Governor Arnold Schwarzenegger on May 14 presented his plan to eviscerate what the Department of Finance calls a $19.1 billion budget deficit for 2010-11 and the remainder of 2009-10. Almost immediately, the governor was criticized by the Democratic leaders in the Legislature, Assembly Speaker John Pérez and Senate President Pro Tem Darrell Steinberg, who called for tax increases to be part of the budget.
The governor's proposal calls for no new taxes (except for a fire insurance "surcharge") and proposes eliminating the state's welfare program (called CalWORKs).
Governor Schwarzenegger's plan includes $12.4 billion in expenditure reductions, $3.4 billion in anticipated federal funds, $1.3 billion in "alternative funding" and $2.1 billion in fund shifts and other revenues.
Cal-Tax President Teresa Casazza said:
"The governor's budget plan wisely avoids tax increases that would make the state's economic problems even worse. With so many Californians out of work, and so many businesses struggling to stay open, adding to the already high tax burden would not help the people of this state.
"There is no easy way out of the budget problems that have snowballed as the state has made unsustainable spending commitments, and the choices remain difficult. To increase revenue, lawmakers need to focus on bringing back jobs and growing the economy."
Speaker Pérez accused the governor of releasing the budget on May 14 to embarrass him, as he was hosting a Democratic fundraiser at Pebble Beach. However, state law requires the budget revision to be released by May 14, and it is common for governors to release their proposals on this deadline day.
Senator Steinberg said the proposal was dead on arrival. "What kind of society maintains business tax breaks and eliminates child care?" he asked. The Senate leader added that he believes the state should extend more taxing authority to local governments – along with more responsibility for some programs – as part of the 2010-11 budget.
Several Democratic lawmakers called for tax increases, with some specifically mentioning an oil severance tax and the repeal of business incentives approved last year.
Republican legislative leaders applauded the governor's stand against tax increases. Assembly Republican Leader Martin Garrick urged the Democrats to "get serious about bipartisan negotiations" that do not involve tax hikes.
On May 19, Democrats on an Assembly budget subcommittee, at the urging of state employee unions and other advocates, voted to reject the governor's proposals to eliminate CalWORKs and to cut the In-Home Supportive Services program.
What Is the True
Deficit?
The $19.1 billion deficit estimate is comprised of a current year shortfall of $7.7 billion, a budget year shortfall of $10.2 billion and a reserve of $1.2 billion.
However, the estimate is based on the usual budget math of determining what the government would like to spend, and comparing that to available revenue. In this case, it is based on the assumption that the state budget should grow 14 percent (from $87.3 billion in 2009-10 to $99.5 billion in 2010-11). Because the state is unable to sustain this enormous increase in spending, it is called a deficit.
Instead, what if the budget deficit was measured by what was actually spent in 2009-10 plus a reasonable COLA (2.2 percent for Consumer Price Index growth and 1 percent for population growth)? Using this method to compute the deficit, the difference between revenue and spending would be $7 billion ($83.1 billion in revenue and $90.1 billion in spending).
Because of an accounting gimmick moving a state payroll date to July 1 to put it in the next fiscal year, 2009-10 expenditures contain only 11 months of state payroll. To restore payroll to a 12-month number, $930 million should be added to the 2009-10 spending base. Additionally, the raid on local agency property taxes for 2009-10 artificially reduced school spending by $1.7 billion for one year.
To adjust 2009-10 spending for these gimmicks, a figure of $89.9 billion could be used as a surrogate for 2009-10 spending. Adjusting for population and inflation would produce a $92.7 billion spending figure. The difference between this number and available revenue would produce a $9.6 billion deficit.
(Cal-Tax: The Legislature needs to determine what the true deficit is, and what expenditures in the budget deficit figure represent increases in spending, whether mandated by law or not. Clearly, a 14 percent increase in expenditures from one year to the next is unsustainable under anyone's theory of state finance.)
In other budget-related news:
Legislative Analyst Weighs In, Calls for Targeted Tax Hikes. Legislative Analyst Mac Taylor issued a critique of the governor's plan on May 18, less than four days after its release. (Cal-Tax: That includes a weekend, too! This is a very timely report from the new analyst.)
The analyst recommended reducing program spending by a lesser amount than the governor proposed, in order to preserve core services for those most in need.
Mr. Taylor also suggested that potential savings be realized in the budgets for the universities, courts and in local assistance grants, and he recommended that new revenues should be part of the mix.
The analyst's tax menu includes delay of the sunset date on the 2009 increases in the sales tax, income tax and car tax. Also recommended is elimination of unspecified "tax expenditures," alcohol tax increases, and some fee increases.
One point made in the analysis is that the League of California Cities' initiative to stop state actions impacting local government could cause the deficit to increase by $1.8 billion. This initiative, to be voted on in November, has been flying under the radar so far. No significant opposition has surfaced.
FTB Accounts Receivable Up. Assembly Budget Subcommittee No. 4, after hearing about the Franchise Tax Board's increase in accounts receivable, granted the FTB's request for $8 million and 111 positions to enhance collection efforts. However, the committee placed a two-year sunset on the positions. The FTB had proposed that they be permanent.
According to the subcommittee analysis, FTB's accounts receivable inventory has increased steadily in the last three years – with personal income tax accounts receivable up 25 percent and business entities up 43 percent. In August 2009, the accounts receivable balance was $8.1 billion, of which $5.5 billion was deemed collectible.
Gina Rodriquez, Spidell Publishing's Sacramento representative, recently looked into the accounts receivable problem and found that in addition to the FTB's accounts receivable, the State Board of Equalization's sales and use tax accounts receivable balance is up $201 million over last year (through March 31, 2010); and the overall BOE accounts receivable at the end of March was $1.6 billion, $1.35 billion of which represents collectible accounts. This does not include accounts in legal status (bankruptcy, probate, late protest, etc.). The accounts receivables for those collections were $261 million as of March.
Tax Agencies Must Report on Results of New Tax-Raising Initiatives. Assembly Budget Subcommittee No. 4 Chair Warren Furutani wants the tax agencies to be accountable for results when they ask for new positions based on the promise of increased revenue. He said it is a gamble to sink money into new positions on promises of added revenue. He was supported by Assemblyman Paul Cook, who said he is nervous about revenue promises.
Due to these concerns, the subcommittee voted May 20 to add to the budget a provision requiring both the FTB and BOE to report to the Legislature, and on the web, precisely the amount spent and the revenue received from tax agency budget augmentations.
Cal-TaxReports, May 24, 2010
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