Summer 2003

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State Budget 

The Overdue $99.1 Billion California Budget Papers Over Much of the Deficit

By David R. Doerr and Ron Roach

Twenty-nine days into the fiscal year, the Assembly sent Governor Gray Davis a $99.1 billion state budget after minority Republicans succeeded in holding the line against billions of dollars in new taxes. The Democrat governor signed the budget four days later, on Saturday, August 2.

“It’s not pretty, but it could have been a whole lot uglier,” the governor said on July 29, after a 56-22 Assembly vote – two more than the necessary two-thirds – completed action on AB 1765 (Assembly Budget Committee) and a host of budget trailer bills. The Senate had approved the package two days earlier. Both houses recessed until August 18, when the Senate is expected to deal with several Assembly-passed trailer bills that increase spending by about $300 million.

The state’s fiscal crisis is far from over, noted newspaper analyses of the budget deal. The San Francisco Chronicle reported that, according to observers, the budget is “held together by bailing wire, the end product of a process left in tatters after years of shortsightedness and neglect.”

Senate Republican Leader Jim Brulte noted that it took years of overspending by Democrat-controlled legislatures to get the state in this fiscal pickle, and it will take years – at least five to cover the deficit bonds – to recover. “Do I like this budget? Absolutely not,” he said.

Among those refusing to vote for the budget were Keith Richman and Joe Canciamilla, a Republican and Democrat, respectively, who led a group of moderate Assembly members trying without success to stake out a middle-of-the-road budget. Mr. Richman, who preferred a solution with higher taxes and deeper cuts, said, “This budget is a get-out-of-town-alive budget and simply rolls all the problems into the next year.”

Senate President Pro Tem John Burton: “This is not a budget to be proud of, except for the fact that the people of the state expect a budget to be passed. They expect bills to be paid. And this does that.”

The state had engaged in enough short-term borrowing to pay most bills through August.

Republican Senator Tom McClintock said future budgets will have multibillion-dollar holes as a result of this budget. “Mark my words: This budget solves nothing … The day that it is signed will be the first day of the budget crisis of 2004.”

Assembly Speaker Herb Wesson sequestered the Assembly for 29 and one-half hours, until the afternoon of July 29. It was a record marathon session for a house of the California Legislature, surpassing the legendary 26.5-hour lockdown by then-Speaker Jesse Unruh over an education issue in 1963. Mr. Wesson called it a “bittersweet” budget. While he celebrated the budget’s passage, he expressed sadness for “the millions of people we will affect by not moving forward on this budget on a balanced approach” of reduced spending and higher taxes.

Assembly Minority Leader Dave Cox said: “There are a lot of things we don’t like in it. But in the final analysis, it’s a budget that did not increase new taxes.” After Democrats agreed to add funding for local governments, public safety, K-12 education and rural areas, Mr. Cox said his caucus concluded that it had won. “We declared victory and said it’s time to go home.”

Ted Gibson, former chief economist at the Department of Finance under governors Pete Wilson and Davis, told the Orange County Register (August 3) that the budget “just postpones the problem. We’re spending as if we had revenues among the top 10 states. But we don’t have that revenue and we have not been willing to cut.”

Getting the budget passed was deemed to be more crucial this year. The Legislature and governor have had lengthier budget stalemates, but this year, the bipartisan decision to borrow nearly $11 billion in so-called deficit bonds focused more attention on reactions from Wall Street, where the state’s budget impasse and huge deficit ($38 billion in the eyes of the governor last May) were damaging the state’s credit rating. It hovers just above junk bond status, according to Standard & Poor’s, after a recent downgrading. Also, the lengthy budget battle was further tarnishing the images of the governor, facing an October 7 recall election, and members of the Legislature of all stripes.

Tax Increases

In the end, the budget deficit solution included higher taxes – a tripling of the car tax to bring in $4 billion – as well as higher fees. The 6 percent manufacturers’ investment (tax) credit was not renewed. The MIC, worth $300 million to $400 million a year, expires at the end of this year.

