Details of Proposed Compromise Emerging
By Frank D. Russo - California Progress report
Thursday Aug 28 7PM - Word has just been received that Democratic President pro Tem Don Perata has scheduled a vote on a compromise proposal to end the budget stalemate that has California on the verge of setting a record for the longest delay beyond the fiscal year for passing a budget. The vote is scheduled to take place tomorrow morning, August 29, at 10 a.m.
I do not believe this vote has been scheduled unless there are indications that there are at least two Republican Senators ready to vote for the budget so that it will secure the necessary two-thirds vote, or unless the governor believes he can deliver these votes.
A document which is not yet available on the net entitled “Governor’s Budget with revisions: August 2008-09 Update Proposed Compromise” is not available on the internet. It details how the proposal differs from that recently put forth by Governor Schwarzenegger and also how it differs from the one passed out by the joint legislative conference committee on the budget.
Update: 8/29: Governors Budget with revisions: August 2008-09 Update Proposed Compromise - Available Here
Budget reform and securitization of the California lottery is part of the package.
It says that a total of $12.0 billion or 51% of all solutions are revenue solutions. These include a temporary sales tax increase of 1%, not to apply to the sale of motor vehicles and motor fuel. There is also the sale of $3.3 billion of economic recovery bonds and loans of $714 million from special funds, revenue acceleration involving suspending net operating losses for two years, an amnesty of personal income tax and corporate income designed to speed up payments owed the state, and the accrual of personal income tax and corporate income tax estimated payments.
There is additional non-tax increase revenue involving Franchise Tax Board and Board of Equalization collection efforts, additional Tideland revenues, and transfer of $141 from ten different special funds.
A total of $11.3 billion or 49% of all solutions represent reductions in program costs.
The document quoted verbatim below appears to be changes made to the proposal the Governor made last week (dubbed by some the "August Revise") with items crossed off and language added. Hence it tracks some of the preferatory remarks about what the Governor has said and the like.
The introduction of the document contains the following:
“California's budget problem has reached crisis proportions. After months of negotiation, the Administration and the Legislature have yet to agree on a plan for solving the state's budget shortfall this year, eliminating its long-term structural deficit, and reforming the budget process to prevent such a crisis from recurring.
The Governor believes that to solve the budget crisis and move forward, the state needs to do all of the following:
Make major reductions in programs to bring spending in line with a realistic long-term revenue projection.
Provide for a temporary increase in revenues to see the state through the next several years of anticipated slow economic growth.
Modernize the state's lottery and securitize expected increased revenues to pay off General Fund debts or contribute to the "rainy day fund" (Budget Stabilization Account) to help see the state through the next three years.
Enact major budget reform that will prevent future legislatures and governors from committing temporary surges in revenues to ongoing program expansions or tax cuts, and that will provide a rainy day fund and mid-year cut authority to address future downturns in revenues.
The last two components of this plan both must be enacted by the people. Budget reform can only be achieved with a constitutional amendment, and lottery reform requires amending both the Constitution and an initiative enacted by the people in 1984.
In the absence of these two components, the only alternatives to solving the state's budget problems will be massive program cuts and/or major tax increases. The Compromise reflects lessons learned after months of negotiation with legislative leaders of both parties. It is a plan that has components that are objectionable to all parties—including the Governor.
Downside Risks to Economic and Revenue Forecasts
Since the May Revision, the economic news has worsened and many forecasters are predicting a slower return to normal growth rates. If, in fact, the economy does not grow at the rates forecast in the May Revision, revenues could decline significantly in 2008-09 and 2009-10, possibly on the order of $5 billion over the two years. This downside risk to the forecast is all the more reason to enact a balanced budget that does not rely on borrowing from local governments or transportation funds.
Outline of the Plan
Figure INT-01 represents the Governor's proposed Compromise which includes General Fund spending of $103.4 billion in 2008-09. This reflects virtually no increase from the previous year and only a 2-percent increase as compared to 2006-07. However, as compared to a workload budget, that is the projected costs of maintaining state programs at their current levels, it reflects a reduction of $9.9 billion, or 9 percent.
The figure also shows that the Compromise is balanced, not only in 2008-09, but into 2009-10 as well. In fact, the Compromise would allow the state to begin rebuilding its rainy day fund in 2009-10, thus setting the stage for achieving structural balance in the future….
