Record budget impasse ends, but next fiscal year’s deficit already projected to be $21.3 billion

California finally passed a budget on October 7, the 99th day of the fiscal year, closing an estimated gap between revenues and spending commitments of $17.9 billion without increasing taxes, but using rosy revenue forecasts, one-time savings, and $7.5 billion in spending cuts.   

 Approval of the spending package, which took hours on the floors of both the Assembly and Senate, ended the longest budget stalemate in California’s 160-year history. The previous record of 85 days was set in 2008. 

     “We will no longer have closed courts. We will continue to have open schools. We will protect the jobs necessary and the infrastructure necessary to protect those who have been dislocated by this recession,” said Sen. Denise Ducheny, the San Diego Democrat who chaired the special two-house budget conference committee, in urging her colleagues to support the 20-some measures needed to enact the budget. 

Overall, the package reduces the state’s general fund by $4.7 billion to $89.4 billion of which $6.2 billion goes to public schools and community colleges, a slight increase over last year.  For Democrats, there weren’t many victories, although spending cuts of $7.5 billion were $5 billion less than what Gov. Arnold Schwarzenegger sought in his January budget proposal.  Republicans won some reductions in future pension costs and succeeded in blocking any tax increases, although they agreed to continue for another two years to prevent companies from writing down current profits with past losses.  “The cuts and reforms the governor pushed for will absolutely help future leaders of the state govern more efficiently,” said Aaron McLear, the GOP governor’s press secretary.  Although several aspects of the budget suggest it doesn’t balance even if it does, the Legislative Analyst predicts a $21.3 billion budget gap in the next fiscal year, caused mainly by the expiration of more than $7.5 billion in temporary taxes imposed through the February 2009 budget to close that year’s shortfall. 

Public schools receive $52.5 billion from state, federal, and local sources instead of the less than $49 billion proposed by the GOP governor.  Within that $52.5 billion is a “deferral” of $1.9 billion. This deferral saves the state money by pushing that amount of its payments to schools into the following fiscal year.  “This reduces the amount of money the state spends in the (current) fiscal year but provides the same level of programmatic funding for schools,” according to a summary of the proposal by the budget conference committee.  Schools can draw on the $1.9 billion during the current fiscal year; however, that means the next year there will be $1.9 billion less.  Over the past two years, schools have received the brunt of state budget cuts – some $14 billion. The state has pledged to repay $11.3 billion of that amount and made a $300 million down payment in the current budget package. 

Despite the state’s austere fiscal condition, $132 million in tax cuts were provided to some companies who were harmed by other tax cuts insisted on by Republicans in the February 2009 budget.  One of the breaks is relaxing the penalties for taxpayers who underestimate their tax liability by $1 million or more.  To save $1.2 billion, the budget prohibits businesses for two years from writing down current profits through carrying forward past losses. A two-year prohibition was included in the February 2009 budget.  Estimates by the Franchise Tax Board are that for 2010, 70,000 of the state’s 740,000 corporate tax returns will be affected by the suspension. Those 70,000 would be the companies with incomes of $300,000 or more, Ducheny said. 

The University of California and the California State University system receive $5.5 billion, an increase of $610 million over last year when they saw cuts of $1 billion. 

Several initial proposals by Schwarzenegger to eliminate or sharply reduce spending on health and social programs did not make it into the final budget package.  The biggest was the GOP governor’s call to eliminate California’s welfare program, saving $1 billion in state money but losing $4 billion in federal matching funds.  Nor were Schwarzenegger’s proposed reductions to Medi-Cal, the state’s healthcare system for the poor, adopted.  Schwarzenegger targeted the state’s homecare program for low-income elderly –In-Home Supportive Services — for deep cuts. It is the fastest growing program in the state.  Most of the governor’s reductions were rejected but a provider fee was created that is expected to save the state $191 million from the $5.5 billion program, of which the state pays 32.5 percent.  The budget also envisions $820 million in savings by reducing medical spending on prison inmates, a proposal also put forward by the governor. 

Among some of the shaky premises on which the budget is balanced is the expectation the state will receive $5.3 billion in additional funds from the federal government, about $1.2 billion more than lawmakers said the state would receive in its August budget proposal.  To date, the state has received only $1.3 billion of the $5.3 billion in additional federal funds, according to Schwarzenegger’s Department of Finance. 

Another $1.2 billion is expected in savings from selling 11 state office buildings around the state and then having the state lease them back. A bidder has yet to be selected.  The budget also uses estimates by the Legislative Analyst predicting revenues will be $1.4 billion higher during the fiscal year than the estimates contained in the GOP governor’s May budget proposal.  “Three months into the fiscal year, this additional revenue has already been realized,” the budget committee handout says.  Through August, the Department of Finance shows state revenue collections $12 million above estimates.  The Legislative Analyst says that revenues in September came in $1 billion over estimates but believes that could be due to changes in tax filing made in the February 2009 budget. 

Also included in the budget package is a scaling back of pension benefits for state workers, boosting the age at which they can retire, and basing the final pension payout on an average of three years rather than their final, highest paying year. 

Lawmakers and the governor tout the “budget reform” contained in the package.  That is a constitutional amendment that will appear on the February 2012 presidential primary ballot that would double the size of the state’s “rainy day” fund from 5 percent of the general fund to 10 percent.  Under the current size of the general fund, that could build an emergency fund of nearly $9 billion, more than $6 billion than the state has ever held in reserve.  Voter approval would be required to implement the change.

 

*Editor’s note: For an Assembly Budget Committee summary, click here.