However, Republicans used their leverage (Democrats lacked by two votes a two-thirds majority in the Senate and by six votes a two-thirds majority in the Assembly) to reject significant tax increases proposed by Democrats, including a one-half cent increase in the sales tax for five years, a new 10.3 percent top personal income tax bracket, and a 63-cent hike in the tax on a pack of cigarettes.

Fee Increases

The budget increases fees and is predicated on a number of fee increases, such as the increase in the community college fees, and the 30 percent fee increases imposed last week and this week by the University of California and State Universities to backfill budget cuts.

Additionally, a number of court fees are increased, and are expected to raise $150 million. For example, the complex litigation fee is increased from $200 to $500. The trial motion fee is increased from $23 to $33. Appellate court filing fees go from $265 to $485. A number of court-related fees are increased (see AB 1759, Assembly Budget Committee).

A number of other fees that the governor recommended increasing were not part of the package that passed this week. These include various DMV fees, such as driver license fees, that are in AB 1767 pending on the Senate floor. These fee increases can be considered when legislators return in August.

The proposed surcharge on intrastate telephone calls to generate $100 million for the Highway Patrol reportedly was rejected.

Although it is unclear in what form and how much, rural Californians are likely to be paying a fee for state fire protection. The budget cut $50 million from the Department of Forestry and Fire Protection, with the intent to replace the amount with fees. The Legislature will have to decide after it returns August 18 how to structure the fee, but a per-acre fee is likely. Some argue, however, that this is unfair to rural landowners without structures on their properties. According to the Los Angeles Times (August 1), local fire officials also oppose the fee because it will force many landowners to pay twice in local fire districts where the state takes responsibility for fire suppression.

Smoke & Mirrors Budget? One Capitol wag suggested the state budget passed by the Legislature wasn’t a “smoke and mirrors” budget: “You can’t see the mirrors due to all the smoke.”

When the smoke clears, what will be revealed is a General Fund budget for 2003-04 balanced by borrowing unprecedented in California history, tax increases scored as budget cuts, one-time federal revenues, spending deferrals, accounting gimmicks, raids on other funds and a number of assumptions that may or may not be realistic.

While General Fund expenditures are projected to be reduced to $70.8 billion, from $78.1 billion last year, this does not represent cuts in overall spending. While some cuts have been made, there have been increases in other programs. A part of this General Fund drop is due to the offloading of the car tax subvention to a tax increase and shifting higher education budgets to student fees. Accounting changes shift spending out of the current fiscal year but do not actually reduce spending. “Spending would be pretty much flat,” Brad Williams of the Legislative Analyst’s Office told the San Diego Union-Tribune (July 29), “and probably would go up a little bit.”

Borrowing

Major borrowing includes a $10.9 billion loan to cover the carry-forward deficit of 2002-03, an additional tobacco settlement bond of $2 billion (the state is selling future income from the tobacco settlement for current dollars), pension securitization bonds of $2 billion, and an $825 million loan from local governments (because the state is not reimbursing local governments for lost car tax revenue in July, August and September of 2003, but promising to pay it back by August 15, 2006).

The spending plan also relies on substantial fee increases (see below) and $2.2 billion of federal funds to cover state costs in this fiscal year and last year. It is unlikely that the federal funds will be available next year, leaving a substantial hole to fill.

Gimmicks

Some examples of accounting gimmicks are a change in Medi-Cal accounting that generates $930 million; deferral of $1.2 billion of school expenditures to fund schools in 2003-04 from June 2004 to July 2004, a one-time shift of $135 million of redevelopment agency property taxes to schools (to reduce General Fund school contributions), and shifts of over $1.3 billion from special funds (primarily transportation) to the General Fund. Other major fund shifts are $182 million from the recycling fund, $150 million from the Teleconnect Fund, and $56 million from the employment training fund.

Major deferrals of spending come from the deferral of payments on state mandates and the deferral of payments to pay off the $10.9 billion loan for last year’s deficit until 2004-05. This one-year deferral allows the spending this year of $2 billion for general purposes that will be needed next year to fund the bonds.