The May Revision identified $24.3 billion in solutions needed to address the projected shortfall at the end of 2008-09 and leave a reserve of $2 billion. The Compromise proposes a reserve of $1.1 billion and therefore proposes solutions totaling $23.3 billion. Figure INT-02 displays how the proposed solutions in the Compromise are divided among various categories, with cuts accounting for the largest contribution to solving the budget problem.
Proposed Compromise Compared to the Conference Committee Report
The proposed Compromise includes $2 billion in additional spending reductions beyond the $9.3 billion in reductions adopted by the Conference Committee. Specifically, the Compromise maintains funding for public transit at the 2007-08 level for savings of $317 million, suspends the federal cost of living adjustment for SSI for savings of $109 million in 2008-09 and $218 million in 2009-10, achieves $210 million in savings from temporary Medi-Cal provider rate reductions, temporarily shifts $228 million in funding from local redevelopment agencies to schools, suspends homeowner assistance programs and reduces senior's property tax relief for savings of $56 million, saves $150 million by deferring "settle up" payments and makes reductions of $50 million to various health and human services programs. The Compromise provides $57.8 billion tofund the Proposition 98 guarantee, $1.1 billion less in funding than what was proposed by the Conference Committee and X1.2 billion above the 2007-08 level. Lastly, the Compromise proposal restores 101 million in funding for local public safety programs.
The Conference Committee Report included $9.7 billion in revenue increases and accelerations, including $6.6 billion in ongoing tax increases. These ongoing tax increases included higher personal income taxes and higher corporate taxes. If enacted, these tax increases would increase the volatility of California's revenue structure and target specific sectors of the state's economy. Recognizing a temporary decline in revenues and the need for a balanced approach to address the budget shortfall, the Compromise includes a three year, one-cent increase in the state sales tax that will be repaid by a permanent 1/4 cent decline in the sales tax. Given higher gas prices, the increase exempts gasoline, diesel and jet fuel from the proposed increase. In addition, the Compromise modifies the tax amnesty proposal included in the conference report to target the proposal to truly non-compliant taxpayers, it suspends the Net Operating Loss deduction for 2 years instead of three years, and it does not require Limited Liability Corporations (LLCs) to pre-pay their fee.
Budget Reform
California's fiscal strength and security hinges on fixing our broken budget system.
In his State of the State speech, Governor Schwarzenegger proposed a constitutional amendment to address two shortcomings in the state budget process: volatile revenues and over-spending. This Compromise would achieve both of these goals, by building on a proposal made by the Legislative Analyst and negotiated with the Legislature.
The Compromise strengthens Proposition 58 by increasing the size of the Rainy Day Fund from 5 percent to 12.5 percent, capturing unexpected increases in revenues following passage of the budget, and ensuring annual transfers to the reserve occur. Specifically, it ensures annual 3-percent of General Fund revenue transfers into the Budget Stabilization Account (BSA), except in years when the reserve exceeds 12.5 percent of General Fund revenue or in years in which revenues are low enough to allow for transfers from the BSA. Transfers from the BSA back into the General Fund would only be allowed when revenues are insufficient to cover baseline spending increases (i.e., the current level of spending as reflected in the annual Budget Act adjusted by the Gann Limit adjustment factors). Lastly, it ensures that one-time revenues available when the reserve has reached the cap are only available for one-time purposes, including paying off state bonds, making pre-payments for the health benefits of retirees, or granting tax rebates. The Compromise proposal would not impact Proposition 98. These Constitutional amendments would take effect in 2010-11 in order to give the state time to recover from the current cyclical downturn in the economy.
This Compromise also proposes a statutory change that would grant the Governor the power to reduce spending on state operations by 7 percent and to suspend implementation of cost of living adjustments or rate increases whenever a budget deficit developed after the enactment of the annual budget.
Proposed Compromise Compared to the Conference Committee Report
The proposed Compromise includes $2 billion in additional spending reductions beyond the $9.3 billion in reductions adopted by the Conference Committee. Specifically, the Compromise maintains funding for public transit at the 2007-08 level for savings of $317 million, suspends the federal cost of living adjustment for SSI for savings of $109 million in 2008-09 and $218 million in 2009-10, achieves $210 million in savings from temporary Medi-Cal provider rate reductions, temporarily shifts $228 million in funding from local redevelopment agencies to schools, suspends homeowner assistance programs and reduces senior's property tax relief for savings of $56 million, saves $150 million by deferring "settle up" payments and makes reductions of $50 million to various health and human services programs. The Compromise provides $57.8 billion to fund the Proposition 98 guarantee, $1.1 billion less in funding than what was proposed by the Conference Committee andj1.2 billion above the 2007-08 level. Lastly, the Compromise proposal restores $101 million in funding for local public safety programs.
