Governor Arnold Schwarzenegger on July 28 signed the 2009-10 budget fix package, passed by the Legislature July 25, after further reducing spending by $489 million with line-item vetoes and by another $168 million through other actions.
The Legislature's budget package fell short of covering the projected deficit, as Assembly Speaker Karen Bass was not able to deliver enough Assembly votes to support the agreement for the package negotiated by the "Big Five." The Assembly rejected a provision to generate $100 million in revenue from offshore oil drilling in the Santa Barbara area (AB X4 23) and a proposal to shift gas tax revenue from local government to the state ($971 million in 2009-10 and $750 million in 2010-11) (AB X4 30).
Before signing AB X4 1, the main budget reduction bill, the governor called it the "good, the bad and the ugly." While eschewing any significant tax increases, the package could result in a balanced 2009-10 general fund if revenues don't deteriorate further and spending is held in check to the levels appropriated. However, there are a number of provisions that could force further cuts or tax increases to balance the budgets for 2010-11, 2011-12, 2012-13 and beyond.
Dangers for Future Budgets
These future problems stem from the passage of future spending obligations, use of one-time solutions, and borrowing that has to be repaid. The potential problems are:
· New Spending Obligations. The biggest new spending obligation included in this package is $11.2 billion of additional funds appropriated to schools in AB X4 3. This amount is not included in the 2009-10 tally, but will come due over a series of future fiscal years, and will be built into the Proposition 98 base. This spending is not required, pursuant to the provisions of Article XVI, Section 8(d) of the state constitution (a provision that was added to the constitution through legislation sponsored by Cal-Tax). There is no funding provided to pay for this new obligation.
· One-Time Solutions. About $4.7 billion in one-time solutions (called "gimmicks" or "smoke and mirrors" by some) are helping balance the 2009-10 budget. These one-time solutions will not be available next year, leaving a gap that will have to be filled either by economic growth or other solutions. The one-time fixes are:
ü Acceleration of withholding and estimated taxes in AB X4 17, totaling $2.3 billion in 2009 and $193 million in 2010-11.
ü A pay date shift for state employees from June 30 to July 1 in AB X4 12 – a one-time benefit to the general fund of $900 million.
ü Sale of a portion of the State Compensation Insurance Fund in AB X4 12 – one-time revenue of $1 billion.
· Borrowing. Borrowing has a more negative fiscal impact than use of one-time revenues. When money is borrowed, not only is it available for one-time use only, but it must be paid back. This creates a double-whammy. The budget fix package is predicated on borrowing $2.2 billion (AB X4 14 and AB X4 15). Most of this is from local government by shifting 8 percent of property tax revenues from local agencies to schools (which reduces state costs for school support). This borrowing has to be paid back by June 30, 2013.
· February Revenues Sunset. With the failure of Proposition 1A in May, the sales tax increase, personal income tax increase and car tax increase enacted in February will sunset after the 2010-11 fiscal year. The total of additional taxes that will not be collected as the result of the voters' rejection of the proposition was estimated by the legislative analyst to be $16 billion.
Revenues
In addition to the one-time revenues from the overwithholding and earlier estimated tax payments mentioned above, the budget fix relies on several other sources of additional revenue:
· Compliance. AB X4 18 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. These provisions were scored as producing $58 million in 2009-10 and $155 million in 2010-11. Originally, the BOE scored the use tax bill as a $640 million increase, but later modified the figure downward. The FTB has scored backup withholding as a $26 million revenue gain.
· Driver's License Fee Increase. AB X4 10 increases the driver's license fee from $28 to $30. This should raise approximately $16 million.
· Higher Education Fees. Directly, AB X4 2 increases community college fees by $1 per unit, to generate about $80 million. Indirectly, as a result of reductions of general fund support for higher education, the University of California increased fees to raise approximately $166 million and the California State University increased fees to raise about $366 million.
· Other Fees. There are numerous other fee increases in the package. For example, AB X4 12 increases mobile home registration fees by $12 and raises fees on providers of employee housing to $200 per facility and $27 per employee. The bill also creates the Labor Enforcement and Compliance Fund, funded by surcharges on employers, for support of the activities of the Division of Labor Standards Enforcement.
Reduction in General Fund
Appropriations
The budget fix anticipates a reduction of $16.1 billion (as estimated by the governor) or $18 billion (as estimated by the legislative analyst) in general fund expenditures, depending on what is counted as an expenditure reduction. Whether this level of reduction actually will materialize is anyone's guess.
These changes often are misconstrued by the press and public to be "cuts" or "program reductions." Some of these reductions do fall into this category, but the category also includes a lot of actions that are not program reductions.
For example, the college fee increases described above are scored as budget cuts, as the general fund expenditures have been reduced. However, this is not a program reduction of $612 million, as fees have been substituted for general fund money to continue the programs.
Further, this budget fix, combined with February's actions, anticipates a $1.2 billion cut in corrections ($788 million in this package), but there is no plan for making such a cut.
One bill that passed as part of the package, almost unnoticed, is SB 90 (Ducheny), appropriating $645 million from the general fund to the Department of Corrections to cover deficiencies in 2007-08 and 2008-09. This illustrates the point that the level of expenditures can be higher than budgeted, and so-called "cuts" may not materialize.
Budget Fix: Process Has Not Improved. The process by which the budget revision was adopted was not much different than the one in February, which was subject to much criticism from the press and public.
The details were negotiated in secret by the "Big Five," amended into bills and jammed through the Legislature without public hearings and without adequate time for the public or legislators to read the bills. Legislators were forced to stay up all night to vote on the package. Los Angeles Times columnist George Skelton tossed out an idea in a July 26 column: prohibit the Legislature from voting on measures after sundown.
State Employee Unions May Ask Workers to Take More Time Off Without Pay. Members of the union that represents almost half of the state government's workforce have voted to authorize a strike due to anger over Governor Arnold Schwarzenegger's decision to furlough state workers three days a month. Service Employees International Union Local 1000 announced August 1 that members have voted to authorize "job actions up to and including a strike." Union leaders said 74 percent of those voting gave the go-ahead for a strike, but they would not reveal how many people voted. (Cal-Tax: A strike would have the same economic impact as a furlough. For example, a 12-day strike would represent the same loss of pay as one furlough day per month for a year. A strike could save the state a considerable amount of money.) (Source: San Francisco Chronicle, August 2.)
Cal-TaxReports, August 10, 2009
© 2009 California Taxpayers'
Association.
All Rights Reserved.