State budget: From bad to worse
Analysis from CSBA’s Governmental Relations Department
Published: September 23, 2008
Without much fanfare, Gov. Arnold Schwarzenegger is expected to sign the state budget for 2008-09 today, 85 days after the start of the fiscal year. His approval of the spending plan came after a week of unprecedented and highly unusual negotiations by legislative leaders and the governor.
Following last Tuesday afternoon's threat to veto the budget passed by the Legislature a mere 13 hours earlier, the “Big 5” (the state Senate and Assembly’s party leaders, along with the governor) resumed meeting to avoid the veto and its anticipated legislative override. The Big 5 cobbled together an agreement that not only fails to address the use of one-time revenues and gimmicks to balance the budget but adds further limits to use of an increased rainy day fund reserve.
Both the Senate and Assembly approved the agreed-to changes late Friday afternoon. The revisions to the spending plan include changing one of the revenue sources; instead of relying on accelerated personal income tax payments, the budget now relies on an increased penalty for corporations that file erroneous tax returns. This is very uncertain revenue.
Additionally, the agreement restricts the amount of money that can be withdrawn from the Budget Stabilization Fund—the rainy day reserve the governor demanded—in low-revenue years. This restriction means that, in some years, the amount that could be used from the fund would not be sufficient to maintain the current level of spending. This would force deeper spending cuts, even while money sits idle in the fund. This is a constitutional change that must be approved by the voters in a statewide election.
The changes to the budget that was approved a week ago are contained in two bills: Senate Constitutional Amendment 30, which imposes the additional restriction on the rainy day fund, and Senate Bill 1x 28, which adds the corporate income tax penalty in lieu of the personal income tax acceleration. The votes were as follows:
School funding essentially flat
Overall, the budget closes a $15.2 billion gap with nearly $6.5 billion in revenues and $8.7 billion in spending cuts. Only $20 million of the new money is a permanent revenue increase. The rest represents one-time funding that simply speeds up the receipt of revenue that is already owed under current law.
For education, this budget means essentially flat funding this school year. The budget will provide $58.1 billion for Proposition 98; this represents $800 million less than was provided by the Conference Committee report that CSBA supported and is $3 billion below the governor’s projected workload budget, which represents the cost of 2007-08 programs and operations adjusted for inflation and enrollment.
The plan does include a 0.68 percent cost-of-living adjustment—but for revenue limits only, which is well below the 5.66 percent COLA required by law, creating a revenue limit deficit of over 4 percent. While it appears that the $58.1 billion is ongoing revenue, it is important to note that this level of funding is based on nearly $6.5 billion in one-time funds and accounting gimmicks. Therefore, funding for Proposition 98 will once again be in jeopardy in next year’s budget.
Yet another special election
Multiple pieces of the budget agreement will require approval by voters. Since the Legislature and governor were unable to reach agreement in time to make this November’s ballot, a special election will be scheduled for next spring. It may be held in March, in tandem with already-scheduled mayoral elections in numerous cities. This would be the ninth statewide election in eight years.
The changes to the state's rainy day fund will need voter approval, as will a few changes related to the state lottery. These include securitization of the lottery, which will allow the state to borrow money off of future lottery revenue, and changes in the allocation of lottery resources, which are designed to attract investors.
More grim news next year
With the enactment of a 2008-09 budget, which is balanced on gimmicks and accounting maneuvers, leaders of school districts and county offices of education will need to brace themselves for the fact that next year is already starting off with a deficit—which will likely mean more cuts for schools. Given the state of the financial markets, the fiscal picture for next year is especially grim, and with this budget the Legislature and the governor added to the deepening fiscal crisis.
Related link:
A comprehensive review of the overall budget details (but not reflecting the changes noted above to either the Budget Stabilization Fund or the shift from accelerated personal income tax payments to the increased penalty for erroneous corporate tax returns) is available @ http://www.csba.org/NewsAndMedia/Publications/CASchoolNews/2008/Sept/ElectronicOnly/BudgetVeto.aspx.