State budget: What next? 

Analysis from CSBA’s Governmental Relations Department

It comes as no surprise that the long-overdue state budget, which was finally enacted less than a month ago, is already out of balance, adding to concerns that could impact school funding. Projected revenues coming into the state coffers so far this fiscal year are already down an estimated $3 billion from projections, and forecasts indicate the cash-flow problem could grow to $7 billion or more.

The condition of the nation and world’s financial markets is also casting a shadow over the state’s fiscal picture, affecting the availability of loans, interest rates and other factors. In light of this two-headed problem, the “Big Six” (Gov. Arnold Schwarzenegger and legislative leaders from both houses, with incoming Senate President pro Tem Darrell Steinberg) met last Wednesday and agreed to work together on the state’s immediate cash crunch by seeking a short-term loan. Afterward, the governor sent a letter to U.S. Treasury Secretary Henry Paulson indicating the state may run out of money and so need to borrow $7 billion from the federal government during the fiscal year; in a second letter, however, he expressed confidence that the state would be able to meet its short-term borrowing needs on the private market.

In a related move today, state Treasurer Bill Lockyer put out a call for $4 to $5 billion in revenue anticipation notes to help cover part of the estimated $7 billion cash-flow problem. While the issuance of RANs has been fairly routine, this bid is different, with the perilous state of the financial markets and the increased costs of loans making it more challenging.

Lower Prop. 98 guarantee, midyear cuts possible

These developments have serious implications for schools. Proposition 98 is directly tied to general fund revenues—so as they drop, so does the education funding guarantee. Thus, school funding could be cut further in the current school year without a suspension of Proposition 98. This means districts would be wise to continue to keep a close watch on their own cash flow.

If the news is not already bad enough for lawmakers, the court-appointed prison receiver is persisting in his efforts to take more funds from the state general fund to bring the state’s prison health-care system into compliance with a federal court order. The receiver, Clark Kelso, has asked a judge to force the state to write a check for $250 million, in addition to the $8 billion that has already been ordered for the construction of long-term prison health facilities.

Special session?

The possibility of a special legislative session to address the growing imbalance in the state budget is high, adding to the danger of midyear cuts to education. There are three likely windows when a special session could be called: immediately after the Nov. 4 election, allowing action to be taken by the current Legislature; immediately following the swearing-in of the new Legislature on Dec. 1, or in January, when the governor’s 2009-10 budget proposal is due.

This continued fiscal crisis is the direct result of the inability of the Legislature and the governor to address the state’s structural imbalance and their decision once again to paper over the budget deficit, in part by using out–of-date revenue estimates. Throughout the budget process, CSBA has repeatedly stated that a balanced approach—one that includes new revenues in addition to cuts—is the only responsible way to close the structural deficit.