The Conference Committee Report included $9.7 billion in revenue increases and accelerations, including $6.6 billion in ongoing tax increases. These ongoing tax increases included higher personal income taxes and higher corporate taxes. If enacted, these tax increases would increase the volatility of California's revenue structure and target specific sectors of the state's economy. Recognizing a temporary decline in revenues and the need for a balanced approach to address the budget shortfall, the Compromise includes a three year, one-cent increase in the state sales tax that will be repaid by a permanent 1/4 cent decline in the sales tax. Given higher gas prices, the increase exempts gasoline, diesel and jet fuel from the proposed increase. In addition, the Compromise modifies the tax amnesty proposal included in the conference report to target the proposal to truly non-compliant taxpayers, it suspends the Net Operating Loss deduction for 2 years instead of three years, and it does not require Limited Liability Corporations (LLCs) to pre-pay their fee.
Budget Reform
California's fiscal strength and security hinges on fixing our broken budget system.
In his State of the State speech, Governor Schwarzenegger proposed a constitutional amendment to address two shortcomings in the state budget process: volatile revenues and over-spending. This Compromise would achieve both of these goals, by building on a proposal made by the Legislative Analyst and negotiated with the Legislature.
The Compromise strengthens Proposition 58 by increasing the size of the Rainy Day Fund from 5 percent to 12.5 percent, capturing unexpected increases in revenues following passage of the budget, and ensuring annual transfers to the reserve occur. Specifically, it ensures annual 3-percent of General Fund revenue transfers into the Budget Stabilization Account (BSA), except in years when the reserve exceeds 12.5 percent of General Fund revenue or in years in which revenues are low enough to allow for transfers from the BSA. Transfers from the BSA back into the General Fund would only be allowed when revenues are insufficient to cover baseline spending increases (i.e., the current level of spending as reflected in the annual Budget Act adjusted by the Gann Limit adjustment factors). Lastly, it ensures that one-time revenues available when the reserve has reached the cap are only available for one-time purposes, including paying off state bonds, making pre-payments for the health benefits of retirees, or granting tax rebates. The Compromise proposal would not impact Proposition 98. These Constitutional amendments would take effect in 2010-11 in order to give the state time to recover from the current cyclical downturn in the economy.
This Compromise also proposes a statutory change that would grant the Governor the power to reduce spending on state operations by 7 percent and to suspend implementation of cost of living adjustments or rate increases whenever a budget deficit developed after the enactment of the annual budget.
Lottery Securitization
The Lottery remains a greatly underutilized state asset. Because of constraints that prevent California's lottery from performing like those in other states, it produces revenues that are only about half of the national average. This compromise proposes to place a ballot measure before the people to modernize the Lottery and authorize a securitization of the resulting increased revenues. The modernization would allow an increase in game payouts and provide more administrative flexibility. These modest changes are expected to improve the Lottery's performance significantly.
The compromise further proposes to use Lottery revenues to the benefit of the General Fund and to compensate education for the loss of these revenues by an equal increase in the Proposition 98 minimum guarantee and the base budgets of higher education.
Revenues from the modernized lottery would be available to pay down General Fund debts or to augment the state's "rainy day fund" (BSA). It is further proposed that a portion of the revenue stream from the lottery be securitized to provide $5 billion in 2009-10 to be used for these purposes.
Program reductions include the following description:
“PROPOSITION 98
Proposition 98 Guarantee
As a result of these actions in the special session, and the revised revenue estimate being proposed in the Compromise, the Proposition 98 General Fund appropriations for 2007-08 are now approximately $41.6 billion, which is $187.3 million lower than the minimum Proposition 98 Guarantee. Total Proposition 98 funding for 2007-08 is $56.6 billion.
