These Budget Cuts Affect All of Us

February 13, 2009
Sketchy Budget Details Slowly Emerge
The following summary is based on the best available, but very limited,
information on the components
of the budget framework that will be voted on by the Legislature. Much of
this material comes from a
document dated February 9; the details may have changed over the past four
days. As of mid-day Friday,
February 13, votes on a spending plan and related legislation are scheduled
for Saturday in both the
Senate and the Assembly. No documents have been made available to the
public; however, documents
identifying major proposed spending reductions and tax increases have
circulated through Capitol
circles.
The proposed budget framework identifies a total of $41.0 billion in “
solutions” – $26.3 billion to
balance the 2009-10 budget and $14.8 billion to close the gap projected for
the remainder of 2008-09.
The proposed framework includes $14.1 billion in spending reductions, $12.8
billion in new and
increased taxes, and $11.5 billion in new borrowing and various accounting
gimmicks. Additional cuts
totaling $947.7 million and an additional tax increase of $1.6 billion would
be triggered if California
does not receive a specified level of federal funding from the economic
recovery plan pending in
Congress.
Budget documents assume the state will receive $5.0 billion from the sale of
bonds backed by lottery
proceeds in 2009-10. The budget framework assumes voters will approve
changes in the allocation of
lottery proceeds in a measure that would appear in a special election. The
proposed framework also
assumes that the state will raise $6.1 billion from the sale of Revenue
Anticipation Warrants. Finally,
the framework assumes $432.6 million in internal borrowing from several
special funds.
Proposed Cap Could Severely Limit Future Spending
The budget framework includes a new limit on state spending. While details
of the proposed cap have
not been made available to the public, it appears that the cap would limit
the annual growth in state
spending to the average of revenue growth over the prior 10 years. In
essence, this formula would tie
future years’ spending to a level established during what is perhaps the
worst budget crisis in the
state’s history. A preliminary CBP analysis estimates that state General
Fund spending could be limited
to approximately $21 billion below the Governor’s baseline spending level in
2012-13 – a level that
assumes all of the cuts proposed by the Governor as part of the plan he
released on New Year’s Eve to
balance the 2008-09 and 2009-10 budgets. In other words, some $21 billion in
cuts above and beyond
those currently under consideration could be required under the proposed cap.
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Tax Cuts Will Worsen Future Budget Gaps
The budget framework includes three significant tax breaks that together
will reduce future revenues by at least $1
billion per year and potentially significantly more. The first of the
proposed changes would give corporations the
option to choose between two different formulas for determining how much of
their income would be subject to tax
in California. Press reports suggest that this would cost $700 million or
more per year in lost revenues. The second
would create a two-year hiring credit for businesses. Past history suggests
that such credits do not lead to new
employment and that they are subject to considerable abuse. A similar
proposal was dropped from the federal
economic recovery plan in response to concerns over cost and lack of
effectiveness. The third proposal provides $100
million per year for five years for a new tax credit for movie and
television production.
Budget Agreement Would Include Up to $14.4 Billion in New Tax Revenues
The proposed budget agreement would raise up to $14.4 billion in new tax
revenues. These tax provisions would be
in effect for four or five years – reports vary – if voters approve a
proposed limit on state spending, which the
Legislature would put on the ballot as part of the budget package. If voters
reject the cap, the new taxes would be in
effect for two years. Specifically, the proposed agreement:
 Increases the state sales tax rate by 1 percentage point, raising an
estimated $1.203 billion in 2008-09 and
$4.553 billion in 2009-10.
 Increases the Vehicle License Fee (VLF) rate from 0.65 percent to 1.15
percent, raising $202.9 million in 2008-09
and $1.715 billion in 2009-10. A portion of the increased revenues from this
provision would be used to fund
local law enforcement programs.
 Imposes a surtax equal to 2.5 percent of personal income tax liability,
raising an estimated $1.627 billion in
2009-10.
 Reduces the size of the dependent credit claimed by personal income
taxpayers, raising an estimated $1.440
billion in 2009-10.
 Increases the gasoline tax by 12 cents per gallon, raising $250 million in
2008-09 and $1.812 billion in 2009-10.
Budget Documents Identify Up to $15.1 Billion in Spending Cuts
The limited available documentation on the proposed budget agreement
identifies the following major spending
proposals:
 $8.6 billion in cuts to programs covered by the Proposition 98 guarantee –
$5.6 billion in 2008-09 and $3.0 billion
in 2009-10.
 $710.8 million in additional savings attributable to funding the
Proposition 98 guarantee at the minimum level
required in 2008-09 and 2009-10.