Assumptions

The budget is also built on a number of assumptions that may or may not be realistic:

• $1.1 billion of state employee compensation cost savings through salary renegotiations or lay offs. A number of observers question whether the governor, who is facing a recall election with public employee unions among his top supporters, can make such cuts. The Sacramento Bee (July 31) reported that the union representing highway patrol officers agreed to save the state $19 million by accepting a 2.7 percent raise instead of a 7.7 percent raise that had been negotiated earlier. In return, officers will get one extra day off with pay each month and the state will pay at least 80 percent of health care premium costs for officers and their families for two years, rising to 85 percent in the third year. If the other 20 bargaining units receive a similar deal, the state would save about $470 million and still have to resort to layoffs, according to Marty Morgenstern, the governor’s personnel chief. The 12 days off a year just about equal the foregone 5 percent, however.

• $30 million in General Fund workers’ compensation insurance savings from reforms that may or may not pass.

• $100 million in savings on state contracts.

• Additional revenues from Indian tribes.

• Truck weight fee increases that have yet to pass.

Legal Challenges. The courts may have to determine the legality of the so-called remote-control hike of the car tax (vehicle license fee) from .65 percent to 2 percent of value effective with vehicle licensing renewals due in October. This in-lieu property tax on cars and trucks was reduced starting in 1998 when then-Governor Pete Wilson signed legislation that was intended to trigger an increase to 1.5 percent if the state could no longer afford to maintain payments to counties to replace the car tax money that they were no longer receiving. After taking office in 1999, Governor Davis signed legislation that would trigger the increase to restore the entire 2 percent tax.

Senator Tom McClintock, a Republican who was the prime mover for the car-tax cut, has sued, contending that the tax could not be increased without a statute getting at least two-thirds approval of the Legislature and the governor’s signature.

The massive borrowing that in effect carries over a huge chunk of the deficit for at least five years had constitutional lawyers busy, and some say it violates the prohibition against carrying over debt from one budget year to the next. Any long-term “deficit bonds” require voter approval, according to the Pacific Legal Foundation. “It’s time for a constitutional reality check,” said PLF attorney Harold Johnson, citing Article XVI, Section 1, that prohibits the state from entering into a “debt” of more than $300,000 unless voters approve in a statewide election.

The reduced employer contributions to the teachers’ retirement fund also drew opposition – and litigation – from the California State Teachers Retirement System.

The Davis administration has asked the court to throw out a lawsuit by the Howard Jarvis Taxpayers Association that challenges the legality of the $1.9 billion pension bond to finance the state’s contributions to the public employee pension system. While the lawsuit was properly filed in Sacramento County Superior Court, state officials contend that the filing fee of $238 was paid beyond the July 15 deadline. It was paid on July 16.

A group of students went to court challenging the increase in university fees, but a judge ruled against them.

Funding the Deficit

“Triple Flip.” To help market the deficit bonds and avoid even bigger interest penalties that add millions to the costs, the governor and majority Democrats demanded a dedicated stream of revenue to pay them off. Republicans wanted the bonds to be financed from existing revenues. The “triple flip” became the key compromise that dedicated the revenue flow to pay off bonds without new taxes.

The three-way state-local government-schools fiscal gymnastics replaced the mid-May plan promoted by the governor and most Democrats to boost the sales tax by a half-penny. Also proposed were higher income taxes on the wealthy and a huge increase in tobacco taxes. The only general tax hike that is taking effect is the restoration of the car tax, and politicians tried to do this without leaving their fingerprints. (The state sales tax went up one-half cent on January 1, 2003 as a result of a trigger mechanism embedded in prior law when revenues were down enough in back-to-back years.)

Here’s how the “triple flip” works: The state will take one-half cent of the existing sales and use tax that now goes to cities and counties, channeling the money into a special fund to pay off the deficit bonds. Cities and counties then get a like amount of revenue from property taxes that they would not turn over to schools, and the state then takes General Fund money to make schools whole.

In addition to the intended effect of making state bonds more marketable, the maneuver frees up about $2 billion for budget-year spending because the $2 billion-a-year payments on the debt will not be required until 2004. Delaying the debt payment enabled the Democrats to drop demands for higher taxes in this budget cycle.

