State Budget and Economic Stimulus

The number one issue of 2009 was providing a solution to what was to become of a $60 billion shortfall between the 2008-09 and 2009-10 Budgets.

In the 2008 Digest of Legislation, under the Overview section relative to the State Budget, the Governor called a special session for November 6, 2008 to close a shortfall in the 2008-09 Budget due to the sudden and massive drop in revenues. By November 25th, a package of budget legislation was presented consisting of $8.1 billion in spending cuts, $8.1 billion in tax increases and about $800 million in other solutions such as fund shifts to close the deficit. However, no agreement came about because the Republicans did not want tax increases to be part of the solution. The following is a list of bills which were part of the package:

SB 6XXXX (Steinberg) Revenue and Taxation Trailer Bill

SB 7XXXX (Senate Budget and Fiscal Review Committee) 2008-09 Budget revisions

SB 8XXXX (Senate Budget and Fiscal Review Committee) Education Trailer Bill

SB 9XXXX (Senate Budget and Fiscal Review Committee) Health and Social Services Trailer Bill

SB 10XXXX (Senate Budget and Fiscal Review Committee) Transportation Trailer Bill

SB 11XXXX (Senate Budget and Fiscal Review Committee) General Government Trailer Bill

AB 6XXXX (Laird) Revenue and Taxation Trailer Bill

AB 7XXXX (Laird) 2008-09 Budget revisions

On December 1, 2008, the Governor called a “Proposition 58” special session for the 2009-10 legislative members to come up with budgetary and economic problems left by the 2007-08 Legislature. Senate President pro Tempore Darrell Steinberg took the unprecedented step of appointing all members of the Senate to the Senate Budget and Fiscal Review Committee to immediately begin hearing recommendations and assessing areas of consensus in closing the widening gap: proposals by the administration, Legislative Analyst, and both caucuses of the Senate were considered and deliberated. In addition, a joint session of the Legislature was held to hear from the State Treasurer, State Controller, Legislative Analyst, and Department of Finance on the implications on the State not acting in a timely manner. (Under a Proposition 58 special session, the Governor must include solution to address the fiscal emergency, and the Legislature has 45 days to act in addressing the emergency.)

The legislative package the Legislature came up with consisted of $7.3 billion in spending cuts, $9.3 billion in tax increases, and about $1.5 billion of other solutions, such as fund shifts. However, the Governor vetoed the package because of the increased taxes and felt there was not spending cuts. The following are bills contained in the package:

SB 3X (Ducheny) Budget Act of 2008: revisions

SB 4X (Ducheny) Environmental Quality: surplus state property

SB 5X (Ducheny) Human Services

SB 6X (Ducheny) County sales and use taxes: rate increases

SB 7X (Ducheny) General Government

SB 11X (Ducheny) User fee: gasoline and diesel fuel taxes

AB 2X (Evans) Sales, use, income, fuel, and oil severance taxes

AB 3X (Evans) Office of Statewide Health Planning and Development

AB 4X (Evans) Education revisions

AB 5X (Evans) Transportation projects

AB 6X (Evans) State finances

AB 7X (Evans) Infrastructure funding

AB 8X (Evans) Department of Corrections and Rehabilitation

AB 10X (Evans) Prison facilities: construction

AB 12X (Evans) Tax withholding on payments for goods and services

On December 19, 2008, without legislative action on the budget shortfalls, the Governor issued an executive order for the Department of Finance to implement a two-day furlough for state employees, to be effective from February 1, 2009 to June 30, 2010 and directed the Department of Personnel Administration to institute a program for state agencies to reduce their costs by 10% to be effective from January 1, 2009 to June 30, 2010. Also, the Governor called another Proposition 58 special session which was convened January 5, 2009.

The total shortfall projection in the Governor’s Budget was $39.56 billion ($41.7 billion assuming a $2.1 billion reserve). The 2008-09 Budget shortfall was estimated at $14.8 billion, and for 2009-10 it was estimated to be approximately $25 billion.

On February 12th, the legislative leadership reached a compromise which included (1) expenditure reductions, (2) tax increases, (3) elements of economic stimulus, and (4) some reforms and efficiencies. The compromise addressed the 2008-09 revenue shortfall and expenditure issues as well as enacting the 2009-10 Budget Act (meeting the Legislature’s Constitutional deadline for a 2009 Budget four month early), in short, providing 18 months of budget solutions for the period ending June 30, 2010. On February 20, 2009, the Governor signed a $37 billion package which addressed the state’s fiscal crisis as well.

