State Budget

The 2008-09 Budget would take until September 23, 2008, before it would be signed into law (85 days past the deadline of July 1, when a budget was to be in place). The main reason for a delayed budget was because the state was facing a $15.2 billion budget deficit and over the question of whether taxes would have to be raised to make up the shortfall.

The Governor’s first proposed budget contained $101 billion in general funds which included (1) a 10% reduction to nearly all General Fund departments and programs, boards, commissions, and elected offices, except in cases where such a reduction was unconstitutional (examples include Proposition 42 and contributions to public retirement systems), cutting debt service payments or departments that generate revenue; (2) closure of state parks; (3) a Budget Stabilization Act; (4) preservation of all K-12 instructional funding; and (5) release of thousands of prisoners.

The Governor’s May Revise provided a $2 billion reserve, fully funded Proposition 98 guarantee with a modest increase in education, deleted the release of prisoners plan and the park plan, and still reduced some social service and health programs. The May Revise provided for securitization of future revenues from the State Lottery, and gave the Department of Finance the determination whether the Revenue Stabilization Fund, that the budget would create, had a sufficient balance for transfer to bring General Fund revenues up to the long-term average of General Fund revenue growth.

In response to the Governor’s May Revise, the legislative Conference Committee budget:

1. Included $6 billion in spending cuts.

2. Provided $2.3 billion more for K-12 education than the Governor recommended.

3. Restored $1.5 billion in health and human services the Governor cut. This included restoring nearly $200 million in health care services to some of the state’s most vulnerable residents, the reimbursement rate for Medi-Cal providers, and federal pass-through funds for the aged, blind, and disabled.

4. Restored $57 million in financial assistance for college students.

5. Reduced corrections spending by $300 million, with a reform package that would have helped reduce the prison population.

6. Restored the tax bracket on the wealthiest Californians by reinstating the 10% and 11%, suspended the net operating loss for three years, suspended a tax adjustment for upper-income Californians, restored the franchise tax of 9.3%, and stepped up tax enforcement.

7. Did not include lottery securitization.

8. Provided $8.2 billion in additional taxes to the Governor’s revenue solution.

A stalemate occurred for a month, between July 17th and August 17th, because the legislative Republicans would not agree to the proposed Budget Bill (AB 1781). During the monthlong stalemate, the Governor issued an executive order laying off about 10,300 temporary workers, banning overtime, and freezing state hiring, and ordered the pay of approximately 200,000 state workers to be cut to the federal minimum wage of $6.55 per hour. State Controller John Chiang declined to comply with the pay cut, indicating the state had enough to pay employees. The Governor also announced he would not sign any regular session legislation until the lawmakers passed a budget. Legislators responded to this by passing measures and holding onto them rather than sending them to the Governor. On August 17th, the State Assembly took up the Budget Bill but it was refused adoption. On August 20th, the Governor made a compromise move with the legislative Democrats by calling for a three-year, one-cent boost in the state sales tax. Other key elements would have enhanced the so-called “rainy-day” fund and given the Governor the authority to make mid-year spending cuts. On August 29th, the Senate took up the Governor’s August revised budget, but it failed on party lines due to the tax revenue provisions. After a vote was taken, Senate President pro Tem Don Perata requested Senate Republican Leader Dave Cogdill to come up with a plan and Republicans would be given the opportunity to present it on the Senate Floor. On September 8th, the Senate Republicans brought forth AB 1793 which (1) eliminated the tax increases in the Governor’s August revised budget, (2) restored law enforcement funds, (3) securitized the lottery, (4) accepted the Governor’s spending reduction and the Legislative Analyst’s and Democrats’ spending reductions, and made other reductions, (5) funded education next year at the same level proposed by both the Governor and Senator Perata, (6) included a strict spending limit and gave mid-year cut authority for the Governor, and (7) eliminated the proposal for early release of criminals. AB 1793 was defeated on a party line vote, 13-21. With this, and the Republican opposition on new taxes, the Democrats made compromises in order to have the budget impasse resolved.

On September 16th, the Legislature passed a compromise budget: 29-11 in the Senate, and 67-11 in the Assembly. However, the Governor vowed to veto the budget because of objection to some of the revenue provisions and wanted the rainy-day fund provisions tightened up. The Legislature approved the revisions on September 19th, and the Governor signed it on September 23rd.

The final 2008-09 Budget was $144.5 billion. Of that total, $103.4 billion was in General Fund monies. The Governor item vetoed $510 million.

Major provisions of the Budget (AB 1781) included:

1. Education - Provided $58.1 billion for schools ($1.5 billion higher than in 2007-08).

2. Higher Education - Maintained funding for the University of California and the California State University at 2007-08 levels. The California Community Colleges received 4.9% above the 2007-08 level.

3. Public Social Services - Eliminated the cost-of-living increase this year for recipients of CalWORKS, and maintained the average monthly benefits for low-income, elderly, blind, and disabled residents at $870 for individuals and $1,524 for couples until January. The state then will pass along monthly federal cost-of-living increases of $15 for individuals and $23 for couples

4. Medi-Cal - Cut Medi-Cal provider rates by 10% but they will be restored in March 2009, and required that children verify Medi-Cal eligibility every six months instead of each year.

