The
state constitution's June 15 deadline for the Legislature to send a budget to
the governor came and went without fanfare last week, while the budget
conference committee continued its work.
The conference committee, made up of 10 members from the
Assembly and Senate, was one week behind schedule and had been leaving many
major items unresolved. Many of the budget items that have been approved by the
committee have been approved on party-line votes, indicating that they will
have a tough time gaining the two-thirds threshold needed to be approved on the
floor of the Assembly and Senate.
From a practical standpoint, the apparent lack of progress
has the effect of making the budget more difficult to balance. The governor has
estimated the budget imbalance to be more than $19 billion for the remaining
period of 2009-10 and the entire 2010-11 fiscal year (an estimate that assumes
state spending will increase 14 percent from 2009-10 to 2010-11). If a new
budget is not in place by the July 1 start of the new fiscal year,
budget-balancing measures will have less time to work budget cuts will not be
in place for the full 12 months, nor will any revenue-enhancing measures be in
effect for the entire 12 months.
Here are some of the issues discussed by the conference
committee Thursday:
·
New BOE Border
Inspection Positions Made Permanent. The committee adopted the governor's
plan to make permanent 42.5 new positions at the Board of Equalization. The
employees have been conducting border inspections in the city of Needles to
determine if goods shipped into California are subject to state taxes.
·
Collection
Costs Recovery Fee. The committee approved one new position to allow the
BOE to impose a fee on non-compliant taxpayers for the cost of collecting
delinquent taxes.
·
Increased
Use Tax Collections. The committee discussed a Senate proposal that would
require Internet retailers to report to the BOE sales information regarding
out-of-state purchases by California residents, and would require Californians
to report use tax to the state on their personal income tax returns.
Assemblywoman Nancy Skinner suggested that California review the model used by
New York in regard to use tax collections. New York's aggressive system is
currently being litigated, and Senator Denise Ducheny, who chairs the conference
committee, said she believes the lawsuit will be decided soon. She suggested
that the committee leave the item open for discussion. Similar measures enacted
in North Carolina and Rhode Island failed to bring in any new revenue.
·
Professional
License Suspensions. The committee discussed whether the state should
suspend the professional licenses of delinquent taxpayers, but did not approve
or reject the idea.
Assemblyman Bob Blumenfield questioned why the Franchise Tax Board would
want to suspend a license of someone when there may not be any nexus between
the license and the taxes owed. FTB staff said that they considered the act of
suspension fair, because it would be taken only as a last step.
Senator Ducheny suggested leaving
the item open until language is crafted that would allow the state to suspend a
professional's license for unpaid taxes, but also allow anyone who is employed
by a delinquent taxpayer to remain unaffected by his or her employer's standing
with the FTB.
·
Corporate
Taxes: NOLs, Credit Sharing and Income Apportionment.
The committee discussed but took no action on business incentives
approved last year allowing employers to share credits, elect a single sales
factor, or carry back or carry forward losses. The agenda item was left open for
discussion at a later date, since there was little consensus among the
committee's members.
The committee discussed both the
Assembly and the Senate's approaches to delaying implementation of the business
incentives. The Senate proposed delaying the legislation for two years, while
the Assembly suggested suspending the incentives for three years. Also, the
Senate recommended eliminating the option for employers to have a net operating
loss carryback period.
Senator Bob Huff warned the
committee that they were traveling down a road that would not be in good faith
with legislators who cast budget votes in 2009. A number of the Republican
legislators who approved the 2009 budget package, which included both business
incentives and temporary tax increases, have faced criticism, recall elections
and difficult re-elections due to their support for the budget.
Senator Huff also reminded the
committee that businesses are looking three to five years down the road to
determine if they should expand or do business in California, and by
"reneging" on promises, the state would promote the belief that
California is not friendly to business.
Senator Bob Dutton said the
committee's discussion of the business incentives would be looked at by Capitol
observers and the state's business community, and will impact future investment
decisions. "What is said here will have a direct impact on what people are
doing," he said. "People are watching this deciding what they are
going to do. It is going to be an encouragement or a discouragement of what
they are going to do."
