The Senate and Assembly voted July 23 and July 24 to approve a budget deal designed to balance the 2009-10 budget with the help of spending cuts, accelerated tax collections, fee increases and deferrals, with no additional tax increases.
We have steered the California ship away from the iceberg, Governor Arnold Schwarzenegger said after the plan was approved. He said the plan will allow the state to quit paying bills with IOUs, and should lead to an improvement in the states credit rating.
The 2009-10 budget, enacted in February with $12.5 billion in tax increases, already was estimated to be out of balance by more than $26 billion. To address the imbalance, the "Big Five" came up with a deal that includes $24 billion in "solutions," including several one-time accounting maneuvers that could make budgeting tougher in the next fiscal year. The governor indicated that the plan addressed the entire imbalance, and that the $2 billion difference was made up for with a smaller reserve and school funding changes.
The budget plan negotiated privately by Governor Arnold Schwarzenegger and the four legislative leaders includes:
· $15.3 billion in program reductions and other changes.
· $4 billion in revenue accelerations and fees, including accelerated Personal Income Tax withholding and corporate tax estimated payments. Also includes proposal to sell a portion of the State Compensation Insurance Fund's book of business.
· $1.2 billion in deferred spending by delaying state employees' June 30 paychecks by a few hours to kick them into July 1, in the next fiscal year.
· $2 billion in borrowing, mostly by taking gas tax revenue local governments (AB X4 30), along with a controversial plan to raise $100 million in revenue from oil drilling off the coast near Santa Barbara (AB X4 23). The Assembly rejected the gas tax shift and the oil lease measure, leaving the budget revision with $1 billion less in revenue. In a press conference held shortly after the Assembly adjourned, Governor Schwarzenegger said he plans to make up for that money by using his line-item veto, but he did not specify which spending proposals he will strike from the budget.
The key revenue-acceleration provisions (included in AB X4 17) will increase tax withholding schedules by 10 percent, and will require individual and corporate taxpayers to accelerate estimated payments by remitting 30 percent of their estimated tax in April and 40 percent in June (compared to the existing requirement of 30 percent in April and 30 percent in June). It is estimated that these changes will allow the state to collect $2.3 billion in the current fiscal year purely a timing issue.
Also approved by both houses was AB X4 18, described as a "tax compliance" bill. It requires backup withholding of 7 percent (when required by federal law), and requires non-retailing businesses with receipts of more than $100,000 to register with the Board of Equalization and file annual use tax returns. The Legislature estimates that the changes will generate $58 million in additional revenue this fiscal year, and $155 million in 2010-11.
The other budget revision bills are: AB X4 1 Described as the "Budget Bill, Jr.," it is the main bill making revisions to the 2009 Budget Act; AB X4 2 Education funding; AB X4 3 Education funding, including 2008-09 reversions, certification, and maintenance factor; AB X4 4 Welfare funding; AB X4 5 Health care programs; AB X4 6 Medi-Cal restructuring and managed care; AB X4 7 Centralized eligibility for welfare programs; AB X4 8 Welfare reforms and COLA suspensions; AB X4 9 Funding for programs helping those with developmental disabilities;
AB X4 10 Transportation funding; AB X4 11 Resources funding; AB X4 12 General Government funding. Among other things, this bill creates the Labor Enforcement and Compliance Fund, funded by surcharges on employers, for support of the activities of the Division of Labor Standards Enforcement. It also increases fees on providers of employee housing to $200 per facility and $27 per employee, and increases the fee for the registration of mobile homes; AB X4 13 Funds for public safety and judicial branch; AB X4 14 Suspension of Proposition 1A to allow borrowing from local governments; AB X4 15 Payback of money borrowed under terms of Proposition 1A; AB X4 16 Cash management and deferrals, and authorization of a "reasonable fee" that state agencies may assess to cover the cost of collecting past-due accounts. The threat of a fee, coupled with other provisions designed to enhance collections, will result in $4.4 million in increased general fund revenue, according to the Department of Finance; AB X4 19 Reforms to save money in the In-Home Supportive Services program; AB X4 20 Consolidation and elimination of boards (does not include any changes to the state tax boards);
AB X4 21 Procurement reform; AB X4 22 Asset management; AB X4 25 Treasurer's Office cash management; AB X4 26 Redirects $1.7 billion of redevelopment property tax increment revenues to K-12 school districts serving redevelopment areas in 2009-10, and an additional $350 million in 2010-11, and makes other changes; AB X4 27 Redevelopment agency project securitization; SB 90 Supplemental appropriations; and SB 63 Eliminates the Integrated Waste Management Board.
