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The budget “reset”

On June 20, 2011, in State budget, by Scott

All eyes will be on the Senate when it convenes at noon today to see if Pro Tempore Darrell Steinberg provides any hint of what will happen next in the effort to reach a state budget. There were no developments over the weekend, although the backchatter was mostly about whether or not Controller John Chiang will pay legislators when June 30 payday arrives.

Chiang did announce that he has ceased weekly per diem checks until he decides whether the Legislature has "passed" a "balanced" budget pursuant to Proposition 25. KQED’s John Myers has a great rundown if you want to read more about this. If, like me, you’d prefer to listen while you’re on the treadmill, Myers teamed up on Friday with LA Times reporter Shane Goldmacher and SacBee reporter Kevin Yamamura for his weekly podcast (also on iTunes).

Let’s take a reset of the budget fight.

Democrats on Wednesday replaced the governor’s $9.4 billion in temporary tax extensions with a mix of cuts, deferalls and smaller tax increases. Some of these are "easy," such as the new $2.8 billion in Proposition 98 that was in the January budget and generally planned on by K-14 school districts. Others, however, such as selling state buildings and assuming new federal revenues, have been tried repeatedly and are essentially considered budgetary paste.

Taxes are essentially off the table for calendar year 2011, as there is no political appetite for a September election, the governor already dropped the personal income tax extension for this year, and you can’t retroactively collect a sales tax approved in a November election. Even in the most optimistic scenarios about a tax extension, at least $3 billion in solutions have been lost.

Thus, the "real" shortfall, assuming you continue the K-14 deferrals and can’t get the taxes, is about $6 billion. This shortfall can be whittled down by $815 milion, or let’s say $1 billion, by increasing revenue projections in account of the $408 million in revenues above projections in the month of May.

That leaves $5 billion as the legitimate sticking point. Democrats closed this by sale of state buildings ($1.2 billion), increased fees/sales taxes ($1.3 billion), cuts ($1.5 billion), and assumed federal revenues ($700 million), and a few miscellaneous actions.

While the governor’s veto message centered on his accusation that the Democrats’ budget was not balanced, the real issue is the "out year problem." The governor desparately wants to end the annual budget shortfall, and most people believe the Democrats plan leaves a $6-7 billion shortfall beginning in 2012-13. The question is whether he wants to eliminate all of the structural shortfall or, whether he’s willing to sign a "workout plan" that phases in budgetary balance. Fixing that structural shortfall will only happen with ongoing spending cuts, ongoing tax increases (for a few years at least), or a mix thereof.

However we get to the final budget, there will be more cuts than included in the governor’s May Revise. Whether they are limited to the $1.5 billion in the Democrats’ plan or deeper will depend on the governor’s willingness to (1) persuade Democrats to support a November election on taxes that labor doesn’t want and (2) accept some gimmicks. Somehow, $5 billion in solutions have to be found.

At the end of the day for Proposition 98 and community colleges, $2 billion is likely the maximum cut beyond the accounting cut of the new deferral ($129m for community colleges). Thus, even in an all-cuts scenario, Scenario B is likely the "worst scenario," although we’ll continue to fight for Scenario A.

The bigger threat, however, may be a prolonged budget fight that may, once again, force districts to scramble for reserves and borrowed cash while Sacramento finds a solution.

 

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