Structural Deficit. While members of both parties held their noses to vote for the spending plan, some actually voted no or abstained because they did not approve of the $8 billion problem they are leaving unsolved. According to Legislative Analyst Elizabeth Hill, the state will have an $8 billion deficit – some have said it will be $10 billion or more – in the next fiscal year.

A special Senate committee has delayed hearings until mid-August on various structural reform proposals, including the threat of a split-roll property tax. In January, Governor Davis said he would not sign a budget without structural reforms. In May, he amended that message to say he hopes legislators will enact changes in the state-local fiscal structure before they quit for the year in mid-September. This has been changed again. He now says he will appoint a blue ribbon task force.

The MIC. Business leaders vowed to continue pursuit of legislation that would save the manufacturers investment credit from an automatic repeal at the end of the year. “We are losing manufacturing jobs. We’re going to continue to push this the rest of the year,” said Jack Stewart, president of the California Manufacturers and Technology Association. The 6 percent credit, born in the early 1990s to help the state’s economy recover, is seen by boosters as being needed more than ever.

The Sacramento Bee (July 31) cited a high-tech company in Davis that spends about $500,000 a year on new manufacturing equipment. Norm Rogers told The Bee he doesn’t know what his Z-World company will do next year without the MIC. “We have contract manufacturers in Mexico, Korea and China. Obviously, if you jack up the cost of equipment in the U.S., it makes it more attractive to go over there.” The MIC’s demise, despite support from the governor, was a target of the Senate’s president pro tem, John Burton, and the California Tax Reform Association, which is supported by public employee unions. “It was a massive waste of taxpayer dollars,” said CTRA’s Lenny Goldberg.

Cal-Tax President Larry McCarthy said ending the MIC would be penny-wise and pound-foolish, putting California at a competitive disadvantage as manufacturers decide where to locate their factories and provide work for thousands of people.

The statute creating the MIC required that to stay in effect the manufacturing sector had to maintain a certain level of employment, a threshold that could no longer be met because of the impact of the recession on manufacturing jobs.

Eliminated or Scaled Back Programs. Among some of the budget cuts:

• The Trade and Commerce Agency was eliminated, saving $18 million in administrative costs.

• The Office of Criminal Justice Planning was eliminated. Senator Jackie Speier, at a Little Hoover Commission hearing in May, said OCJP, “has been an ATM machine for the governor – no matter who the governor is – to dole out grant money to people who have friends in high places. I think the whole prospect is suspect. The agencies getting the grants have been getting them for decades. They’re on automatic pilot over there.”

• To be closed is a women’s prison and youth correctional facility in the Stockton area and a portion of the male area of the Ventura youth authority facility, as the corrections budget was reduced by an additional $120 million. A provision slipped into the budget requires closing of three small private prisons – two in Kern County and the other ion Riverside. Operators of the prisons told the Bakersfield Californian (August 1) that they can be operated more cheaply than state prisons. The powerful prison guards union (Correctional Peace Officers Association) that has made major campaign contributions to the governor and others, is said to be behind the move, as guards in the private prisons are not a part of their union.

• The Arts Council budget was cut from $19 million to $1 million.

Welfare Cuts. While making cuts in health and welfare programs, major reductions recommended by the governor were not made. The June 2003 cost-of-living adjustment for welfare grants (SSI/SSP) was retained, as was the cost-of-living adjustment for the CalWORKS program.

Higher Education. The budget funds enrollment growth of 7 percent at the University of California and the California State Universities. However, it makes unallocated reductions in funds of $497 million to the universities. All but $121 million will be backfilled by student fees. The UC Board of Regents and the state universities’ Board of Trustees recently hiked fees by 30 percent.

Opening of UC’s new Merced campus was deferred for a year. Cal-Tax had urged the Legislature to postpone construction of the campus until the fiscal situation brightens.

What Republicans Won. In addition to avoiding more tax increases, the GOP holdout resulted in about $300 million in additional spending, including:

• Sheriff’s Grants. Funding ($19 million) is restored for rural and small county sheriff grants. Also added was $17 million for sheriffs’ correctional officer training. The Assembly also restored $39 million to cover sheriffs’ booking fees.

