California Budget: What Happened Last Fall — The New Budget Immediately Starting Bleeding Red Ink

The 2008-09 budget which was passed in September of last year ( two and a half months late) contained several overly optimistic (I would say wildly unsustainable) assumptions concerning revenue:

  • First, it assumed the sale of over $3 billion in revenue bonds, but no one wanted to buy California bonds.
  • Second, it “borrowed” from over 40 different special funds in the budget, all of which were declining because of the economy.
  • Third, although it accelerated estimated quarterly payments by corporate taxpayers that owe more than $80,000 per year in taxes, so that they would have to pay 30% or their liability in April and June and 20% in September and December, that was no help in the immediate months of October and November.
  • Fourth, although it eliminated the so-called “safe harbor” for taxpayers with incomes over $1 million and required them to make their quarterly payments based on their current income, their current income was tanking.
  • Fifth, although it adopted an accrual device to bring more revenue into the 2008-09 budget, such that 60% of the balance of the changes of corporation income and franchise tax payments are accrued to the 2007-08 year and the balance of corporation and franchise tax payments and all changes in personal income tax payments are accrued to the 2008-09 fiscal year, none of that was helping as the state’s revenue plummeted in October.
  • Sixth, the budget was balanced on paper by selling future lottery income on the open market, but that provision required a vote of the people.
  • And, finally, the biggest source of revenue to the budget, income taxes and capital gains, were plummeting.

The “Big Five” Started Meeting Again In October
By then, September’s disappointing revenues had already put the brand-new budget in danger. First quarter (July, August and September) revenues were down $1.1 billion, but budget spending was required by the new budget to continue at the same rate. There was only enough liquidity to stay solvent through October 28, which, even so, meant paying only those expenses required by the State Constitution: schools, debt interest and repayment, and payroll.

Our credit was in big trouble nationwide. We had to get $4 billion in short term loans to get through December. $3 billion more in short term loans would get us through March. Borrowing borrowing borrowing, which meant paying more and higher interest.

It was clear: practically the day after the tricky budget passed in September, the state immediately needed more cuts and revenues. The Governor was already calling another “Special Session” and everyone was grumpy because the Democrats were unwilling to pile more misery on Medical and Calworks recipients (whose numbers were already growing) and the Republicans had blocked all revenue increases and indicated they would continue to do so.

Why Did We Need A Special Session?
Every year since his election, Governor Schwartzenegger has called a “Special Session” in the Fall to resuscitate all the plans he failed to get through in the regular session. Whether it was health care, water, the budget, or education, the Governor has been very slow to propose real solutions in the regular session, which normally goes from January through mid-September, or, in election years, through the end of August.

2008 was no different. Since the budget had quickly gone out of balance and the economy was spiraling downward, yet another special session was convened on November 6th and the “old” legislature (including all the termed-out members and none of those who had been elected November 4th but wouldn’t be sworn in till December) was tasked with finding new budget solutions.

What the Governor Proposed in November
The Governor made six proposals. In no particular order:

Cuts: 2.5 billion more to K-14 education, 132 million more to higher ed, reduction of SSI and SSP grants to the federal minimum, six month reviews on eligibility for CalWORKS, one day furloughs each month for state employees, eliminating two state holidays, parole reforms that protect public safety but cut costs, and reducing MediCal benefits (not payments to doctors, which the court overturned).

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Taxes: A temporary sales tax increase from 5% to 6.5% for three years, broadening the sales and use tax to include appliance and furniture repair, vehicle repair, golf, veterinarian services, amusement parks, and sporting events, imposing an oil severance tax on oil producers similar to that imposed by all other oil producing states, and increasing alcohol and excise taxes to fund drug and alcohol treatment and prevention services.

Unemployment Insurance Fund: An increase in the amount employers pay to the fund by increasing the maximum taxable wage and the minimum tax rate, reducing benefit levels, and maintaining current payments by taking out a federal loan.

Economic Stimulus: These proposals were immediately troubling to the democratic majority in both houses. As the Governor proposed actions to stimulate the economy, he also took the opportunity to reduce environmental protections and other regulations. He proposed: accelerating hospital construction by “streamlining” the permitting process (reducing regulatory interference) for non-structural projects under $2 million; getting more Prop 1B money out to fix local streets and roads as well as using Workforce Investment Act funds out for training. He proposed providing overtime exemptions for those earning more than $100,000 no matter how many hours they work, and to allow more “flexible” work schedules by allowing 10 hour days with no overtime. He proposed more “design-build” projects which, he maintained, gets the job done faster, but also allows one builder to secure both parts of a project at once. He proposed tax credits to the movie industry, but no other industry.

All of these proposals, he maintained, would get more work started, and more jobs. However, most of these proposals have been made year after year to rid the business community of those pesky regulations and were very difficult to justify as economic stimulus.

Mortgage relief: He adopted a few of the proposals in the mortgage relief bill he vetoed in September, but, all in all, his proposal was much weaker. He proposed: a 90 day stay of the foreclosure process, a “safe harbor” under which lenders would be able to exempt themselves from the 90 day stay if they have their own modification program in place.

Sheila Kuehl

Tax Commission: He proposed a bipartisan Commission on the 21st Century Economy to (once again) propose refinements to California’s tax structure. The major roadblocks to any changes in the past have been the 2/3 requirement for raising taxes (with only a majority vote required to cut them) and the 2/3 vote requirement for the budget.

Sheila James Kuehl

Sheila James Kuehl was appointed to the California Integrated Waste Management Board on December 1, 2008, after having served eight years in the State Senate and six years in the State Assembly. Senator Kuehl served as chair of the Senate Natural Resources and Water Committee from 2000-2006. Her website is www.sheilakuehl.org
LA Progressive

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