State budget: Time running out on special session as LAO totes up hit to Prop. 98
Analysis from CSBA’s Governmental Relations Department
Published: February 18, 2010
The state Legislature seems poised for action as the 45-day clock on the special session Gov. Arnold Schwarzenegger called to address the state’s budget deficit winds down to its conclusion next Monday.
While lawmakers are not currently taking up any of the governor’s specific proposals to make cuts to education for this year, school funding may be affected by the governor’s proposed gas tax swap, which would move some revenues out of the state’s general fund—and could thereby lower the Proposition 98 base by $800 million.
Meanwhile, the nonpartisan Legislative Analyst’s Office has released a report confirming CSBA’s own analysis that the governor’s 2010-11 budget proposal would cost K-12 public schools $2.4 billion—despite Schwarzenegger’s vow to “protect education funding.”
Gas tax
One of the governor’s proposals to address a $20.7 billion deficit projected through June 2011 is to exempt gasoline and diesel purchases from the state sales tax while increasing the existing 18-cent-per-gallon “gas tax” on those fuels. The extra revenues would be dedicated to transportation bonds and highway and street improvements.
The shift proposed by the governor would deprive the state’s general fund of sales tax revenues from those transactions and specifically includes a corresponding reduction to Proposition 98, reflecting the loss to the general fund. An alternative legislative proposal is silent on how Proposition 98 would be affected. Absent legislative language to ensure that schools would be held harmless, they could lose out on the portion of the gasoline sales tax that would have gone towards Proposition 98 under either proposal. CSBA is working with others in the education community to ensure such “hold harmless” language is included.
However, the maneuvering is bound to get complicated in overall budget negotiations. State Senate Pro Tem Darrell Steinberg told the Sacramento Press Club Wednesday that Democrats are considering tying a change in the gas tax to reductions in corporate tax benefits that Republicans have exacted in budget negotiations in recent years. Democrats maintain that could be done with a simple majority, rather than the two-thirds required for revenue proposals, but Republicans are resistant to that notion.
Steinberg also told reporters he hopes the state’s deficit picture will improve by as much as $3 billion by the time the annual May Revision of budget revenues and expenditures is released. Should these revenues not materialize, the governor’s proposed cuts to education may well be back on the table.
Prop. 98 cuts
The LAO analysis reinforces the education community’s assertion that the governor’s budget does not, in fact, “protect” education spending, as Schwarzenegger had said. It estimates that the complicated accounting maneuvers the governor has proposed would reduce the minimum funding guarantee under Proposition 98 by a total of $2.4 billion over 2009-11.
Through a variety of proposed funding shifts, the Proposition 98 guarantee would drop by $893 million for 2009-10. According to a recent CSBA analysis, various budget manipulations in recent years have created a significant difference between the amount that the state records as Proposition 98 spending and the amount of revenue that K-14 entities actually receive. Depending on how the Legislature responds to the governor’s new revenue proposals, the minimum Proposition 98 guarantee could rise or fall, the LAO said.
Although by one interpretation of the state constitution the minimum funding level under Proposition 98 may technically be met by the governor’s budget proposal, the LAO analysis said others would interpret the constitutional requirement at a “significantly higher” level. Regardless, “the administration acknowledges that it is veering away from the July 2009 budget agreement” that had addressed the state’s obligations under Proposition 98, the LAO said.
Maintenance of effort
The proposed reductions would require U.S. Education Secretary Arne Duncan to approve the state’s request for a waiver from maintenance–of–effort funding requirements included in the federal American Recovery and Reinvestment Act.
The Education Coalition, consisting of CSBA and other groups representing public school administrators, employees and parents, have corresponded with Duncan more than once to object to the “shell game” the governor is staging to meet the federal MOE requirement.
“No amount of manipulation can mask the fact that the Governor is proposing new, additional cuts to K-12 education of $2.4 billion,” said one coalition letter. “These cuts simply do not meet any test of the reasonable meaning of the term ‘maintenance of effort.’ If the investments made in public education through ARRA are to have meaning, it is critical that you enforce the commitment to a maintenance of effort that was signed by the Governor last year and that the proposed devastating cuts to public education be rejected.”
General fund: ‘Very difficult choices’
The LAO pegs much of the state’s $20.7 billion shortfall through June 2011 on the failure of several proposals for balancing the budget in recent years. In addition, settlements in several adverse court rulings and the expiration of various one-time and temporary budget solutions approved during the last budget cycle have caused the deficit to grow.
To help close the projected gap, the governor has proposed asking the federal government for $6.9 billion in additional funding related to health, social services, education and prison programs. While the LAO said that’s probably a good idea, the likelihood that the Obama administration will agree to that level of extra support is “almost nonexistent.”
Should the state fail to receive all the extra federal support requested, the governor proposes dollar-for-dollar cuts to a number of health and human services that would negatively impact public school students and their families. Programs on the “trigger” list include CalWORKS, Healthy Families, Medi-Cal, In-Home Supportive Services, Supplemental Security Income and food programs.
“The Legislature must make very difficult choices affecting both state revenues and spending. The Governor’s trigger cuts—to take effect if federal funding is less than the Governor hopes for—are painful and in some cases draconian,” according to the report.
Meanwhile, time is of the essence, and the LAO recommends that legislators assume federal relief will be far less than the governor requests.
Anticipating the state’s dire financial picture will persist into the foreseeable future, the analysis advises lawmakers to take a comprehensive look at the state’s priorities and suggests working toward creating a “new, sustainable budget framework” that would need to encompass both revenues and spending. “Such progress is imperative to restore the state’s fiscal health and enhance public trust in state government,” the report said.
The “bottom line,” according to the LAO, is that legislators need to act immediately—by March, well before June’s constitutional deadline for a budget—if any savings are to be realized this year. And it’s going to hurt, said the analysis.
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