• Redevelopment. The transfer of redevelopment area property taxes to schools was reduced from $250 million to $135 million.

• General Aviation. Some $4.7 million in funding for rural airport security was restored.

• School Equalization. Some Republicans and Democrats conditioned their votes on a promise of $50 million in school district equalization funding to correct property tax distribution inequities.

• County Property Tax Allocations. According to the Orange County Register, Orange County would be allocated 11 percent of property taxes collected, rather than the 6 percent they have received from the original formula implementing Proposition 13 of 1978, as adjusted for the 1990s shift of property taxes to schools. Presumably, the state would provide added funding for schools so property taxes could be released to the county. Two Assembly Members from Orange County, Lou Correa, a Democrat, and Lynn Daucher, a Republican, joined forces to bring the deal to fruition. This has been a major irritant to the county for nearly 25 years. According to a report in the Davis Enterprise, Yolo County also expects to benefit by an allocation of additional property taxes.

• Fees. Proposed fee increases for timber harvesting and for pesticide use by farmers and exterminators were eliminated. The two items total $15 million for environmental programs that will have to be covered by the General Fund.

Local Government Takes Hits. Cities and counties came up big losers in the battle over budget priorities. They won’t get their tax subventions for July, August and September of 2003 until 2006. Redevelopment agencies, which would have lost $250 million in property tax revenues under the Senate version, still lose $135 million after the Assembly modified the proposal. Local mandates will go unfunded.

The Los Angeles Daily News reported that the local government budget cuts will reduce funding for county services by $231 million, according to county CAO David Janssen.

Long Beach is looking at an $8 million car tax hit from the budget agreement. “This is not good for the city,” Long Beach Finance Director Bob Torrez told the Long Beach Press-Telegram. In addition, he said the city‘s redevelopment agency will lose $3 million.

Hollister City Council Member Tony Bruscia told the Free Lance, “They are taking over $1 million from Hollister citizens to balance the budget they screwed up.” Manhattan Beach Mayor Steve Napolitano told the Torrance Daily Breeze, “We feel the current state budget proposals will torture our cities.”

Education. Schools (K-12) get $41.3 billion for Proposition 98 funding, which is $288 million less than last year. However, schools are authorized to tap $350 million in statutory reserves to offset the amount.

A spokesperson for schools seemed relieved that much education funding was preserved. Bill Kugler, deputy superintendent of San Jose’s Eastside Union High School District, said, “There is no such thing as good news here but this is less devastating than anticipated.” Dennis Meyers, assistant executive director of the California Association of School Administrators, said, “We’re celebrating that we didn’t get cut worse, but we’re not celebrating the budget as a whole.”

Basic aid districts, which would have taken a big hit under the governor’s January proposal, suffered some modest reductions: constitutionally mandated basic aid to such districts (of $120 per student) is satisfied through categorical grants and categorical grants are reduced by $9.9 million. Basic aid districts are ones with large amounts of property tax per student. Even with the cuts, they could see budget growth in areas where the property tax rolls have increased substantially. See AB 1765, Assembly Budget Committee, and AB 1754, Assembly Budget Committee.

Transportation Funds Raid. Transportation funds were raided to help balance the budget. Most of the sales tax revenue from sales of gasoline ($856 million) is not transferred to the Transportation Investment Fund as required by Proposition 42 (of 2002), but remains in the General Fund. Additionally, the repayment of a $500 million loan to the Traffic Congestion Relief Fund that had been scheduled for 2003-04 is deferred.

Williamson Act Subventions. The budget continues the full subventions to local government to offset property tax losses due to the Williamson Act. Originally, the governor had recommended elimination of the subventions.

Redevelopment Agencies. Local redevelopment agencies will lose $135 million of property tax revenue, which is being shifted to schools. The transfers are based on 50 percent on gross tax increment and 50 percent on net tax increment. The annual deposit for low and moderate housing is excluded. (See AB 1755, Assembly Budget Committee.)

