1. California Budget Update June 28, 2009

2. Agenda California’s financial situation This year’s budget process
The current California State Budget and May Revise

3. California’s financial situation
Carry Forward Deficit
-$6.2
Plus Revenues and Transfers
$88.8
Total Available Resources =
$82.6
Less Expenditures
-$101.0
Budget Deficit =
-$18.4
This deficit is WITHOUT considering Reserve Goals….depending on reserve goals of between $1.1 billion and $4.5 billion, this deficit increase to anywhere from $19.5 billion to almost $24 billion.
This depends on what the Legislature wants to leave in reserves.

4. This year’s budget process
Budget already signed for and 09-10
May Revisions and the Conference Committee Report
Big 5 meetings and 2/3 vote
IOU’s
Schedule
Budget was signed in February for the end of this fiscal year and for the next fiscal year, which starts on July 1
The Governor came out with his revisions to that budget, called the “May Revise” which included the 5% pay reduction for state employees and it was heard by a budget conference committee made up of 10 legislators, 5 senators and 5 assemblymembers, 6 were democrats and 4 were republicans. These were public hearings in which our members testified extensively on ways the Legislature could save money – specifically looking at the outsourcing of contracts. The CC then makes recommendations based on the May Revise, which is then sent to the full legislature for debate and passage.
During this time, the “Big 5” (Governor, Speaker, Pro Tem and Minority Leader in both houses) meet behind closed doors to work out the details on how they will pass a budget. They basically meet because most of the budget bills that are debated in the Legislature both floors will
Next Thursday, July 2, the Controller has said that he will have to issue Revenue Anticipated Warrants (RAW’s) or IOU’s – which affect the credit rating of California , impacting its ability to borrow money cheaply– it’s basically akin to mortgage crisis. The issuance of IOU’s means less likely to be able to borrow money at a reasonable interest rate. This will happen without a balanced budget. To put things in perspective, the last time RAW’s were issued was in 1992 and before that it was during the Great Depression. The Assembly put forth a $4-5 billion in cash budget that received the 2/3 – the Senate did not pass it with the required 2/3 vote. The Governor has said he will veto this bill. Depending on what the Senate does with this bill, the legislature may have the 2/3 needed to override the Governor’s veto.

5. 08-10 California state revision: Cuts
$11.4 Billion vs. Governor’s $15 Billion in spending cuts, including:
Cuts $322 million of $1.2 Billion from counseling and rehabilitation programs
Rejected the 5% cut, talk of third furlough day by Governor’s office
Cut CalWORKs by $270 million by reducing payments to counties; less steep than Governor
Cuts $4.5 billion from K-12 schools and $700 million form community colleges, $500 million less than Governor
Cuts and Program Changes
The legislative proposal includes a total of $11.4 billion in cuts, compared to $15 billion included in the governor’s proposal. Other program changes, such as changes to work requirements for CalWORKs recipients, will result in reduced General Fund costs without being deemed direct program cuts. Major program cuts and differences from the Schwarzenegger plan include:
$5.5 billion in cuts to K-14 education programs. The education reductions would involve $1.4 billion in immediate cuts followed by more severe cuts for the budget year that starts in July. This includes nearly $700 million in cuts to the state’s community colleges. Legislative cuts are approximately $500 million lower than those proposed by the governor. To make these spending reductions, school districts would be given flexibility in a number of areas including reducing the total number of school days and suspension of the high-school exit exam.
$2.6 billion in cuts and other reductions from health and human services programs. The legislature rejected some of the governor’s most sweeping changes including his plan to eliminate Healthy Families and reduce in-home supportive services by 90%. All programs would still see deep cuts, however, including cost increases for service users and restricted eligibility.
$2.1 billion cut to transportation. Transportation is the only major budget area that would be harder hit by the legislative proposal than by the governor’s. New proposals include borrowing $134 million from the State Highway Account and transferring $70 million from the Motor Vehicle Account.
$2.0 billion in cuts to CSU and UC programs. The legislature rejected the governor’s proposal to eliminate Cal Grants, but maintains the same overall level of cuts to both systems – roughly a billion will be taken from each.
$1.2 billion in cuts and other reductions from corrections. The legislature largely adopted the governor’s proposals for budget cuts to the Department of Corrections and Rehabilitation.
The reason for the differences is because the Legislature’s budget takes a more balanced approach, a mix of cuts and revenues, which we have advocated for. The Governor’s proposal is steep cuts with no sources of revenue.

6. 08-10 California state budget: Revenues
Defers June 30, 2010 paycheck for state employees until July 1, 2010 saving $1.2 billion on the books
Increase cigarette tax by $1.50 per pack, raising $1.2 billion
Imposes 9.9 percent tax on oil extraction to raise $830 million
Sale of State Compensation Insurance Fund for a savings of $1.2 Billion
Suspension of two of three corporate tax cuts passed in the February budget
The Conference Committee proposal would close the other half of the budget gap with a variety of taxes, improved and accelerated revenue collections, and temporary solutions. The Committee plan includes two key differences from the governor’s: the legislative plan calls for nearly $2 billion in new oil and tobacco taxes and it rejects the governor’s call to borrow $2 billion from local governments. The legislative plan would maintain a $3.8 billion reserve, compared to Schwarzenegger’s $4.5 billion reserve. Major non-cut solutions include:
$5.0 billion in accelerated and increased tax and fee collections. The Committee adopted most of the governor’s plans to speed up the collection of taxes already owed and added in several new pieces. The most significant proposal is one to require businesses to withhold 3% of payments to independent contractors. The funds would be applied against income taxes owed by the contractors, but would likely increase the overall collection of income taxes.
$1.9 billion in new revenues from oil and tobacco taxes. The Committee plan calls for an oil extraction tax of 9.9% (the same level advocated by the governor in December) and an increase in the tobacco tax of $1.50 per pack.
$1 billion from the sale of part of the State Compensation Insurance Fund. Like the governor’s plan, the legislative proposal counts on $1 billion in revenues from a plan to sell a portion of SCIF’s book of business. This proposal risks rising premiums for employers covered by SCIF and worse care for injured workers who go to a private company.
The legislative plan also calls for the suspension of two of the three large corporate tax cuts that were included in the last two budget deals – net operating loss carrybacks and affiliate credit sharing among corporations. While these provisions would have limited impact in the current budget year, repealing them before they are fully in effect could prevent nearly $1 billion a year in future tax losses. This proposal and the oil and tobacco tax measures would require a 2/3rds vote of the legislature.
Eliminates Loopholes and Increases Compliance:   Repeals recent changes to tax law, enacted in the September budget package, to allow the carry back of Net Operating Losses during the prior two years and another provision that allows corporations to assign a portion of unused tax credits to an affiliated corporation.  Also includes various compliance measures to ensure payment of taxes owed to the state.