California Budget Update August 8, 2009 -Introduce

Agenda California’s financial situation The 09-10 California State Budget, amended What’s next… -Overview

This year’s budget process Different than normal Budget already signed in February (for 08-09 and 09-10) Budget amended late July Normally, the Governor proposes a budget in January, the legislature holds budget hearings starting in Feb/March, the Governor issues a May Revise, and the legislature – and ultimately, “big five” – hammer out a final budget for the Governor to sign sometime in the summer (supposed to be by end of June, but…). This year has been much different. A budget was passed in February for both the remainder of 2008-09 and for 2009-10. Then, just two weeks ago, a “July package,” a package of over 20 bills, was passed – this amended the 2009-10 budget.

California’s financial situation: The $60 Billion Gap 2009 Budget Act (enacted in Feb.) 2009 Budget Act Amendments (enacted in July) Total "Solutions" Cuts $14,893 $16,125 $31,018 Taxes $12,513   Federal Stimulus $8,016 Other $402 $8,034 $8,436 TOTAL $35,824 $24,159 $59,983 This table looks at the actions taken with the February budget and now, more recently, with the July amendments to the budget. The General Fund budget gap was $42 billion in Feb, when the leg passed a budget with $36 B in solutions and hoped for another $6 B to be adopted at the ballot. Since then, the Department of Finance states that the gap grew another $18 B to $60 B. However, this is a strange way of reporting it because really, we had a $42 billion gap and the February budget dealt with $36 billion of that, leaving a $6 billion gap. Then this gap grew to $24 billion, which the July package amendments now address. Revenue shortfalls have been a major contributor to the gap – California continues to bring in less in taxes than anticipated. The recent amendments to the 2009-10 Budget Bill contained another $24 B in “solutions,” which we’ll go through in a second. The July 09 budget package projects $89.5 B of revenues and transfers to the General Fund, and authorizes total General Fund spending of $84.6 B. Here we see that the July package just passed includes mainly cuts, along with $8 billion in “other” funds – for the most part, revenue acceleration, borrowing, etc. Again, we’ll go through those in just a moment. Note that July’s cuts were even larger than those originally passed in the budget in February. (Chart is from DOF)

July budget package: Cuts Over $16 billion in cuts, including: Almost $1 billion from “employee compensation” $2.3 billion from health services $1 billion from criminal justice $1 billion from social services Almost $1 billion from transportation $6.5 billion from K-14 and $2 billion from higher ed -The July Package, as stated earlier, consisted of over $24 billion in “solutions.” This included: -$16 billion in cuts -$3.5 billion in revenues (and revenue accelerations) -$2 billion in borrowing -$1 billion in fund shifts -and over $1 billion in “other” solutions -Of the $16 billion in cuts, we saw almost one billion taken from employee compensation – this is based, among other things, on over $400 million in “savings” scored from instituting a third furlough -Health services were cut once again. Support was reduced for Health Families, Prop 36 substance abuse programs and developmental services. The Rural Health Care Equity program was eliminated altogether, scoring a savings of approximately $15 million a year. NUMBER OF MEMBERS WHO WERE ACCESSING THIS -The budget for Corrections was cut by an additional $800 million, and trial courts were cut by about $170 million. We don’t know yet how just this will impact staffing. -About $1 billion was cut from social services, including additional cuts to CalWORKs, In-home Supportive Services and Child Welfare Services. -Certain transportation funds were redirected or loaned to the General Fund, and about $8.5 billion was cut from K-14 and higher education. -A lot of these cuts will have direct impacts at the county level. However, cuts to employee compensation and Corrections, and the elimination of the Rural Health Care Equity program clearly impact our members. -We should note that upon signing the July Package, Schwarzenegger got out his blue pencil and vetoed almost $500 million in expenditures, constituting another ½ billion in cuts. These came largely from health and human services, including the Healthy Families Program, and the Child Welfare Services Program.

July budget package: Revenues $3.5 billion in revenue (and acceleration) including: Increases schedules for payroll withholding by 10% Assumes sale of part of SCIF in 09-10 Accelerates Personal Income and Corporate Tax receipts Taxes? Closed Corporate Loopholes? The July package also includes $3.5 billion in revenues. As you can see from the slide, these revenues are to be generated through accounting tricks and the supposed sale of part of SCIF. The first measure, to increase payroll withholding by 10%, is slated to bring in $1.7 billion. What this means is that starting in January 2010, taxpayers will pay a larger share of their personal income tax during the first half of the calendar year because more is being withheld from their checks. What this really means is that the state will be borrowing from taxpayers paychecks and “settling up” with them come April 15th. People won’t be paying more taxes, they’ll just be paying them earlier. So, for example, if you are single and claim one allowance and make $3000 a month before taxes, your monthly state withholding is currently about $80; therefore, you’d be paying $8 more a month. Again, you are not paying more in taxes overall, you’re just paying them earlier and over time. The July package also assumes $1 billion from the sale of parts of SCIF. This is highly questionable. We are still looking into the legality of such a sale. Revenues are also expected to be generate by “accelerating” personal income and corporate tax receipts. What this means is that the schedule for estimated tax payments – which used to be 25% due per quarter – will be altered once again (because it was already altered in the Feb. budget). Now, more will be due in the first two quarters of the calendar year so that it can be scored for the 09-10 fiscal year. As can be seen, then, the “revenues” scored by the July package mainly involve accounting gimmicks and the questionable expectation that parts of SCIF can and will be sold in the current fiscal year. We don’t see any new taxes and we don’t see any closing of corporate loopholes. The oil severance tax, the alcohol excise tax, and other revenue options that were once proposed are now no longer discussed. Three corporate loopholes were passed in the last two budgets that will start costing us, as of 2001, about $2.5 billion a year. My notes: Under federal law, taxpayers make four equal (25%) estimated tax payments on April 15, June 15, September 15, and January 15, 2010. California moved to 30% payments for April and June and 20% payments for September and January this year. In the new budget, the estimated taxes are sped up even more. The first payment (April) will remain at 30% but the second payment (June) will increase to 40%. The September payment is eliminated, but the January payment is moved to December and will be 30%. Corporate estimated payments will follow the same pattern, except that the minimum franchise tax of $800 will still be due in April (15th day of the fourth month of the corporation's fiscal year). This provision is estimated to accelerate $610 million into the 2009-2010 fiscal year

