Committee OKs budget; leadership continues to meet

Analysis from CSBA’s Governmental Relations Department

The state Legislature’s Budget Conference Committee wrapped up several weeks of work and approved a $107.7 billion spending plan last week. While there was support from the Republican members of the committee on certain aspects of the proposal, ultimately it was a Democrat-approved package. The plan is based on $6.2 billion in spending cuts and revenue increases of about $8 billion.

For Proposition 98 education funding, the original plans from the Assembly and state Senate were generally in agreement, so limited action was needed in the Conference Committee. The total level of funding approved for Proposition 98 is $59.1 billion, which is still $1.7 billion below the workload budget that Gov. Arnold Schwarzenegger had calculated schools would need just to maintain current services. Both houses did provide partial, across-the-board cost-of-living adjustments—1.67 percent in the Assembly and 3.68 percent in the Senate. The Conference Committee compromise essentially splits the difference, calling for a COLA of about 2 percent; by comparison, the statutory COLA is 5.66 percent. The COLA remains the “balancer” depending on revenues, so it will likely change—up or down—in the final budget.

Additionally, actions taken by both houses that were aligned (and therefore not at issue in conference) include:

• fully funding revenue limits and providing funding for growth
• rejecting approximately $1 billion in cuts proposed by the governor to categorical programs
• restoring ongoing funding for programs funded with one-time dollars in 2007-08

The revenue plan
All along, the legislative Democrats’ spending plans have relied on an unspecified increase in revenues. Last week, they laid out their plans, which would generate over $8 billion in revenues by:

• reinstating the 10 percent and 11 percent tax brackets to generate $5.6 billion
• suspending net operating losses for corporations to generate $1.1 billion
• suspending the adjustment of tax tables (indexing) to generate $815 million
• rolling back the dependent tax credit for taxpayers earning more than $150,000 to generate $215 million
• restoring the 9.3 percent corporate tax bracket to generate $470 million
• increasing enforcement of tax collection to generate a one-time amount of $1.5 billion

Conference Committee Chair Sen. Denise Ducheny, D-San Diego, noted that these increases would merely roll back tax cuts from as far back as 1997, and that without these revenue increases, an additional $9.7 billion would have to be cut from the budget. The Republican members of the committee expressed their opposition to the revenue proposals, saying they were apprehensive of how the increases would affect the economy. School funding is directly related to the level of revenues, because the legislative budget proposal contains the minimum level of funding allowed by Proposition 98; if revenues go down from the Conference Committee proposal, then school funding would go down accordingly.

Lottery securitization
At this point, plans for securitizing the lottery—basically, leasing out long-term profits for an immediate revenue boost—have been rejected by legislators because they don’t believe it would benefit the current-year budget. However, the door is still open for a lottery securitization proposal to reemerge in the final budget.

What comes next
Since the outcome of the Conference Committee’s plan is not supported by both parties, it represents just one step in the budget process. Typically, a floor vote on the conference report would take place soon after the report is adopted; however, the four legislative leaders have been meeting almost daily, and if those meetings yield any real progress, it’s possible that the only floor votes will be on a compromise negotiated by the leaders.

Assembly Speaker Karen Bass, D-Los Angeles, said in a press conference after the adoption of the Conference Committee report last week that the committee’s plan represents “a line in the sand.” She noted that the budget is painful and no one escaped unscathed, but she added that this was as far as Democrats were willing to go with spending cuts.

The state’s cash management situation places additional pressure on legislators to reach a budget agreement very soon. State Controller John Chiang has indicated that Aug. 1 is an important date for his office to be able to secure short-term financing to bridge gaps in the cash flow. If a budget is in place by that date, the controller can finalize the process for revenue anticipation notes, which the state has used in 24 of the last 25 budgets. In order to meet that timeline, legislative leaders recently indicated they are striving to approve a budget about 10 days prior to Aug. 1. If a budget is not approved by that date, the controller will have to seek more costly and difficult revenue anticipation warrants to bridge the gaps.

Weighing in on the budget
We would like to once again emphasize the importance of making sure legislators hear often from their constituents. Express your opinion on the Conference Committee’s budget; information on contacting your Assembly member can be found at http://www.assembly.ca.gov; information on contacting your senator can be found at http://www.sen.ca.gov.

Related link:
More news on the state budget’s impact on schools can be found @
www.csba.org/EducationIssues/EducationIssues/SchoolsInvestment.aspx.