·
Alcohol
Tax Increase. The committee discussed a Senate proposal to increase alcohol
taxes by $14 million. According to the legislative analyst, the additional
funds would be used to fund services to combat alcoholism. Senator Alan
Lowenthal asked what would be needed to change the alcohol tax increase into a
"fee." Representatives of the Legislative Analyst's Office said that
while anything can be crafted in a way to turn a tax into a "fee,"
they advised the Legislature that they would need to look at the matter further
and that the Legislature should confer with the legislative counsel. The matter
was left open.
In other conference committee activity last week:
·
Committee
Considers Suspending Law That Requires Local Governments to Hold Open Meetings.
On June 17, the committee discussed whether the Legislature should adopt
the governor's budget plan to suspend the Brown Act, which was approved by the
Legislature in 1953 to require locally elected officials to hold open and
public meetings. According to staff, the state must reimburse local governments
for the cost of developing a public meeting agenda and making that agenda
available to the public. By suspending the program, the state claims that it
would save $362,000 in 2010-11 and $16.5 million in 2012-13.
The original statute, named for
author Assemblyman Ralph Brown, was designed to address rising concerns that
local governments would meet informally and not provide the public with
transparency. Since 1953, the state has amended the statute to provide
taxpayers with more transparency, such as broadcasting or recording public
meetings. Some of the later provisions furthering the Brown Act are
"mandated costs" to local government, and must be reimbursed by the
state.
One of the items discussed was
that the state is paying local governments to develop and post their agendas
for public meetings. Assemblywoman Skinner asked why the state was paying local
governments to develop agendas. She stated that if a local government is going
to hold a meeting, "an agenda is not optional." According to
committee staff, prior to the Brown Act there was no formal requirement for
local governments to notify the public with an official agenda.
Legislators expressed concern that
if they suspend the program, Californians may not be able to hold their local
governments accountable. However, the item was left open,
with the idea other state laws may also require local governments to provide
open meetings, which would allow the state to suspend the Brown Act.
·
UC
Retirement System Contributions? Should the state, in the future,
contribute to the University of California Retirement System? For the past 20
years, the UC Retirement System operated without any contributions from
recipients, from UC or the state. Due to the economic downturn, budget
conferees were told that the system will need funds equivalent to 20 percent of
salary.
However, current state law prohibits the state from contributing to the UC
Retirement System. Governor Arnold Schwarzenegger wants to repeal this statute
so the state could make contributions in the future. Senator Dutton said this
is opening "Pandora's box," as the state already faces a big unfunded
pension liability. Senator Ducheny pointed out that the UC system negotiates
pension benefits outside of state control.
Assemblywoman Skinner said the state saved $2 billion by not having to fund
UC retirement, and urged repeal of the prohibition. Senator Jim Nielsen asked
if repealing the pension prohibition was "pension reform," and the
legislative analyst's staff said the repeal does not specifically have any
reform elements.
This issue was left open.
·
Legislature Increases Funding for Program
That No Longer Exists. Columnist
Dan Walter of The Sacramento Bee pointed
out several decisions made by the committee to approve funding for a program
that doesn't exist. The committee approved appropriating $8.7 million to
Charles Drew University, a private medical school in Los Angeles. Previously,
the state provided funding to the university's hospital and residency program.
However, since the hospital lost its accreditation, the program was ended. Mr.
Walters pointed out that one of the hospital's administrators is Mervyn Dymally, a former
legislator, lieutenant governor, and "one of California's most venerable
political figures of the last century." Mr. Dymally
recently came to Sacramento to lobby legislators for additional funding, and
was successful. Mr. Walters writes: "Giving Drew $8.7 million just because
it's gotten the money in the past, or just because a former legislative
colleague lobbied for it, doesn't wash in an era of multibillion-dollar
deficits, wholesale slaughter of basic services, and wrangling over whether
taxes should be raised
"
In other budget-related news:
Attorney General Says
Assembly Speaker's Plan Could Violate Proposition 58. In a legal opinion
released June 15, Attorney General Jerry Brown's office opined that a major
provision of Assembly Speaker John Pιrez's budget
proposal could violate Proposition 58. "We conclude that a court could
reasonably determine that the proposed transaction violates Proposition
58," the opinion states.
