Current Legislative Updates

2008-09 Budget Stalemate Lingers While Governor

Introduces 2009-10 Budget Early

As the State’s economy began to soften in late 2008, the Governor announced the need for a special session to deal with the growing budget shortfall.  In November of 2008, he indicated that a package of cuts and taxes would need to be implemented immediately if the plan was to work.  After more than six weeks of fruitless negotiations, the Governor  announced that the problem had worsened - - significantly.  In essence, the combined “failure of the Legislature to act” and the further deterioration of the U.S. and California economies, prompted the Governor to unveil his 2009-10 State Budget 10 days early.

Speaking on behalf of the Governor, State Finance Director Mike Genest, continued to emphasize the urgency of the state’s fiscal crisis and underscored that without adoption of the majority of the Governor’s revenue enhancement and spending reduction proposals, California will be unable to meet its current expenditure obligations sometime in late February or March. Moreover, as evidence that California’s fiscal condition had worsened to a point never seen before, Genest acknowledged that the Governor no longer believes the budget shortfall can be solved with revenue increases and spending reductions alone. Accordingly, the Governor’s 2009-10 Budget contains just over $5 billion in new borrowing, including $4.673 billion in expensive Reimbursement Warrants (commonly known as RAWs).

On behalf of the Governor, Genest announced both changes to the current year (2008-09) budget as well as 2009-10 Budget Proposals. More specifically, California’s Finance Director outlined the revenue increases, spending cuts and borrowing the Governor feels will be needed to balance the now estimated $41.6 billion two-year budget shortfall.   

New Revenue and Borrowing Proposals

The Governor includes revenue enhancements in 8 major areas (including lottery expansion that must still be approved by the voters) that will generate $24.318 billion in additional general fund revenue over two years. These new revenue/borrowing proposals include:  1 Temporary Sales Tax Increase, effective January 1, 2009, 2) Broaden the Sales and Use Tax to Include New Services, effective February 1, 2009, 3) Oil Severance Tax effective January 1, 2009,  4) Increase Alcohol and Excise Taxes by 5 Cents a Drink  beginning on January 1, 2009, 5) Personal Income Tax Dependent Exemption Credit  beginning with the 2009 tax year, 6) Vehicle Registration and Driver’s License Fee Increases to be increased by $12 to support state vehicle registration operations, 7)   General Fund Borrowing of $5.031 billion by July, 2009, 8) Lottery Expansion of $5.001 billion in revenue that would need to be approved by the voters.

Proposed Changes to 2008-09 Education Budget

The Governor’s major current year K-14 budget adjustments build upon the proposals he made in November, 2008.  Specific Proposition 98 (K-12) mid-year reductions proposed by the Governor include:

1. Elimination of the 0.68 Cost of living adjustment for 2008-09.
2. $1.6 billion in savings (approximately $300 per ADA) by further reducing local education agency (LEA) revenue limits. This proposed cut is coupled with flexibility to transfer categorical funds to each LEA’s general fund (see below). 
3. $55 million is savings by capping child care programs to reflect the amount of funding that will not be allocated in current year contracts as reported by the Department of Education for General Child Care, Preschool, Alternative Payment and other programs. 
4. $42 million in reductions to CalWORKS Stage 2 and Stage 3 child care programs based on revised estimates for lower than anticipated caseload since the budget was enacted.  Stage 2 costs are revised down by $27 million and Stage 3 costs are revised down by $15 million.
5. $108 million in recently identified prior-year child care savings is to be re-appropriated for CalWORKs Stage 2 and 3 programs to offset an estimated shortfall in one-time savings from the After School Safety and Education (ASES) program that was anticipated to fund part of the 2008-09 costs for these caseload-driven programs.
6. Expanded Categorical Flexibility to minimize the impact of budget reductions. The administration explained that this strategy is necessary to provide “maximum flexibility” to local education agencies (LEAs). The Administration proposes to authorize LEAs to transfer any categorical allocations received to their general fund for any purpose up to the amount of their share of the reduction.  Specifically, the Governor is proposing:
• Authorizing local education agencies (LEAs) to transfer any categorical allocations received to their general fund for any purpose, without dollar limitation. In order to utilize this flexibility, LEAs would be required to sunshine those decisions in public hearings. What is new is that Governor is proposing to make this change permanent.
• Reducing required contributions into restricted routine maintenance accounts from 3 percent of an LEA’s general fund expenditures to 1 percent in current and budget year.
• Eliminating Deferred Maintenance Program matching requirements of one-half of one percent of revenue limit funding.
• Utilizing prior-year, restricted fund reserves, with certain limitations, for any purpose in the current year.

2009-10 Proposed Education Budget

The Governor intends to create savings in the following K-12 Programs:

1. $2.5 billion in savings by not funding a 5.02% statutory cost of living adjustment for K-12 education programs.
2. $1.1 billion reduction to revenue limits. The Governor’s proposal would authorize districts to reduce the school year by up to five days which would result in “savings” to LEAs of $1.1 billion. 
3. $83.2 million increase for growth for the following categorical programs:

·        Adult Education, ($19.3 million)

·        Child Nutrition ($8.4 million)

·        Charter School Categorical Block Grant ($42.6 million)

·        K-3 Class Size Reduction ($9.1 million)

·        Teacher Credentialing Block Grant ($3.8 million)

4. $152.7 million decrease to school district and county office of education revenue limits due to a decline in average daily attendance.
5. $35.5 million increase to reflect increased Deferred Maintenance program allocations.
6. $4.5 million decrease to align the testing appropriation with anticipated contract costs and one time availability of federal carryover funds.
7. $287.5 million increase to backfill one-time current year and to adjust for revised estimates in the caseload-driven CalWORKs Stage 2 and 3 programs, which are estimated to decrease by $35.7 million and $1.4 million, respectively, compared to revised current year costs.  An increase of $18.9 million for 1.23 percent statutory growth based on the age 4 and under population change.

Total Proposition 98 expenditures are proposed to decrease from the $58.1 billion amount assumed for the enacted 2008-09 Budget to the revised minimum required guarantee of $51.5 billion in 2008-09 reflecting a decrease of $6.6 billion, or 11.4 percent in the current year.  The 2009-10 Budget also funds the minimum required guarantee in the budget year at $55.9 billion, reflecting an increase of $4.4 billion, or 8.5 percent, compared to the reduced current year minimum level.

Negotiations Drag On - Where Are We Now?

With California set to run out of cash by the beginning of February, the timeline is very narrow for a deal to be reached.  We can only hope that as the Governor and legislative leaders get closer to the fiscal cliff that a reasonable deal can be reached.  The developments in December and the veto of the Democrat’s budget plan in early January would lead us to think that the parties are at impasse.  But the issues are not new and have been on the negotiating table for a long time.  The big questions is whether the Democratic leaders will agree to make key concessions in the areas of the environment, labor and a hard spending cap on state expenditures.  At the same time, will Republican legislators actually vote to increase taxes even if they do get many of these policy concessions?  CASP will keep monitoring the situation.

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