Sixth in a Series of Essays by Sheila Kuehl on the 2008 California State Budget: The Governor’s August Budget Revision6 min read

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This is my sixth budget essay for 2008 and continues my reports on the 2008-09 budget processes and continuing changes.

My first essay set out some background information on actions taken by the legislature in February to re-balance the 2007-2008 budget, given shrinking revenues. The second reviewed the Governor’s budget as he presented it in January of this year. The third presented the changes made by the Governor in his May revision of the 2008-09 budget, usually referred to as the “May Revise.” The fourth left the budget area per se for a moment and reported on the LAO’s report on the single payer bill, SB 840. My fifth essay presented the budget as it stood in July at the end of the Legislative Budget Conference Committee’s work. This budget was called, during the course of the summer negotiations, the “Democratic budget.”

This essay, my sixth this year, analyzes the revised budget presented by the Governor at the beginning of August, which contained a number of new proposals.

August Update and Proposed Compromise

In early August, the Governor presented a new budget he called the August Update and Proposed Compromise budget. The Democratic caucuses in the Senate and the Assembly reviewed the factors set out below and, although they decided to deeply compromise in order to come to agreement with the Governor on most of his proposals and move to a budget vote, several problems remained. In my next essay, I will set out the changes the Democratic majority proposed and which they put up for a vote of both houses.

Here, below, is what the Governor proposed:

General Outline of the August Plan

Although the Governor continued to insist on deep cuts to social services and health programs, without major reductions to prison spending, the August budget contained a number of new or clarified components:

• A temporary increase in revenues, but a greater reduction when the temporary increase goes away

• Securitization of the state lottery, but specifically, this time, either to pay off General Fund debts (from past borrowing) or to contribute to what the Governor calls his “Rainy Day Fund,” generally more formally called the Budget Stabilization Account, which would require the deposit of monies collected over a certain amount and only be available in the “bad years.”

• Interestingly, the Governor admitted in his introductory paper to the August revision, that both the lottery proposal and the various budget reform proposals require a vote of the people, as one is constitutional and the other amends a 1984 initiative.

The August Plan: Spending

No increase in spending from the current budget year. A total budget of $103.4 billion. This was a reduction from the Conference Committee report (essay #5). It cut an additional $1.1 billion from education, an additional $567 million from public transit (the non-highway kind), cut funds for counties for the administration of Medi-Cal, In Home Support Services and Food Stamps by an additional $34 million, suspended cost of living adjustments for SSI, kept the reductions in payments to doctors and others serving Medi-Cal recipients, made an interesting shift of $228 million dollars from local redevelopment agencies to schools, suspended homeowner assistance programs, reduced the tax relief program for seniors, and cut an additional $50 million from health and human services.

The August Plan: Revenue

The Governor, not surprisingly, rejected the higher personal income tax and corporate tax brackets proposed by the Conference Committee and suggested, instead, a temporary, three-year, one-cent tax increase in the state sales tax from 5% to 6%. In the fourth year, however, there would be, not only a one-cent reduction, to restore the sales tax to current rates, but a further 1/4-cent reduction, making the sales tax lower than it is now (and, most conveniently, blowing a huge hole in the four-year out budget, which will be the problem of a new governor and not this one). Gasoline, diesel and jet fuel were to be exempted from the new tax.

Oh, Yeah, and More Borrowing

The remaining $3.3 billion of Economic Recovery Bonds would be sold. $714 million would be “borrowed” from over forty different special funds (where monies are collected for a specific and limited budget purpose). And, to quote the explanatory document accompanying the Governor?s presentation: “Loan repayments are anticipated to be made in 2010-2011 or after.”

In Addition–Sock It Away For A Rainy Day

Under the provision already adopted by the voters in Proposition 58, there is a 5% cap on the Budget Stabilization Account (BSA), a savings account into which, when revenues exceed budget projections, monies automatically go, but only up to 5% of the budget. The Governor’s August proposal raises that to 12.5%.

Transfers from the rainy day fund back into the budget would only be allowed when “revenues are insufficient to cover baseline spending increases” (current level adjusted by specific factors) and can only be spent for one-time purposes and not to increase on-going spending, such as for schools, social services, healthcare, child care, foster family services, and all the programs that, after all the deep cuts they’ve taken, so desperately need it.

But Just Try to Use This Savings Account

The Governor’s proposal requires a two-thirds vote of the Legislature, just as is now required for the budget and for tax increases, to transfer rainy day money into the budget, except for non-fiscal emergencies or when used for one-time purposes and only if the Budget Stabilization Account exceeds 12.5% of the budget. In other words, just try to get your hands on this money. Unanticipated revenues (over the amount projected in the budget) can only be used for Prop 98 (K-14 school) obligations, to fund the BSA, to pay off debt of for one time purposes, including “tax relief.”

Last “Budget Reform”: The Ace Trumps the Face Cards

The Governor’s proposal also included a provision that would give him authority, in the middle of a budget year, to unilaterally reduce state operations by up to 7% and to defer all cost of living adjustments and rate increases adopted by the Legislature in the budget. Two-thirds to spend. One to cut.

Changes to Labor Law Protections, or, in Gov-Speak “Economic Stimulus”

In virtually every year of this Governor’s administration, he has pitched changes to labor laws, proposed by the State Chamber of Commerce, to achieve what he calls “Economic Stimulus.”

In his August budget revision, he proposed more non-budget changes related to labor law, including, changes to overtime, meal and rest periods and work shifts, changes to state infrastructure project development shifting work to the private sector, and additional bonds and expenditures for capital outlay projects which have already been turned down by the Legislature.

Still On The Drawing Board

The majority party in the Legislature decided to adopt most of the Governor’s proposals, in order to try and reach some budget solution. There were still no Republican votes for his proposal. The Democrats did insist, however, on a few changes to the plan outlined above, which I will cover in my next essay. It was the Governor’s plan with these changes that went up for the first budget vote in August.

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