The speaker proposed securitizing the future revenue stream
of regulatory fees paid into the Beverage Container Recycling Fund, and to put
the money in a new "Jobs Fund" that would pay for a variety of
general fund spending. The plan also calls for an oil severance tax to be
enacted, with the revenue going into the Jobs Fund.
Proposition 58, approved by voters in 2004, prohibits future
deficit financing, among other things. The attorney general's opinion notes
that some of the Jobs Fund money likely would be used to make up for deficits
in certain programs left over from the 2009-10 fiscal year.
Assembly Republican Leader Martin Garrick said the opinion
"confirms what we have said all along the Assembly Democrats' borrowing
scheme is a lead zeppelin that's not going to fly." Mr. Garrick added:
"Given that the centerpiece of the Assembly Democrats' Government Jobs budget
has now been invalidated, it's time for them to start real negotiations with
Republicans based on the governor's budget blueprint to close a $19.1 billion
deficit."
Governor Negotiates
State Employee Contracts That Include Pension Reform, Pay Raise. The
governor and four state employee bargaining groups announced June 16 that they
have agreed to new contracts that include pension reforms (employees hired
after the contracts take effect will make higher contributions, will not be
able to retire as early, and will have pensions based on the average salary for
their three highest years, rather than their single highest year). The deals
also include protection from being furloughed or having their pay reduced to
the federal minimum wage when the state does not have a budget in place, and it
includes a 5 percent "step raise" for employees who are at the top of
the pay scale in their job classification for one year or more.
The contracts which affect California Highway Patrol
officers, firefighters, psychiatric technicians and social services workers
now must be approved by the Legislature and the employees represented by the
bargaining groups. The deals cover approximately 23,000 of the state's 196,000
union-represented employees. (Source: The
Sacramento Bee, June 17.)
State Employees'
Retirement System Approves $600 Million Increase in State's Contribution.
The California Public Employees' Retirement System board voted June 16 to
increase the state's contribution to the system by $600 million a year, arguing
that the money is needed to help the pension system recover from major
investment losses in 2008-09. The Legislature and governor cannot stop the
action, so the money will be taken out of the state's budget. The retirement
system said the increased contribution will add about $87 million to the
state's structural deficit, because much of the increase will be borne by
special funds, not the general fund. (Source: The Sacramento Bee, June 16 and June 17.)
Supreme Court Accepts
State Appeal of Courts Prison Inmate Reduction Mandate. The United States
Supreme Court on July 14 agreed to hear the state's appeal of a federal court
order to release 40,000 prisoners by December 2011. The issue has a
far-reaching impact on future state budgets, as well as the safety of the
people of California.
A three-judge federal panel ruled in August 2009 that
reducing the number of inmates is the only way to improve medical and mental
health care of inmates. According to Rachel Arrezola, a spokeswoman for the governor: "We continue
to believe federal judges do not have the authority to order the early release
of prisoners in our state. California should be able to take action on
its own to keep its citizens safe without interference from the federal
courts."
The suit was initiated by the Berkeley-based Prison Law
Office. This law firm represents individual prisoners and engages in
class-action lawsuits. (Source: Salinas
Californian, June 15.)
Governor Reiterates
Anti-Tax Stance. On June 18, Governor Schwarzenegger reiterated his
anti-tax stance in a statement responding to a California Employment
Development Department report showing that the state's unemployment rate
decreased from 12.5 percent in April to 12.4 percent in May, and that non-farm
payroll jobs increased by 28,300 during the month. The governor said:
"While the decline of our unemployment rate is welcome
news, there are still far too many Californians out of work. To achieve a full
recovery, there must be accelerated hiring in the private sector, and that's
exactly why we must not burden California employers and consumers with higher
taxes. Now is the time for government to be a partner to economic growth, not
an obstacle to it. Just this week, Baxter's BioScience
business announced it would continue investing in California because of the
efforts of Los Angeles and my Administration to expand the East Los Angeles
Enterprise Zone. These are the type of efforts we should focus on, and I
encourage the legislature to consider this as they continue budget deliberations."
Cal-TaxReports, June 21, 2010
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