The Proposition 98 Guarantee for 2008-09 is projected to grow to $57.8 billion of which $41.8 billion would be from the General Fund. While the Compromise fully funds the Proposition 98 Guarantee, and provides a $1.2 billion year over year increase, it does not fund the cost-of-living adjustments required under current law. This level of funding is higher than the amount necessary to fund Proposition 98 programs, including Special Education, Class Size Reduction and Child Nutrition, at their 2007-08 base program levels.
2008-09 Proposition 98 Guarantee Program Savings:
Cost-of-Living Adjustment: $2.9 billion savings: The Budget does not provide Proposition 98 programs with the statutory 5.66 percent cost-of-living adjustment resulting in a $2.9 billion savings, including $353.9 million from Community Colleges.
Community College Growth: $58 million additional savings are realized by reducing new enrollment growth from 3 percent to about 2 percent resulting in a total Proposition 98 expenditure level of $4.46 billion for the community colleges.
Redevelopment Agency: 5 percent or $225 million savings: The Budget also proposes a shift in the amount of funding provided by local redevelopment agencies (RDA's) to local schools and community colleges in each county. For 2008-09 through 2010-11, RDA's will be required to shift the greater of (a) five percent of their tax increment revenue, or (b) $225 million, to the Education Revenue Augmentation Funds (ERAF's) in their respective counties. For 2008-09, the Budget assumes that $228 million in additional local revenue will be passed on to schools and community colleges, which in turn reduces the state's Proposition 98 General Fund contribution by an identical amount.
2009-10 Proposition 98 Guarantee: Increase $1.1 billion: Under the Lottery proposal, commencing with the 2009-10 fiscal year, the Proposition 98 Guarantee would be increased to reflect a shift of $1.1 billion, which is the amount that was dedicated to K-14 education programs from the Lottery in 2008-09. The University of California, California State University and Hastings College of Law, will receive non-Proposition 98 General Fund in 2009-10, in place of the amount they would have otherwise received from Lottery proceeds.
Proposition 98 Settle-Up Payment: $150 million deferral. The Budget proposes to defer the annual $150 million settle-up payment. Proposition 98 appropriations for fiscal years 1995-96, 1996-97, 2002-03, and 2003-04 are $1.4 billion below the amounts required for those years. Chapter 216 of the Statutes of 2004 annually appropriates $150 million beginning 2006-07 to repay prior-year Proposition 98 settle-up obligations.
Home to School Transportation Reimbursement from Public Transportation Account: $1 billion savings over two years: The Special Session authorized up to $409 million in Proposition 98 General Fund expenditures for the Home-to-School Transportation Program for the 2007-08 fiscal year to be reimbursed from the Public Transportation Account (PTA). Similarly, the Budget Act includes $592.9 million from the PTA to reimburse the General Fund for the 2008-09 cost of the Home to School Transportation Program, including Special Education transportation (reflected in the totals for General Government).
HIGHER EDUCATION (NON-PROPOSITION 98)
Savings of $486 million are realized for higher education segments (excluding community colleges) resulting in a $7.1 billion General Fund expenditure level. Major reductions include $233.4 million for UC and $215.3 million for CSU from the workload budget level. The savings include unallocated reductions of $201.1 million and $172.1 million for UC and CSU, respectively, and 10 percent reductions to Institutional Support of $32.3 million for UC and $43.2 million for CSU. One-time savings of $24 million were realized in the Student Aid Commission budget due to a one-time fund shift to the Student Loan Operating Fund for a portion of CalGrant payments.
HEALTH AND HUMAN SERVICES
Department of Health Care Services
As part of the 2008 Third Extraordinary Legislative Special Session, legislation was enacted to reduce expenditures by authorizing a ten percent reduction in payments to Medi-Cal fee-for-service and managed care Medi-Cal providers/programs, inpatient care payments to hospitals that do not contract with Medi-Cal, as well as provider payments for the California Children's Services (CCS) program, the Child Health and Disability Prevention (CHDP) program and Genetically Handicapped Persons Program (GHPP). This Compromise retains these reductions until March 1, 2009, which will save $505.4 million General Fund in 2008-09.
Department of Social Services
Current law suspends provision of the June 2008 State Supplementary Payment (SSP) COLA until Oct 2008. Permanent suspension of the June 2008 SSP COLA would result in General Fund Savings of $198.3 million in 2008-09.
Suspension of the June 2009 SSP COLA would result in General Fund Savings of $48.9 million in 2008-09.”
That is all for now.
Posted on August 28, 2008
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