The $39-$56 billion gap was bridged with $14.9 billion in expenditure reductions, $12.5 billion in multi-year General tax increases, $7.8 billion of federal stimulus revenue that was conservatively estimated base amount for the current and budget year, $5.4 billion in borrowing, $957 million in Governor’s vetoes, including $510 million in vetoes to higher education that are anticipated to be backfilled with federal economic stimulus dollars. The final budget reserve was $2.049 billion.

Some of the highlights of the February Budget included:

1. A one-cent increase in the state sales and use tax, effective April 1, 2009. A 25% rate surcharge on the Personal Income Tax brackets, effective starting in the tax year of 2009. Reduced the dependent amount allowed against the Personal Income Tax to the amount of the personal income starting in the 2009 tax year. Increased the Vehicle License Fee from the current rate of 0.65% to 1.15% except for heavy vehicles. These taxes were for a two-year period and would have been extended for another year if the voters had passed the proposed Budget Stabilization Constitutional Amendment at the May 19, 2009 special election -- which they did not.

2. Provided economic stimulus tax provisions as follows: (a) a single sales factor apportionment for multi-state businesses, (b) a film/TV production tax credit, (c) a homebuyer’s tax credit, and (d) a small business hiring credit.

3. Provided (a) an $8.6 billion reduction in education, but did not suspend Proposition 98, (b) a 10% reduction to the Receiver Medical Services Program in the Department of Corrections and Rehabilitation, (c) a 3% reduction in the Regional Center Operating Costs and the development of cost-containment measures for the Department of Developmental Disabilities, (d) a suspension in CalWORKs cost-of-living adjustment, (e) an across the board 10% reduction to the California State University and University of California system to be replaced by federal funding, (f) the elimination of two state holidays and changes to overtime rules, (g) cuts in funds for public transit operations, but did not suspend Proposition 42, and (h) for full funding of local law enforcement programs with use of increase in the vehicle license fee.

While not directly related to the budget, the following economic stimulus bills were passed which had the intention of easing the economic downturn and unemployment: (1) unlimited Public Private Partnerships for transportation through 2017, and up to 4,500 beds in corrections reentry facilities, (2) use of “design-build” in 10 state transportation projects, five local transportation projects, 10 redevelopment projects, and five other state office buildings, (3) meal break flexibility for employees to be taken between the third and sixth hour, (4) clarified the schedule options that can be voted on by employees, (5) California Environmental Quality Act (CEQA) exemptions for eight specific projects, (6) diesel agricultural equipment eligible for the Carl Moyer Program, and (7) CEQA exemption for the sale of surplus state property.

Included in the agreement were provisions which required voter approval to be enacted. The following appeared on the May 19, 2009 special election ballot:

Proposition 1A (ACA 1XXX [Niello], Resolution Chapter 1, Statutes of 2009-10, Third Extraordinary Session), which provided for a cap on spending by limiting the amount of revenue that can be appropriated for General Fund purposes. It required that each year the Department of Finance forecasted a revenue amount for the fiscal year that derived from the last 10 years of revenue growth amounts. Any revenue that exceed this forecasted amount must be deposited in the Budget Stabilization Fund, with the exception of revenue that is required for Proposition 98 purposes that has exceeded revenue growth. This proposition failed by a vote of 34% to 66%.

Proposition 1B (ACA 2XXX [Bass], Resolution Chapter 2, Statutes of 2009-10, Third Extraordinary Session), which required the state to increase the annual school funding by $49.3 billion in future years in lieu of any maintenance factors that could be required by Proposition 98. Funding would have come from a specific supplemental education payment account specified in Proposition 1A. This proposition failed by a vote of 38% to 61.9%.

Proposition 1C (AB 12XXX [Evans], Chapter 8, Statutes of 2009-10, Third Extraordinary Session), the Lottery Modernization Act, which would have made changes to clarify education opportunities, the Lottery director’s authority relative to state employees, required greater transparency of having lottery audits be posted on the Internet and would have provided approval of AB 1654 of 2008, the Lottery Modernization trailer bill for the 2008-09 Budget Act. This proposition failed by a vote of 35% to 64.4%.

Proposition 1D (AB 17XXX [Evans], Chapter 11, Statutes of 2009-10, Third Extraordinary Session) dealt with children’s services funding, which would have expanded the use of Proposition 10 funds for health and human services through state programs for children up to five years of age. This proposition failed by 34% to 66%.

