in the price of gasoline in the past three months, the sales tax on gasoline is generating a lot more money. As a result of some mind-boggling formulas, half of the "spillover" amount from the sales tax on gasoline is deposited in the mass transportation fund, which may be used to reimburse the general fund for transportation-related expenses. The May revision proposes using $828 million in spillover revenues in the fund to pay for K-12 home-to-school transportation and to pay debt service on transportation-related general obligation bonds.
LLC Tax Payment Date. The May revise counts an additional $360 million from the tax on limited liability companies by changing the payment date for the tax. The new, earlier payment date would be June 15, Finance Director Mike Genest said. (Cal-Tax: This would result in LLC taxpayers paying the LLC tax twice in one year.)
EdFund Sale. The plan to sell the EdFund, the state's student loan guarantee service, was approved as part of the plan to balance the 2007-08 budget, but is being postponed until 2009-10. (Cal-Tax: This is more evidence that the budget developed last year was full of holes.)
State Park Fee. While the May revision abandons the January proposal to close some state parks, it proposes that in lieu of this action, some park fees should be increased $1 to $2 where the effect on attendance will be minimal.
Deferred Maintenance in the School System. Taxpayers have been giving school districts billions of dollars to build new school facilities and modernize older structures. Unfortunately, schools have a spotty record in maintaining such facilities. They have spent dollars that should go toward maintaining schools for administrative and employee salaries instead. This has led to current bond issues to fix the run-down schools, and to statutory requirements on school districts to spend a fixed amount on deferred maintenance.
The governor's May revision proposes to relax these requirements and spend maintenance money for salary increases and other purposes. A total of $222 million of Proposition 98 money designated for maintenance will be shifted to restore funds that had been reduced in the January budget. Further, the administration proposes to eliminate the local matching requirement for state deferred maintenance funds. In addition, the administration suggests that the current requirement that 3 percent of district spending go toward maintenance be reduced to 2 percent.
Loans. Special funds are being raided to provide one-time loans to the general fund to help balance the budget. Roughly $280 million would be taken from transportation funds and an additional amount from many other funds. The administration says the loans will not impact any programs of the various funds.
Cal-TaxReports May 19, 2008
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