July budget package: Borrowing & “Other solutions” $2.2 billion in borrowing, including: $1.9 billion from local governments $1.4 billion in “other solutions,” including: Almost $1 billion from delaying state worker payroll one day The July package also includes borrowing and “other” solutions. The state intends to borrow $1.9 million from local governments by suspending Prop 1A, which basically means that states would be borrowing local property taxes to use for General Fund spending on education and other programs. This maneuver will inevitably face legal battles waged by local governments. The July package also includes a provision to delay state worker payroll by one day, from June 30th to July 1st, thus shifting it into the next fiscal year. So far, we’ve heard that this will merely translate into a delay of a few minutes for the actual issuing of checks to state employees, but we are following up on it. Again, this is just another accounting “gimmick” – however, if it results in late pay for state workers, it has very real impacts.

California state budget: Federal stimulus State of CA will receive close to $31 billion, including: Over $9 billion for health programs Almost $8 billion for education Almost $6 billion for labor and workforce development $3.5 billion for social services $2.6 billion for transportation We also wanted to briefly mention the federal stimulus package slated for California. Overall, the federal government issued $787 billion to states in federal stimulus. Of this, California is to receive an estimated $85 billion. Of that $85 billion, $31 billion is dedicate to state aid, split out amongst the various programs described on this slide. Health and social services, education, labor and workforce development and transportation are all key areas. This money will be doled out through 2011. Already, we have seen $8 billion of this funding scored in the budget passed in February. The Research Department is continuing to track the funds. Here are a few of the uses so far: -EDD has received $400 million to help the unemployed and is actively recruiting for Employment Program Representatives (EPRs), and also has $50 million for State UI administration and projects to improve services to UI claimants. -DSS will receive $162.9 million which increases the department’s federal share and reduces the state’s share of Title IV-E funding for Adoption and Foster Care Assistance. -DSS has already received $840 million of federal stimulus money  to increase food stamps benefits which brings an additional $47 million to the state each month.  As a result of the increase in food stamps benefits, DSS has also been provided with federal stimulus monies of $22 million for administrative costs to handle increased caseloads. -While $31 billion sounds like a lot of money, it’s clear that it is not the silver bullet for fixing the state’s budget problems. It is spread out over at least three years, and a large portion of it has already been scored towards the General Fund. My notes: Transparency of how the State is using ARRA funds, with regards to the California Recovery website,  is not the best but has improved significantly over the last month.  EDD has received $400 million in ARRA funds to help the unemployed and is actively recruiting for Employment Program Representatives (EPRs). EDD has $50 million for State UI administration and projects to improve services to UI claimants. DSS will receive $162.9 million which increases the department’s federal share and reduces the state’s share of Title IV-E funding for Adoption and Foster Care Assistance. (I followed up to see if they have received the money and am waiting to hear back.) DSS has already received $840 million of federal stimulus money  to increase food stamps benefits which brings an additional $47 million to the state each month.  As a result the increase in food stamps benefits ARRA also provided DSS with $22 million in administrative costs to handle increased caseloads.

What’s next… Special Session of the Legislature, September Tax Commission Report: Sept. 20th IOUs come due in October Deficit for the next fiscal year? Already, it’s projected to be $7 to $8 billion…or more Looking ahead, we already see some important budget-related events on the horizon. The regular legislative session ends on Sept. 11th. The Governor has already called a special session to deal with a report expected to be released by the Tax Commission on Sept. 20th. This commission – officially named the Commission on the 21st Century Economy – was put together last year by the Governor to consider ways to improve the state’s tax structure. We can expect possible recommendations of a flat personal income tax (and possibly a flat corporate tax), a “split roll” which treats corporate property different that residential property for purposes of taxation (this is related to Prop 13), sales tax on certain services, and the like. Then, the following month, in October, the IOUs – or “registered warrants” – issued by the state come due. This occurs on Oct. 2nd. And, already, the state administration is predicting a $7 to $8 billion deficit for the upcoming fiscal year, 2010-2011…