In other budget-related news:
Steinberg to Focus on Repealing Two-Thirds Vote for Taxes, Implementing Tax Commission Recommendations. Senator Steinberg said July 23 that after the budget revision is complete, he will focus his attention on trying to repeal the provisions of Proposition 13 that require a two-thirds legislative vote for tax increases. In an interview broadcast on YouTube, the senator said the two-thirds vote requirement forced the Legislature to "make these (budget) decisions with one arm tied behind our backs" because Republicans refused to vote for tax increases beyond the $12.5 billion approved on a bipartisan basis as part of the 2009-10 budget deal in February. He said he wants the Legislature to spend the next few months focusing on "changing the system" by repealing the two-thirds vote, enacting "initiative reform" and "taking very seriously the recommendations of the tax commission and redoing our tax structure in California."
State Pension Funds Lose Nearly $100 Billion, So Taxpayers Will Have to Contribute More. The California Public Employees' Retirement System and the California State Teachers' Retirement System lost nearly $100 billion combined in the just-completed fiscal year, meaning taxpayers will have to contribute more in the coming years to shore up the funds.
CalPERS, which lost 23.4 percent of its portfolio's value, already has said it will demand more from the state beginning next July, and will want more from local governments a year later. The amounts will not be specified until October or November.
The teachers' retirement system, which lost 25 percent, cannot demand higher payments from taxpayers, but has been talking to lawmakers about drafting legislation to increase the amount of state funding it receives. (Source: The Sacramento Bee, July 22.)
State Unemployment Increases. The latest unemployment figures for the state indicate that California lost another 66,500 jobs in June, and continues to have an unemployment rate of 11.6 percent. From June 2008 to June 2009, the state experienced a decrease of 766,300 jobs (a 5.1 percent drop). There now are 2,146,000 Californians unemployed. According to the California Employment Development Department, government workers have fared well, compared to those in other industries. In the past 12 months, the construction industry had an 18.6 percent drop in employment, manufacturers cut 8.7 percent of their jobs, information industry jobs were down 8 percent, transportation and utilities fell 6.6 percent and mining companies cut 5.9 percent of their jobs. Government, by comparison, lost 0.9 percent of its jobs. (Only one industry reported an increase in employment: educational and health services, with a 1.1 percent increase.) (Source: California Employment Development Department, July 17.)
Questions Raised About BOE's Revenue Estimate for Marijuana Sales. The Board of Equalization recently made headlines with its estimate that the state would reap $1.4 billion in revenue if it legalized and taxed marijuana. Joseph Abrams of FOX News reported July 23 that "a close look at that $1.4 billion figure raises a timely and important question: What in blazes were they smoking?" Mr. Abrams continued: "To reach that amount, the board apparently relied on a source that relied on a source that misquoted a book that misquoted a study, all involving a hazy mix of out-of-date numbers, high margins of error and complete guesswork that could be a mere $700 million off the mark." Click here to read Mr. Abrams' account of how the state's estimate can be traced back to marijuana usage rates reported in a dated study conducted at music festivals and marijuana legalization rallies in Great Britain. (Source: FOXNews.com, July 23.)
Cal-TaxReports, July 27, 2009
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