Proposition 1E (SB 10XXX [Ducheny], Chapter 15, Statutes of 2009-10, Third Extraordinary Session), the Mental Health Services Act (MHSA) funding, which would have used MHSA funds in the amount of $226.7 million in 2009-10 and up to $234 million in 2010-11, to support the Early and Periodic Screening, Diagnosis, and Treatment Program as administered by the Department of Mental Health and additional statutory changes in the health omnibus trailer bill to improve the use and effectiveness of MHSA funds, consistent with the recommendations of recent audit reports. This proposition failed by 32.3% to 67.7%.

Proposition 1F (SCA 8 [Maldonado], Resolution Chapter 3, Statutes of 2009) dealt with elected officials salaries, which would not have allowed legislative or constitutional officer salaries to be increased in years where the state faced a projected fiscal deficit. This proposition passed by 74.3% to 25.7%.

Another piece of legislation which passed as part of this package was SB 6 (Ducheny) and SCA 4 (Maldonado) of 2009 which provides for an open primary system which will appear on the June 2010 primary ballot.

The following is the 37-bill budget package list:

Third Extraordinary Session Bills

SB 1 (Ducheny) - Fiscal Year Budget Bill

SB 2 (Ducheny) - Changes to Fiscal Year 2008-09 Budget Bill

SB 4 (Ducheny) - Education trailer bill

SB 6 (Ducheny) - Human services

SB 7 (Ducheny) - Transportation finance

SB 8 (Ducheny) - State and local government

SB 9 (Ducheny) - Proposition 10: use of funds: services for children

SB 10 (Ducheny) - The Mental Health Services Act: Proposition 62 amendments

SB 14 (Ducheny) - Prison facilities: construction

SB 15 (Calderon & Florez) - Tax credits: apportionment: sales factor

SB 19 (Ducheny) - Elections

SB 20(Maldonado) - State Controller

AB 3 (Evans) - Tax changes to VLF, income tax, and sales tax

AB 5 (Evans) - Health

AB 11 (Evans) - Special Election

AB 12 (Evans) - California State Lottery

AB 13 (Evans) - State and local government: cash management

AB 15 (Krekorian) - Tax credits: apportionment: sales factor

AB 16 (Evans) - State finance

AB 17 (Evans) - California Children and Families Act

ACA 1 (Niello & Adams) - State finance

ACA 2 (Bass) - Education finance

Second Extraordinary Session Bills

SB 3 (Florez & Denham) - Air pollution: grants: farm equipment (Carl Moyer)

SB 4 (Cogdill) - Public contracts: design-build: public private partnerships

SB 7 (Corbett) - Residential mortgage loans: foreclosure

SB 9 (Padilla) - Public works: labor compliance

SB 10 (Oropeza) - Vehicle license fees

SB 11 (Steinberg) - Judges: employment benefits

SB 12 (Steinberg) - Court facilities financing

SB 15 (Ashburn) - Personal income taxes: credit: principal residence

SB 16 (Ashburn) - Horse racing: license fees

AB 5 (Gaines) - Employment: alternative workweek

AB 7 (Lieu) - Residential mortgage loans: foreclosure

AB 8 (Nestande) - State government

Regular Session Bills

SB 6 (Maldonado) - Elections: primaries

SCA 4 (Maldonado) - Elections: open primaries

SCA 8 (Maldonado) - State officer salary increases

On March 19, 2009, a critical court ruling was made by the Sacramento Superior Court (Gilb v. Chiang) confirmed the State Controller’s duty to follow state law during a budget impasse and that the State Controller is legally obligated to reduce or not pay the salaries of state employees during a budget impasse. State law, and a 2003 California Supreme Court decision (White v. Davis), provides that the state has the authority to only pay minimum salaries required under federal law in the absence of a budget. This is because for most employees there is no appropriation to pay their salaries when there is no budget. Once a budget is enacted, then state employees receive their full salaries retroactively to the beginning of the year.

On March 27th, the Governor signed five bills taking advantage of federal economic stimulus monies to assist unemployed persons and to create jobs. These bills allowed California to capture and expedite more than $17.5 billion to highways, roads and waterway projects, and provided relief to the unemployed and provided health care benefits for children and families. These bills were:

SB 24 XXX (Alquist) - Health care

SB 27 XXX (Negrete McLeod) - Water projects

AB 20 XXX (Bass) - Highway and road maintenance

AB 23 XXX (Coto) - Additional unemployment benefits

AB 29 XXX (Coto) - Unemployment benefit eligibility reform

To further assist the employed, the Governor, on May 12th, signed AB 23 (Jones) to help those individuals stay enrolled in private insurance.

