Upon signing the 2010-11 state budget, Governor Arnold Schwarzenegger vetoed $963 million in general fund spending – a move that Democratic Assembly and Senate leaders say they will seek to overturn.
The governor's vetoes included elimination of child care for 55,000 children from families on welfare (also known as CalWORKs' Stage 3 child care, savings of $256 million); assumed accelerated receipt of future federal Temporary Assistance for Needy Families funds (CalWORKs General Fund savings of $366 million); and suspension of funding for student mental health services (savings of $133 million). The governor also vetoed funding to various health and social services programs that also were vetoed last year.
Assembly Speaker John Pérez said October 19 that he will ask the state's First 5 program to provide money to restore funding to the CalWORKs child care program. The First 5 program, funded by a tobacco tax increase approved by 50.5 percent of voters (Proposition 10 of 1998), is intended to provide development for low-income children and anti-smoking education. The speaker's borrowing proposal will provide CalWORKs with 90 percent of its total operating budget of $60 million for the next year. Also, the speaker has said that he will divert $6 million out of the Assembly's operating budget to make up the additional funds. (CalTax: This may set a precedent. Future governors could pressure the Legislature to seek funds from First 5 and to divert money from its own budget.)
On October 13, Senate President Pro Tem Darrell Steinberg said he will seek to undo the governor's line-item vetoes. Senator Steinberg indicated that he will not ask the Legislature to override the vetoes, which would take a two-thirds vote. Instead, his plans rely on passage of Proposition 25, the majority-vote budget (and potential majority-vote tax) measure, or on Jerry Brown being elected governor.
In an e-mail to The Bee, H.D. Palmer, spokesman for the Department of Finance, said: "The reserve for the budget that was sent to the governor was unacceptably low, which is why he was compelled to veto nearly $1 billion to restore it. Each of these line-item vetoes involved tradeoffs and some tough choices."
Analyzing the budget and budget vetoes, a new report released by the Legislative Analyst's Office estimates that "well over two-thirds of the 2010-11 budget solutions are one-time or temporary in nature" and that many of California's budget problems will return next year.
On October 18, Moody's Investors Service issued a report whose title tells the story: "California Budget Likely to Lead to Mid-Year Shortfall and Large Gaps in Future Years." The report said the new budget "relies heavily on one-time measures, optimistic revenue assumptions, and the receipt of funds, some of which may not materialize." Therefore, Moody's said, "It is likely that the state will face a large mid-year budgetary shortfall later this year and that the budget gap for next year will be significant, both of which will place continued credit pressure on the state."
The Moody's report said the state could face a budget gap of at least $12 billion in the near future, and that one of the reasons is that "the state has made it a practice to use one-time measures and accounting gimmicks to solve budget gaps in economic downturns."
State Controller John Chiang's latest cash report, released October 11, shows that the state's cash situation does not look good. On the plus side, compared to the projections in the governor's May Revise, receipts for the month of September were $1.1 billion, or 15.3 percent, higher than expected. However, since the start of the fiscal year on July 1, the controller has not made payments to independent contractors, vendors or other companies and organizations that do business with the state. Controller Chiang noted that the amount of outstanding bills for this year's budget delay totals $8.3 billion.
Once the state pays its outstanding bills, the controller expects to have $3.5 billion in cash-on-hand, which means the state will not have enough funds for all of October's bills. To make up for the cash-flow problem, the controller said he will work with the state treasurer to borrow funds through Revenue Anticipation Notes (RANs).
(Sources: The Sacramento Bee, October 13 and October 19; Moody's Investors Service, October 18; State Controller's Office, October 11.)
In other budget news:
After Budget Vetoes, State Spending Still Up More Than $200 Million. While the spending lobby laments what it describes as "draconian" budget cuts, general fund spending is actually increasing. After the governor's $963 million in line-item vetoes, general fund spending in 2010-11 will still be more than $200 million above 2009-10 spending. (CalTax: This figure will increase if the Legislature overturns the vetoes or if the Legislature and governor approve additional spending before the end of the fiscal year, as has happened in recent years.)
While there are reductions in some programs, there are increases in others. According to the legislative analyst, 2010-11 general fund expenditures are projected to be $86.552 billion. Last fiscal year, general fund spending totaled $86.349 billion.
Suspension of NOL Provisions Limits Taxpayers on Charitable Contribution Deductions. Provisions in the budget trailer bill SB 858 (Senate Budget and Fiscal Review Committee) will have the effect of preventing some taxpayers who have carryforward losses from being able to fully or partially deduct charitable contributions on their state tax return.
The Franchise Tax Board is asserting – and the Board of Equalization, in a case decided this week, agreed (see BOE story on page 4) – that taxpayers must use their federal adjusted gross income (AGI) to compute limits on charitable contributions.
Taxpayers with carryforward losses may have a low AGI on their federal return. With the loss carryforward suspended, these same taxpayers will have a higher state AGI. They will have to use the lower federal AGI to compute their limit on state deductions, which means the state deduction for charitable contributions will be limited. (CalTax: The Associated Press reported earlier this week that donations to the nation's 400 biggest charities dropped 11 percent last year – the worst decline in the 20 years since the Chronicle of Philanthropy began keeping a tally. California's position on this tax issue certainly won't help the charities recover.)
Budget Package Delays Tax Refunds. The recently enacted budget package included a provision delaying tax refunds, the Franchise Tax Board announced on its website. The delay is due to insufficient cash in the state treasury, despite the budget's passage.
The delay was authorized by AB 1624 (Assembly Budget Committee), which was approved by a 34-1 vote in the Senate (Senator Jeff Denham voted "no") and a 64-11 vote in the Assembly (opposition came from Assembly members Joel Anderson, Connie Conway, Chuck DeVore, Jean Fuller, Diane Harkey, Kevin Jeffries, Steve Knight, Dan Logue, Jeff Miller, Jim Silva and Mike Villines).
The FTB's website provides questions and answers regarding the delay:
· When will refunds be issued? All refunds will be paid as received once a sufficient loan (known as a Revenue Anticipation Note, or RAN) is issued, or there is otherwise sufficient cash in the treasury. Returns that have not completed processing before October 7, 2010, will have their refunds delayed until further notice.
· What type of refunds are affected? This applies to all refund types – paper and direct deposit. Delayed direct deposit refunds will be electronically transmitted when funds are available.
· Where to find more information: Visit the State Controller's page.
Correction: Bill Number for Budget Deal's Restrictions on Tax Agencies Was Incorrect. The restrictions on tax agencies mentioned in the October 8 CalTaxReports are in SB 870 (Senate Budget and Fiscal Review Committee), not SB 858. SB 870 is the main budget bill, and the restrictions are in budget control language.
Cal-TaxReports, October 22, 2010
© 2010 California Taxpayers'
Association.
All Rights Reserved.