5. State Employees - Maintained the executive order terminating about 10,000 temporary and part-time state employees and eliminating overtime until at least July 1, 2009. Included a 10% cut from last year’s spending to most state departments.

6. Shifts and Transfers - Shifted public transit money from special funds to pay for transportation programs in the General Fund. Borrowed and transferred to the General Fund from special state funds. Shifted 5% of local redevelopment funds to schools and community colleges.

7. Budget Reform - Created a rainy-day fund and authorized the Director of the Department of Finance to do the following when she/he determines, mid-year, that revenues have fallen below specified levels:

A. Reduce state operations budgets by up to 7% without modifying or suspending the law.

B. Freeze cost-of-living adjustments (COLAs), rate increases, or increases in state participation in local costs, as designated in the Budget Act, for up to 120 days.

C. The Governor can submit urgency legislation to permanently suspend COLAs and other rate increases. If the Governor fails to act within the 120 days, or the Legislature fails to adopt the suspension, the COLAs and other rate increases are reinstated.

8. State Lottery - Proposed a ballot measure to modernize the State Lottery. If passed by the voters, future proceeds of an improved State Lottery would be securitized (estimated to be approximately $5 billion in 2009-10), with the additional revenues used to pay down debt and fill the rainy-day fund in the out-years.

9. Tax Policy - Accelerated tax collection from quarterly filers and those who make over $1 million a year. Suspended net operating loss deductions for businesses in tax years 2008 and 2009, and made other changes for businesses to recoup the money and more, in future years. Limited business tax credits for research and other items for two years, and allowed for expanded write-off thereafter. Doubled the penalties on companies who have not paid tax bills of $1 million or more. Reinstated and made permanent the 12-month period for application of the use tax to vehicles, vessels, and aircraft purchased outside the state and subsequently brought into California. Provided for an accrual accounting adjustment.

The following is a list of Budget Trailer bills that were signed into law along with the Budget:

SCA 12 (Perata) - State Lottery

SCA 13 (Ashburn) - Budget Reform

SCA 30 (Ashburn) - State Finance

SB 28X (Senate Budget & Fiscal Review Committee) - Taxation

AB 10 (Assembly Budget Committee) - Employment: overtime compensation

AB 88 (Assembly Budget Committee) - Supplemental Budget Bill

AB 158 (Torrico) - Tribal Gaming: local agencies

AB 186 (Maze) - Crime prevention

AB 268 (Assembly Budget Committee) - Transportation

AB 519 (Assembly Budget Committee) - Education

AB 1183 (Assembly Budget Committee) - Health

AB 1279 (Assembly Budget Committee) - Human Services

AB 1338 (Assembly Budget Committee) - Public Resources

AB 1389 (Assembly Budget Committee) - State Government Operation

AB 1452 (Assembly Budget Committee) - Taxation

AB 1526 (Assembly Budget Committee) - Before and After School Programs

AB 1654 (Assembly Budget Committee) - Lottery Modernization

AB 1741 (Assembly Budget Committee) - Lottery Securitization

AB 2026 (Villines) - State Property

Four measures which were part of the Budget were vetoed by the Governor: AB 1805 (Assembly Budget Committee) - seriously emotionally disturbed children; AB 2246 (Villines) - charter schools: joint powers agreement; AB 2784 (La Malfa) - Medi-Cal reimbursement; and AB 36XXX (Laird) - taxation. AB 36XXX was vetoed because SB 28X made revisions to the bill making it unnecessary.

In October, it was estimated that the state will be facing a $3 billion deficit in the budget. On October 15th and 16th, State Treasurer Bill Lockyer sold $5 billion worth of revenue anticipation notes to keep the state’s cash flow running. However, at the end of the month, the deficit was estimated to be approximately $10-$12 billion. The State Treasurer indicated he was postponing the issuing of any of the billions of dollars in general obligation bond notes already authorized but have not been sold. He may postpone trying to seek a $2 billion loan through the issuance of short-term notes that are being scheduled for mid-November. The Governor has called a special session of the Legislature to start meeting on November 5th to attempt to solve the deficit.

The Governor is proposing in the Special Session to cut $4.5 billion from the 2008-09 Budget and to add $4.4 billion in new revenues. His plan calls for a temporary increase in the state sales tax, from 5% to 6.5%, which will generate additional sales tax revenues of $3.219 billion in 2008-09 and $6.606 billion in 2009-10 for the General Fund. At the end of three years, the state sales tax would revert back to 5%. Additionally, the Governor called for additional revenue increases including broadening the sales and use tax to include certain services, imposing an oil severance tax upon any oil producer that extracts oil from the earth or water in the state and increasing the alcohol excise tax by five cents a drink.

The Governor is also creating a commission on the 21st Century Economy to reexamine and modernize California’s out-of-date revenue laws in order to attempt to prevent the deficits the state has experienced in the last several budget cycles.