July 6, 2011 - Now that California's 2011-12 budget has gone into effect, at least until some revenue assumption proves wrong and triggers more cuts, this set of essays reviews the history of that budget's progress over the last six months, culminating in a report on the final budget, as signed. This essay is the first in the series, and describes the provisions of the original budget, as presented by Governor Brown in January of this year. The Roman god, Janus, for whom January is named, had two faces, looking both backward and forward. Like Janus, the Governor's January budget had two faces, one with the tax extensions he was seeking, with little damage to education, and one that was all cuts, if the tax extensions failed. Further essays will describe ongoing changes to the original budget made in quickly called Budget Committee hearings in both houses in February, the budget presented by the Conference Committee in March, the continuing and unsuccessful saga of trying to get tax extensions on the ballot before June 30 when they would expire, the May Revise, the June budget, the first budget veto, the final budget, with trailer bills, the winners and the losers.
January, 2011: Draw Your Chair Up Close To the Edge of the Precipice and I'll Tell You a Story
This phrase appears in one of F. Scott Fitzgerald's many notebooks, in which he jotted down his fragmentary thoughts. Perhaps fittingly, for our purposes, the next thought he wrote in that same notebook was "Drifting towards some ignoble destiny they could not evade." Both musings seem tailor-made for a discussion of Gov. Brown's situation in January of this year, presenting his first budget to the Legislature.
As you undoubtedly know, the Governor is required to present his version of a balanced budget to the Legislature early in January of each year, and, as expected, this January, the presentation was glum. The last adjustment to the 2010-2011 budget under Schwarzenegger had contained so many unrealistic revenue assumptions that, combined with plummeting revenues, the current budget shortfall was projected to be 8.2 billion dollars in the General Fund by June 30th. Without changes, there would be an additional shortfall in the 2011-12 budget of 17.2 billion dollars. The Governor's proposed budget also contained a healthy budget reserve fund of 1 billion so the overall "budget problem" as the Capitolistas like to put it, was pegged at 26.4 billion dollars. That's the predicted difference between revenue and expenditures if everything stayed the same, which, of course, it couldn't.
Brown's proposed 2011-12 budget, which adopted deep and deeper cuts to higher education and health and human services to solve about half of the shortfall, also contained a risky assumption: that the temporary taxes adopted in 2009 for two years would make it to the ballot and be continued through a thumbs-up from the voters. This premise allowed the proposed budget to fully fund the schools, K-12. No one really wanted to talk about necessary cuts if the extension didn't get the requisite two Republican votes in each house and didn't get to the ballot. If that was the case, it was clear that K-12 would suffer even deeper cuts.
The budget estimated revenues to the General Fund of about 92.2 billion and expenditures of 84.6 billion. These amounts continued a precipitous slide that started years ago, in revenue and in expenditures. As a comparison, the 2007-08 budget had expenditures of about 103 billion and was balanced, though primarily with what have come to be called "gimmicks", that is, borrowing, deferring expenses, assuming sales of assets never sold, etc. Over the past four years, a total of more than 40 billion dollars had been cut, cuts made primarily to health and human services (the poor, sick and elderly) and public schools (K-12, community colleges, CSU and UC).
Wait a Minute There: How Can a Balanced Budget Result in a Deficit?
Answer: you don't always haul in the money as projected. In the case of the 2010-11 budget, at least 3.6 billion assumed to be coming from the feds didn't materialize, assumptions about how much would be saved by program changes in prisons and medical care were overblown, the passage of Props 22 and 26 in November made it impossible to use transportation monies for debt service (that's interest on the huge amount the state has borrowed) and the extension to the state of the estate tax cut by the feds further cut the amount the state would actually receive.
For a quick California budget history in this century, see my next essay: "2011 Budget Essay #2: How We Got Into This Mess", which will be sent on July 9th.
First the Bad News and Then the Real Bad News
The 2010-11 budget had been continuously revised and cut over the months of 2010 and, without changes, Brown was looking at an actual spending figure in 2010-11 of about 92 billion. His 2011-12 budget proposed spending only about 84 billion, a reduction of an additional 8%. The real news, however, was in the assumptions made in the new budget to get to that lower figure.
First, Brown proposed permanent reductions in all the large budget categories, including a controversial proposal to do away with Redevelopment Agencies that already had California's cities screaming from Oregon to Mexico. The total savings were projected at about 12 billion.