When the May Revise was presented for the 2009 Budget, it showed another $19.5 billion shortfall which required actions to be taken to balance the 2009-10 Budget. On May 20th, the California Citizens Compensation Commission voted to impose an 18% pay cut for state elected officials. On May 21st, the Legislature began deliberations on the May Revise. The Legislature’s goal was to address both the budget and cash flow issues by mid-June. The Conference Committee (this year comprised of 10 members of each house of the Legislature) heard public testimony for over two weeks. Thousands of concerned citizens and their locally elected representatives presented their view and suggestions regarding the Governor’s May Revise proposals.

The Governor, on June 1st, spoke before a joint legislative session requesting the members of the Legislature to come together once again to adopt a plan to make up what became a $24 billion shortfall.

On June 6th, the Governor issued Executive Order S-09-09 eliminating funding for contracts entered into by state agencies and departments after March 1, 2009 for all goods and services excluding those necessary for public safety and prohibited the entering into new contracts. It also ordered state departments to develop and submit to the Department of Finance plans to reduce their future spending on contracts and provides by at least 15% no later than 30 days after the adoption of the revised 2009-10 budget.

Beginning June 24th, the Legislature attempted, on a 2/3 vote, to pass a package of bills that represented all the final actions of the Conference Committee, however, the package had yet to receive the necessary votes for passage. On June 28th, in the absence of a 2/3 vote, the Legislature put forth a package of 14 majority vote measures in the Third Extraordinary Session intended to provide a level of savings and additional revenues that would assist the state from falling into a financial abyss. Leadership discussions with the Governor began in earnest immediately following the June 30th end of the 2008-09 fiscal year, when the State Controller began issuing registered warrants in lieu of immediate cash payments for various bills owed. This is the first time since 1992.

The Governor, on July 1st, called another Proposition 58 legislative special session (the Fourth Extraordinary Session) to address the new budget crisis, and on July 2nd, the Governor directed the Department of Personnel Administration to have state offices closed the first, second and third Fridays of every month through June 2010, which meant state employees had to take unpaid furlough days on these Fridays. For employees who work in exempted positions that cannot be furloughed on this schedule, the furloughed days had to be used at another time. All state hospitals, prisons, and other 24-hour care facilities had to maintain their regular hours as well as the California Highway Patrol and CalFire. Between July 1st and July 27th, intense negotiations took place between the leaders. A package of bills were finally adopted which included $24.2 billion in solutions without having to raise taxes.

The summary of solutions is as follows:

Cuts: $15.6 billion

Revenues: $3.9 billion

Borrowing: $2.1 billion

Fund Shifts: $1.5 billion

Deferral/other: $1.2 billion

Total: $24.2 billion

The major provisions of the agreement included the following:

1. Avoided suspension of Proposition 98, the funding source for both K-12 education and community colleges, and guaranteed repayment in future years of $11.2 billion in Proposition 98 “Maintenance Factor.”

2. Protected the human services “safety net.” It protected CalWORKs from elimination and from extreme cut proposals. It maintained the IHSS program largely intact, except for major new fraud prevention measures. It protects Healthy Families from elimination or from a reduction in the program eligibility threshold, although there are significant cuts to the program.

3. Restored $62 million of the $70 million parks cut to avoid massive park closures.

4. Provided no new tax credits.

5. Reductions to local government, but with some mitigation.

6. Major spending reductions included $6.1 billion in Proposition 98, K-14 education funds; $2 billion in higher education; $1.3 billion associated with state worker furlough days; $1.2 billion in corrections; $1.3 billion in Medi-Cal General Fund reductions; $1.7 billion from local redevelopment agencies; $528 million to CalWORKS; $334 million General Fund in Developmental Services; $226 million to In-Home Supportive Services; and $124 million in the Healthy Families program.

7. Revenue solutions included $1.7 billion from increasing payroll withholding schedules by 10%; $610 million from accelerating Personal Income Tax and Corporation Tax revenues into 2009-10; and $1 billion from the sale of a portion of the State Compensation Insurance Fund.

8. Borrowing solutions included $2 billion from the suspension of Proposition 1A (2004). Suspension diverts 8% of property tax revenues of cities, counties, and special districts. The state must repay the $2 billion (with interest) within three years.

9. Eliminated and consolidated some state boards and commissions including the elimination of the California Integrated Waste Management Board.

10. Provided for the suspension of cost-of-living adjustments in the area of general government, leverage state assets, and made reforms in the statewide information technology procurement.