Health Programs. An accounting gimmick reduces the Medi-Cal budget by $930 million. The program will change from an accrual to a cash budgeting system. In addition, general funds are to be offset by $37.5 million by a quality improvement fee. Reimbursement rates to Medi-Cal providers are reduced by 5 percent. (See AB 1762, Assembly Budget Committee.) The Legislature did not reduce or eliminate currently available optional benefits as suggested by the governor.

Community College Fees. Community college fees are being raised from $11 per unit to $18 per unit. This is less of an increase than originally proposed by the governor in January (to $24). So far, there has not been the public squawking that accompanied the increases at the universities. Perhaps that’s because community college students are not as well-organized. This fee increase should raise around $150 million to offset a General Fund cut.

E-Filing of Income Tax Returns. Tax preparers filing over 99 income tax returns a year must e-file returns or pay a $50 fine per return. This provision is estimated to save $1.2 million.

Foreign Trade Offices Eliminated. All foreign trade offices established by California around the world will be closed. Currently there are 12 offices – Buenos Aires, Frankfurt, Hong Kong, Jerusalem, Johannesburg, London, Mexico City, Seoul, Shanghai, Singapore, Taipei and Tokyo.

At legislative hearings, such offices have been criticized for ineffectiveness and duplication of services provided by the federal government. Critics have also charged that some offices have been established to pander to ethnic constituency groups with emotional ties to the mother country.

Film California First. A program that has allocated $21 million in recent years for incentives to keep movie and television production in California wound up on the cutting room floor, reported the Los Angeles Daily News (July 31). The program, which had $7.9 million in funds for incentives this past year, was administered by the California Film Commission. “We’re incredibly disappointed,” said the commission director, Karen Constine. “But the fact is that every agency is having to do their fair share …”

California Budget Lays Wall Street Egg. Governor Davis’ August 2 signature on the state budget bill didn’t stop a Wall Street rating agency from downgrading California’s credit rating. Moody’s dropped the state’s general obligation bond debt from A2 to A3, affecting about $29 billion in outstanding bonds. The rating service cited the state’s $8 billion budget deficit carried over for the next fiscal year, believing the state would have “substantial difficulty” dealing with the problem. Further, The Sacramento Bee reported that Moody’s may not be done downgrading the state and is keeping it on a watch list. Two weeks ago, Standard & Poor’s hammered the state’s credit rating, knocking it down three notches into “B” territory, just above junk status.

Finance Director Steve Peace told reporters on August 4 that California was fortunate that Moody’s and Fitch waited until after the budget was finally passed. Fitch had not yet acted. State Treasurer Phil Angelides said Moody’s action was “yet another warning signal” that the state needs a structurally balanced budget. The San Francisco Chronicle reported that state officials, instead of paying higher interest on publicly issued bonds, may consider approaching investors for direct loans to deal with an expected cash crunch of $200 million or more that would normally be covered by short-term borrowing.

The Votes. In the Senate, the 27-10 vote included five Republicans in support. In the Assembly, the 56-22 vote included support from 11 Republicans. Two Democrats were opposed. One from each party did not vote.

Line-Item Vetoes. The governor used his item veto on 19 budget items, and actually ended up increasing spending. Most of the items “blue penciled” were either technical or control language the governor didn’t like.

The actual cuts were:

• $668,000 for a Child Development Policy Advisory Committee no longer functioning (of which, only $367,000 is a General Fund savings).

• $147,000 augmentation for the Sexually Violent Predators Conditional Release Program.

• $123,000 augmentation for special education dispute resolution services.

• $500,000 for a special subvention to the Huntington Beach redevelopment agency.

These cuts were more than offset by the item veto of language requiring the Health and Human Services Agency to economize and reduce the cost of data services to various state agencies. This would have achieved a $20 million savings. The governor said (Yogi Berra take note), “To the extent that client departments’ funding for information technology is reduced, these departments would not have appropriate resources to pay for increased utilization. Any decrease in utilization from that projected in setting the rates would preclude the ability to actually lower the rates.” This statement totally misses the point. If the Agency can manage its data unit more efficiently and economically, it could lower the rate it charges other state agencies.

Spending Increases for Welfare and Social Programs. Much of the propaganda proffered during the budget debate was on how the draconian budget cuts were going to hurt the poor. As was reported last week, the Legislative Analyst has concluded there is no overall reduction in state spending below last year’s level. Cuts in some programs, however, masked substantial increases in others.

