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‘Colossal budget gap’ puts state ‘on the edge’ 

Analysis from CSBA's Governmental Relations Department

The Legislative Analyst’s Office last week released its “Overview of the Governor’s Budget,” the first in a series of analyses of individual budget areas that the LAO plans to publish over the next six weeks. They will replace the single, comprehensive analysis the office typically released late in February each year on budget proposals issued by the Governor’s Office in January.

The LAO overview generally agrees with Gov. Arnold Schwarzenegger’s estimation of a $42 billion deficit for the 2008-09 and 2009-10 fiscal years, but Legislative Analyst Mac Taylor’s report cautions that a risk of further deterioration in the economy and state revenues could increase that figure. Calling it a “colossal budget gap,” Taylor’s report says the state is “on the edge of fiscal disaster” that the Legislature and governor must act immediately to resolve.

$10 billion questions

The LAO overview also casts doubt on two proposals from the governor to raise nearly $10 billion through borrowing. First, the document questions whether the issuance of $5 billion in revenue anticipation warrants would be legal under Proposition 58—the initiative approved by voters in March 2004 at Schwarzenegger’s urging. Proposition 58 prohibits the state from borrowing money for operating expenses, but that is exactly what the governor proposes, according to the LAO, because the RAWs would be repaid not in 2009-10 but in the following budget year.

Second, the LAO questions the governor’s reliance on $5 billion from securitizing the California Lottery. This proposal, which essentially amounts to the state borrowing money against future lottery revenues, faces two significant challenges: It would have to be approved by voters, and it is uncertain how eager financial institutions would be to invest in the securitization.

The colossal budget gap that already exists would widen by $5 billion if either of those proposals didn’t pan out—and by $10 billion if both fail. Under any of those scenarios, greater spending cuts would be required than those already proposed.

A simple budget—not so fast

Meeting with members of the education community last week, representatives from the Governor’s Office and the Department of Finance clarified many aspects of the governor’s budget that was released Dec. 31. Two key misunderstandings were cleared up:

1. The deferral of $2.6 billion in payments for K-12 revenue limits and class-size reduction from February to July—the following fiscal year—would be a permanent shift, not a one-time adjustment. Further, this would replace the deferral approved by the Legislature and governor in September that delayed $2.8 billion in apportionment payments; it would not be in addition to that previous deferral.

2. There would not be an additional $1.5 billion cut to revenue limits in 2009-10, as was feared earlier. The $1.5 billion cited in the governor’s budget documents was meant to reflect that nearly all of the $1.6 billion revenue limit cut proposed in the midyear would be continued in 2009-10.

The net result of these clarifications would be a level of funding for schools of $55.8 billion for 2008-09. This would represent a reduction in funding of $2.1 billion ($356 per average daily attendance) below the level of funding provided when the budget was originally approved in September.

When added to the cuts contained in the September budget, this means schools would be funded at $4.9 billion below the workload budget, or $830 per ADA. For 2009-10, the funding level for Proposition 98 would be $55.9 billion.

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Download the LAO’s “Overview of the Governor’s Budget” @