11. Deferred June 30, 2010 state employee paychecks to July 1, 2010, to achieve budget savings.

12. Made provisions for cash deferrals.

13. Reduced “Williamson Act” payment by about 20%.

14. Fully funded the California Conservation Corps.

15. Reduced funding by $168.6 million, by reducing general fund support to the courts by 10%. This reduction will be achieved through various measures, including one-day per month court closures, transfer of reserves in various funds, and an increase in fees.

16. Selling a portion of the State Compensation Insurance Fund to a private entity for an estimated $1 billion.

On the issue of Corrections, leaders agreed upon a reduction level with specific proportions to be determined when the Legislature reconvened in August.

The following 27 bills were adopted to balance the 2009-10 Budget and signed by Governor Schwarzenegger:

SB 63 by Senator Tony Strickland (R-Thousand Oaks) - Waste management

SB 90 by Senator Denise Moreno Ducheny (D-San Diego) - Budget Acts of 2007 and 2008: augmentation

SB 116 by Senator Ron Calderon (D-Montebello) - State warrants

SB 13XXXX by Senator Denise Moreno Ducheny (D-San Diego) - Courts omnibus bill: public safety

SB 16XXXX by Senator Denise Moreno Ducheny (D-San Diego) - State finances

AB 1XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Budget Act of 2009: revisions

AB 2XXXX by Assemblymember Noreen Evans (D-Santa Rosa ) - Education

AB 3XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Education finance

AB 4XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Human services

AB 5XXXX by Assemblymember Noreen Evans (D-Santa Rosa ) - Health

AB 6XXXX by Assemblymember Noreen Evans (D-Santa Rosa ) - Medi-Cal

AB 7XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Public social services: statewide enrollment process

AB 8XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Human services

AB 9XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Developmental services

AB 10XXXX by Assemblymember Noreen Evans (D-Santa Rosa ) - Assembly Budget Act of 2009

AB 11XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Public resources

AB 12XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - State government

AB 14XXXX by Assembly Budget Committee - Property tax revenue allocations

AB 15XXXX by Assemblymember Ted Gaines (R-Roseville) - Property tax revenue allocations

AB 17XXXX by Assembly Budget Committee - Taxation

AB 18XXXX by Assembly Budget Committee - Taxation

AB 19XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - In-home supportive services

AB 20XXXX by Assemblymember Audra Strickland (R-Moorpark) - Consumer affairs: regulatory boards: operations: reorganization

AB 21XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - State contracts

AB 22XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - State property: inventory: leases: sale and leaseback

AB 25XXXX by Assemblymember Noreen Evans (D-Santa Rosa) - Surplus state funds

AB 26XXXX by Assembly Budget Committee - Community redevelopment

When the Legislature reconvened its business in August, they passed the last trailer bills to the 2009-10 Budget -- bills which were still open items and which had to be solved (i.e., Corrections) and items that had been vetoed and worked out with the Governor’s Office. These bills included:

SB 65 (Senate Budget and Fiscal Review Committee) Deferrals of state payments

SB 66 (Price) California Small Business Expansion Fund

SB 67 (Senate Budget & Fiscal Review Committee) Property tax revenues: Proposition 1A receivables

SB 68 (Senate Budget and Fiscal Review Committee) Community redevelopment

SB 72 (Senate Budget and Fiscal Review Committee) State employees: payroll

SB 73 (Senate Budget and Fiscal Review Committee) State fees

SB 13XXX (Alquist) Domestic violence centers: funding

SB 18XXX (Ducheny) Corrections

AB 187 (Assembly Budget Committee) Cal Grant program

AB 188 (Jones) Medi-Cal: quality assurance fee revenue

AB 1422 (Bass) Healthy Families Program

AB 1568 (Salas) Healthy Families Program

With the infusion of the federal American Recovery and Reinvestment Act, and monies made available through the sales of bonds, the budget and economic crisis facing California was given a “shot in the arm” to keep many Californians employed. Monies made available from these sources have been used for transportation infrastructure, emergency preparedness, job training, gang reduction intervention, school construction, levee improvements, and environmental and parks projects.

On November 18, 2009, the Legislative Analyst indicated that their forecast of California ’s General Fund revenues and expenditures shows that the state must address a General Fund budget problem of $20.7 billion between now and the time the Legislature enacts a 2010-11 state budget plan. The budget problem consists of a $6.3 billion projected deficit for 2009-10 and a $14.4 billion gap between projected revenues and spending in 2010-11. The Department of Finance has concurred with the Legislative Analyst’s estimate.