As identified by the Legislative Analyst, some of these spending increases are:

• Healthy families program: Annual spending up 37 percent.

• Services to people with developmental disabilities: Spending increase over last year’s revised level of 12.3 percent.

• Mental health services: Spending up 3.1 percent.

• Social services programs, including SSI/SSP (welfare): Spending is $9.3 billion, an increase over the prior year of 5.4 percent.

• Student Aid Commission: Spending for the state’s student aid program, mostly Cal Grants, is up 15 percent. In addition, UC and CSU operate their own financial aid programs. Funding for these programs, which comes from student fees, is up 71 percent.

• K-12 Education: No matter how it is measured, Proposition 98 spending on K-12 schools was not reduced below 2002-03 levels. The $41.3 billion for Proposition 98 (which includes General Fund and property tax revenue) is 4 percent above the 2002-03 revised level of $39.2 billion. It is $300 million below what was originally budgeted for 2002-03, but schools are authorized to take $350 million out of reserves.

• Medi-Cal Eligibility: The budget continues to fund the March 2000 expansion of eligibility by 230,000. By linking Medi-Cal eligibility to the schools’ free lunch program, eligibility in 2003-04 is expanded by 5, 850. Additionally, by linking Medi-Cal coverage with food stamp eligibility (which has a monstrous error rate causing the federal government to impose big fines on California), eligibility for Medi-Cal is expanded by 5,500 parents and 5,550 children.
  
  In addition, the budget does not contain a proposal made by the governor to drop selected optional services such as acupuncture.
  
  However, the budget does assume $21 million in savings from a semi-annual reporting process to verify eligibility.
  
  The big savings in Medi-Cal comes from an accounting shift and an arbitrary rate reduction in payments to providers (of 5 percent).

When Bonds Aren’t Bonds. Whether the courts will allow it remains to be seen, but the Legislature, armed with an attorney general’s opinion, believes it found a way to skirt the state Constitution’s prohibition against long-term borrowing of more than $300,000 without voter approval to pay for ongoing state operations. The plan is not to guarantee that the bonds will be repaid from the state’s General Fund, and therefore negate the need for voter approval. Instead, a flow of existing sales tax money will be set aside to pay the bond purchasers with annually approved appropriations. Interest rates will be higher than if the bonds were voter-approved and underwritten by the state’s General Fund. The Sacramento Bee’s Dan Weintraub reported (August 5) that it is a risky deal for the bond buyers and the state. In the short run, he said, this financing is likely to be quite expensive, and, in the long run, the state’s citizens might pay an even greater price if they lose control of how their government is financed.

Bee Criticizes Davis Administration Labor Pacts as Costly. In a sharply worded editorial, the Sacramento Bee on August 14 denounced the Davis administration’s renegotiated contracts with state employee unions as costly to taxpayers in the long run. The paper, which supported Mr. Davis for reelection last year, said, “In exchange for short-term minimal savings, the Davis administration has committed the state to much higher long-term costs.”

In a renegotiation of their current contract, the unions representing the highway patrol and firefighters agreed to defer 5 percent of a 7+ percent pay raise this year. What the governor gave up:

• 12 added days of vacation about equal to the 5 percent raise.

• Higher costs for overtime, which have not been budgeted for. (In fact, the Department of Forestry, which paid $78 million in overtime last year, had been budgeted for just $31 million this year.)

• Computation of overtime and retirement benefits as if the pay raise is still in effect.

• A boost in health benefits.

• A 20 percent increase in firefighters pension benefits, beginning in 2006.

• An agreement with the firefighters union to push legislation to change the retirement formula from 90 percent of final compensation to 100 percent of final compensation.

• An agreement to enhance highway patrol pension benefits as early as possibly 2005.

• A promise to use any savings from the temporary 5 percent deferral to avoid layoffs of highway patrol officers or firefighters.

This report by David R. Doerr and Ron Roach of the Cal-Tax staff is based on coverage originally published in the Caltaxletter of August 1 and August 15, 2003.