That would cover about half of the necessary fixes. The other half of the proposed 2011-12 solution was revenue--in four categories:
1) A five-year extension of the taxes adopted in 2009, a solution that had been negotiated out of the final 2010 budget.
As you may recall, in 2009, several temporary budget revenue measures were adopted, all of which were to expire June 30, 2011: a one-cent increase in the sales tax, a restoration of the annual Vehicle License Fee to 1.15% of the value of an automobile, and a small surcharge on personal income tax.
2) an elimination of the 1.4 billion corporate tax break insisted on by Schwarzenegger and ratified by the voters (though no one seems to remember voting on it!) in November.
This tax gift allows the ten or so largest corporations doing business in California to choose each year how to figure their taxes so they can gain the greatest advantage. Usually, legislatures tell corporations how they must compute their taxes, most usually a combination of revenues, employees and presence in the state. Some states use just the amount of sales in a state. California gave the corporations (thanks to Arnold saying he wouldn't sign the budget without this provision) a choice of various methods, which they could change each year to their advantage.
3) an elimination of Enterprise Zone tax credits and
4) various tax shift and enforcement proposals, including 1.4 billion in "loans" and transfers from special funds, 362 million gained by using the Disability Insurance funds to make interest payments to the federal government for Unemployment Insurance benefits (which will have to be repaid in years to come), deferrals of other loan payments and collection of sales taxes on internet sales.
This was a risky ploy on the Governor's part, as the temporary taxes set out in number one, above, needed to be extended before June 30 in order to be counted as revenue in the new budget. Brown had promised during his campaign to allow the people to decide whether or not to extend the taxes. Unfortunately, the Governor and the Legislature seemed to rather reluctantly believe that couldn't even place the measures on the ballot unless they secured a 2/3 vote of the Legislature in favor in both houses. This meant getting every single Democrat and two Republicans in both houses to vote to put a constitutional amendment on the ballot to continue the taxes. Then there was the question whether it could all be done in time to keep the revenue coming in without a hitch, as of July 1, and, of course, whether the people would actually vote to ratify the taxes. If all worked out, 12 billion in cuts and 12 billion in revenue. If not, 24 billion in cuts, and bye bye public education.
The Truth, At Last No one liked hearing that, if none of the shaky scenario set out above came to pass, the cuts would be doubly deep. They were already pretty bloody, even with the revenue assumptions. Permanent cuts for sure:
· From MediCal 1.7 billion
· From eliminating Redevelopment Agencies 1.7 billion
· From CalWORKS (California's welfare to work program) 1.5 billion
· From mental health, 1 billion
· From services to those with developmental disabilities, 750 million
· From in-home support services, 500 million
· From state employees having their salaries cut, 308 million
· From Social Security State Supplemental Income, 190 million
What would not be further cut if the revenue solutions came to pass? K-12 education, but there would still be reductions in community college funding and deep deep cuts in child care. This was an interesting ploy on the Governor's part. Fail to extend the taxes and K-12 education would be the only thing left to absorb the remaining 12 billion dollars in cuts.
To Put It Nicely: Realignment The Governor's budget also proposed shifting responsibility for a number of public safety and welfare programs from the state to the counties and providing a fixed amount of 5.9 billion to do so. The money was to come from continuing the vehicle license fee and the sales tax and dedicating that money to newly "aligned" county programs, including child welfare services, child protective services, low-level offender programs, parole, court security, juvenile justice programs, alcohol and drug programs and adult protective services.
This is not great news for the counties, as they have to fund growing programs on a fixed amount, although the Governor's budget did provide for growth in the monies provided each year. For those of you who would like more details about the initial budget proposed by the Governor in January, please go to Brown's Initial Budget.
Timing Is Everything
In order for all of this to work, of course, the Legislature had to severely truncate its consideration of the budget as presented. Normally, budget sub-committees take pieces of the budget according to their subject-matter jurisdiction, review it over months, make recommended revisions, reconcile the differences in a conference committee, and send the budget to the Governor, if there's agreement, by the end of June. In this case, in order to get proposals on the ballot in time to be adopted and go into effect by July 1, committees were called upon to complete their work in weeks.
This essay is from former California State Senator Sheila Kuehl. If you want to subscribe to these essays, go to www.SheilaKuehl.org.
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