To:       ACSA Leadership and interested parties
 
FR:       Adonai Mack, Legislative Advocate
 
RE:       Legislative Analyst Analysis of Governor's Special Session
 
On Tuesday, the newly appointed Legislative Analyst, Mac Taylor, who took over for the retired Elizabeth Hill, jumped right into the budget deficit fray with his analysis of the Governor's proposal for a special session.  The Legislative Analyst Office (LAO) noted immediately that the revenues in the state are plummeting quickly and will continue to plummet if the Legislature fails to act quickly.  Further, the deficit has become a monumental problem and now equals approximately $28 billion over a 20 month period.
 
The LAO continued with more dire news that there is a bleak outlook for the future.  The LAO is estimating that this budget shortfall could last through the 2013-14 fiscal years, when the state could be facing annual budget shortfalls of $20 billion.  The LAO noted that the governor's plan takes positive steps to solve the state's budget crises.  He believes that the governor's numbers and estimates for the deficit were real numbers and that the governor's solutions did not rely on borrowing.  The LAO praised the governor's long term approach of examining permanent revenues and taking a balanced approach to solving the budget deficit. However, the LAO also urged lawmakers to act early and reach a solution now.  Failure to solve the deficit early will cause the state to make major cuts in the 2009-10 budget year.  In addition, the failure to act early will cause the state to make severe reductions to current services in the 2009-10 budget year.

Analysis of Governor's Proposal
 
The LAO believes that the governor's estimates are reasonable.  California, much like the rest of the nation, is facing a struggling and slowing economy.  This has caused a major reduction in expected revenues.  The state's spending problems are magnified by a reduction in local property taxes for schools because of the housing market crash.  The loss of local property taxes makes schools more reliant on state funding.   The LAO notes that if the governor's proposal is implemented as is and the deficits are solved for the 2008-09 fiscal year and the 2009-10 fiscal year, the state will end the 2009-10 fiscal year with a $168 million reserve.  However, the long term outlook is less rosy.  The governor's proposal cuts the projected ongoing deficit in half, but still leaves a deficit of almost $10 billion a year after the 2010-11 budget years.
 
As regards to Proposition 98 funding, the LAO notes that the Governor proposes a mid-year reduction to K-12 funding of $2.2 billion that comes mostly from base reductions to K-12 revenue limits, through a rescission of the 0.68% COLA, and $132 million captured from child care and other K-12 programs with lower-than-expected expenditures.
 
The LAO notes across a two year period (2008-09 and 2009-10) the governor's proposed cuts to Proposition 98 will equate to a total reduction of $3.2 billion from the funding levels assumed in the 2008 Budget Act that was signed just a month and a half ago.

LAO Alternative Approach
 
The LAO suggested an alternative approach to solve the budget deficit. His alternative approach revolved around several themes.  First, taking action early and saving money in the current year will carry over into the 2009-10 budget year and help mitigate the adverse effects of any necessary reduction for 2009-10.  Acting early will also help mitigate the state's cash flow demands.  Second, any actions by the Legislature such as raising taxes or cutting expenditures will have an adverse effect on the economy.  Since any of the actions could adversely effect the economy, the Legislature should look toward developing a permanent fix to the budget problems.  Finally, the state should push for any federal assistance that may come from a federal stimulus package.
 
Proposition 98
The LAO concedes that making mid-year cuts the magnitude of those proposed by the governor cannot be realistically accommodated by local districts.  Instead, the LAO suggested taking a more modest approach to mid-year cuts.   The LAO's approach would include the following:

• Mid-year cut of $1 billion by:
  • Suspending COLA
  • Sweeping up unexpended resources from programs that had lower than expected usage
  • Suspending several programs including professional development, maintenance and instructional materials

·        Scoring any current year Prop 98 spending that exceeds the calculated guarantee or the "over-appropriation" as "settle-up" dollars

·        Educational Revenue Augmentation Funds (ERAF) Redevelopment Pass-Through Payments-Increase current-year amount by $50 million and make the pass-through requirement permanent. This would offset part of the annual revenue loss K-14 districts experience due to redevelopment.

The LAO urges the Legislature to act now to implement any mid-year cuts because of the magnitude of the cuts and the potential impact on school districts.  Further, the LAO encourages lawmakers to link reduced state funding either to reduced local costs or increased local revenue. He also believes the state should preserve K-12 revenue limits and instead make targeted, transparent cuts by indentifying low priority categorical programs and cutting them directly.
 
Revenue Options
The LAO proposes several options to raise revenues or make additional program reductions or revisions.  Some examples of these are as follows:

• Raise the vehicle license fee (VLF) from 0.65% to 1.00%, the same level as other property taxes; use the revenues to realign state programs
• Consider a smaller one-cent sales tax increase
• Impose a temporary 5% income tax surcharge on all personal income taxpayers

What Does this all mean?
 
This is another proposal for the Legislature to take under advisement and is just the beginning of what will be a long discussion over how to fix another budget crisis.  This Friday the Assembly Budget Committee will have an informational hearing to hear from the LAO and the administration regarding the two proposals for the special session.  With Thanksgiving rapidly approaching and many Legislative members traveling outside of the country, it is unclear whether we will have any action taken during this special session.
 
Also, the LAO will release its regularly scheduled California's Fiscal Outlook publication, which will have further detail regarding LAO projections. We will have an analysis of that publication shortly after it is released.
 
If you have any further questions, please do not hesitate to call or email Adonai Mack at amack@acsa.org.