State Budget:
Investigaton Finds State May Have $2.3 Billion More Than Reported in Special Funds

An investigative report by the Contra Costa Times, published this morning, may have a major impact on state budget negotiations and efforts to increase taxes. The story, which is making the rounds quickly around the Capitol, reports:

"A week after uncovering a hidden-funds scandal at the state parks department, finance officials are now trying to piece together why the balance sheets for similar 'special funds' are off by $2.3 billion – money that appeared to be right under their noses amid California's financial meltdown.

"An analysis by this newspaper of California's little-known 500-plus special funds – like the ones that included $54 million in parks money shielded from the Department of Finance – shows tens of millions of dollars in discrepancies in numerous accounts.

"The fund that gives restitution to violent crime victims was off by $29 million. The one that provides kids low-cost health insurance was $30 million out of balance. The fund that rewards people for recycling bottles and cans was $113 million off."

The newspaper said it found at least 17 accounts that appeared to have significantly more cash that what individual departments reported to the Department of Finance.

A spokesman for the Department of Finance said the problems do not necessarily mean that funds have been hidden. "In many cases, there will very likely be legitimate accounting reasons for the difference in those funds," the spokesman said.

Senator Mark DeSaulnier commented, "It's hard to ask people to increase their taxes when they hear about things like this." He said the problems with reporting the size of the special funds are "completely unacceptable."

The story was picked up by the Associated Press and is a major topic of discussion this morning on social media. (Source: Contra Costa Times, July 27.)
Other budget developments:

June Revenue Up – But Not Enough. June general fund revenue was slightly above May projections, according to Controller John Chiang, but this was not enough to prevent the state's 2011-12 budget from being awash in red ink. In the month of June, total revenue was 2.2 percent ($247 million) above projections, with personal income tax revenue $496 million above forecasts.

Unfortunately, during the 2011-12 fiscal year, cash receipts were $87.8 billion while cash disbursements totaled $89.2 billion.

The state ended the fiscal year with a general fund cash deficit of $9.6 billion, the controller said. According to Mr. Chiang, "That deficit is being covered by internal borrowing (temporary loans from special funds.)"

Governor Orders Furloughs. Furlough policy was a controversial issue in the 2010 gubernatorial election, with candidate Jerry Brown criticizing Governor Arnold Schwarzenegger's action on furloughs. Unfortunately for now-Governor Brown, two employee unions have refused to agree to furloughs in negotiations, so the governor was forced to impose one-day-a-month furloughs on members of the Professional Engineers in California Government and the International Union of Operating Engineers.

In our July 6 issue, we reported that the biggest state employee union (Service Employees International Union Local 1000) approved the governor's one-day-per-month furloughs by a 65 percent yes vote, as that was the figure that union President Yvonne Walker trumpeted. What she neglected to mention, and The Sacramento Bee later found out, was that only approximately 5 percent of the membership voted. So the governor's furloughs were affirmatively approved by less than 4 percent of the membership of the union – a very different picture from the one painted by the union's leader.

Retirement System Earnings Fall Far Short – Hit on General Fund Is Likely. Earnings at the state's two big retirement systems fell drastically short of agency projections, with the likely result that the already strapped state general fund will be forced to cough up more to pay public employee pensions.

The California Public Employees' Retirement System (CalPERS) reported July 16 that it earned 1 percent on investments, far short of a projected 7.5 percent forecast. Similarly, the California State Teachers' Retirement System (STRS) announced July 13 that its earnings were 1.8 percent, compared to the 7.5 percent forecast.

In another headache for the governor, CalSTRS Chief Executive Jack Ehnes said: "Investment returns alone cannot place CalSTRS on a solid financial footing. It's clear that the Legislature and governor must implement a long-term funding plan that includes gradual, predictable and fair contribution increases for all parties involved."

CalPERS has the authority to impose higher contributions on the state (and local governments that participate in the pension system), but there won't be any changes for the state until next summer. (Source: The Sacramento Bee, July 14 and 17.)

July 27, 2012
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