Special session: New LAO warns of ‘plummeting revenues,’ talks of midyear school cuts 

Analysis from CSBA’s Governmental Relations Department

There was no good news when new Legislative Analyst Mac Taylor offered his first testimony to the state Legislature Nov. 11. Using words like “plummeting revenues” and “bleak,” he released his office’s “Overview of the Governor’s Special Session Proposals.” Taylor projected a $27.8 billion shortfall for the remainder of this fiscal year and through 2009–10, absent any corrective action.

A longtime staffer in the Legislative Analyst’s Office, Taylor was tapped earlier this fall to succeed Elizabeth Hill at the head of the nonpartisan advisory agency. He’s in general agreement with Gov. Arnold Schwarzenegger’s assessment of the state’s fiscal condition and the need for immediate action.

The growing deficit is the result of a dramatic downturn in the national and international economies and the historic drop in the U.S. stock market, with the $700 billion bailout of many of the country’s largest financial institutions as a backdrop. The problem is worsened by the decline in the state’s housing market. Six of the nation’s 10 cities with the highest foreclosure rates are in California.

The Legislative Analyst’s Office is projecting a decline of $1.5 billion in property taxes for school districts over the next three years; that would mean a corresponding hit to the state general fund, which must backfill that loss to school districts.

Threat of billion-dollar midyear education cuts

Taylor’s staff offered an alternative to the governor’s proposal for cutting education. While the LAO agrees that the 0.68 percent cost-of-living adjustment for revenue limits in the budget approved in September should be eliminated, it acknowledges that it would be difficult to make cuts such as those proposed by the governor when schools are already well into the 2008–09 academic year.

Instead, the LAO believes schools could “accommodate” midyear cuts of about $1 billion. Losing the COLA and “finding one-time savings” from programs that have lower participation than expected would account for half that amount. Targeted changes, such as suspending some professional development activities, maintenance and instructional materials purchases would account for the remainder.

This may seem more appealing than a larger cut to revenue limits, but districts that have already entered into contracts for such things as instructional materials may not be able to realize those savings.

In order to bring current-year funding down an additional $500 million to the minimum funding level, the LAO believes the other half-billion dollars should be counted as a partial “settle up” for prior-year obligations under Proposition 98. The current amount owed to schools for underfunding in 2002–03 and 2003–04 is estimated at $1.1 billion.

Looking beyond the 2009–10 budget, the LAO is projecting massive shortfalls of approximately $20 billion each year through 2013–14. This projection doesn’t account for the $5 billion anticipated in both 2009–10 and 2010–11 from securitization of the lottery which, if approved by voters in a special election expected to be called for next year, would decrease those projected $20 billion annual deficits by $5 billion a year for those two years. The LAO’s projection also does not factor in revenue increases proposed by the governor, led by a 1.5 percent temporary sales tax increase that would partially close the gap until it lapses after three years, as Schwarzenegger called for.

“Based on our forecast, we recommend that any major revenue increases adopted be in effect for at least a three-year period,” the LAO report says.

The LAO issued last week’s report in response to proposals the governor made when he called the Legislature back for a special session following the Nov. 4 elections.

It is unclear at this time how the Legislature will respond to the issues currently before it, or even whether any action will be taken before the end of November, when the current Legislature expires to make way for the new legislative session.

At an informational hearing of the Assembly Budget Committee last Friday, the governor’s Department of Finance and the LAO provided their perspectives on the governor’s proposals. Public comment was not taken at the hearing. Committee chair John Laird, D-Santa Cruz, opened the hearing by stating what he saw as three key principles: This problem can’t be solved with just cuts or just taxes; there is a need to act swiftly; and federal help is needed. Vice chair Roger Niello, R-Fair Oaks, responded that lawmakers must not exacerbate the economic downturn and can’t turn to tax hikes before all possible spending reductions have been investigated. The two men’s remarks are indicative of the current position of legislative Democrats and Republicans, which doesn’t bode well for the prospects of any action to close the current budget deficit in the days remaining in this special session.

Related link:

Find the LAO report, “Overview of the Governor’s Special Session Proposals,” @ http://lao.ca.gov/laoapp/main.aspx.