 A redirection of state First 5 Commission balances, as well as 50 percent
of additional First 5 state and county
funds, to support children’s programs for state savings of $608.0 million in
2009-10. This fund shift would remain
in effect through 2013-14 and would require voter approval.
 Diversion of funds raised by Proposition 63 of 2004 to support Early and
Periodic Screening, Diagnosis, and
Treatment (EPSDT) programs for state savings of $226.7 million in 2009-10.
Available budget documents suggest
that this fund shift, which would require voter approval, would remain in
effect through 2010-11.
 Avoidance of the pass through – beginning in an as-yet-unspecified month –
of the 2009 federal SSI COLA in the
SSI/SSP Program for state savings of $79.8 million in 2008-09 and $487.3
million in 2009-10. Available budget
documents are not clear whether these savings assume not passing through the
2010 federal SSI COLA as well.
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The proposed budget framework also would suspend the June 2010 state COLA in
the SSI/SSP Program for onemonth
savings of $27.0 million in 2009-10 and annual savings of more than $300
million beginning in 2010-11.
 Suspension of the July 2009 COLA for CalWORKs grants for savings of $79.1
million in 2009-10 and suspension
of funding for the Pay for Performance Program for additional savings of
$40.0 million in 2009-10. This program
was intended to provide additional funding to counties that achieve certain
CalWORKs outcomes; however,
funds have not been provided since the program was created in 2005-06.
 A cut of funding for Regional Center service provider payments and
operations of 3 percent for savings of $24.6
million in 2008-09 and $60.2 million in 2009-10 and a further reduction of
7.1 percent in service provider
payments for additional savings of $100.0 million in 2009-10.
 Suspension of the July 2009 COLA for county operation of the Medi-Cal
Program for savings of $24.7 million in
2009-10.
 Delay of a child-support automation project for savings of $36.1 million
in 2009-10.
 Reductions in support for the University of California, California State
University, and Hastings College of Law
totaling $264.4 million – $132.2 million in 2008-09 and $132.2 million in
2009-10.
 A reduction of $427.6 million in 2009-10 relative to the level of support
for UC and CSU outlined in the Higher
Education Compact.
 A $95.7 million reduction in funding for higher education retirement
contributions in 2009-10.
 A $375.8 million reduction in state employee compensation costs in 2008-09
and $1.024 billion in 2009-10.
 A $6.5 million 2008-09 reduction and a $32.0 million 2009-10 reduction in
funding for property tax assistance for
seniors and blind or disabled Californians available through the Senior
Citizens’ Property Tax Deferral Program.
 Continuation of “one-time” reductions and fund shifts for the judicial
branch for savings of $109.3 million in
2009-10.
 Elimination of cost-of-living adjustments for trial courts and the state
judiciary for savings of $36.7 million in
2009-10.
 Elimination of the price increase for state agencies per the current
projection of 0.4 percent inflation for savings
of $136.0 million in 2009-10.
 A 10 percent reduction in support for the federal-court-appointed receiver’
s inmate medical services budget for
savings of $180.8 million in 2009-10.
 A delay in the implementation of the Guardianship and Conservatorship
Reform Act of 2006 for savings of $17.4
million in 2009-10.
 A redirection of tribal gaming revenues from transportation to the General
Fund for savings of $100.8 million in
each of 2008-09 and 2009-10.
 A suspension of state funding for local transit agencies for five years
for savings of $153.2 million in 2008-09
and $306.4 million in 2009-10.
Additional Cuts and an Additional Tax Increase Would Be Triggered if
California’s Share of Federal Economic Recovery
Funding Does Not Meet a Certain Threshold
Additional cuts totaling $947.7 million and an additional tax increase of
$1.6 billion would be triggered if California
does not receive a specified level of federal funding from the economic
recovery plan pending in Congress. If federal
funding does not meet the threshold, the proposed budget framework would
require the state to:
 Impose an additional 2.5 percent personal income tax surtax. This surtax
would be in addition to the one
included in the proposed package. The additional tax would raise $1.6
billion in 2009-10.
 Reduce SSI/SSP grants by 2.3 percent for a cut of $267.8 million.
Individual recipients would lose $20 per month
and couples would lose $35 per month.
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 Eliminate certain Medi-Cal optional benefits and reduce reimbursement
rates for public hospitals by 10 percent
for savings of $183.6 million.
 Reduce CalWORKs grants by 4 percent for a cut of $146.9 million.
 Cap the state’s contribution toward the wages of In-Home Supportive
Services (IHSS) workers at $9.50 per hour
plus $0.60 for benefits and require some IHSS recipients to pay a larger
share of the cost of the services they
receive for combined savings of $78.0 million.
 Reduce funding for the University of California and the California State
University system by an additional $100
million.
 Cut judicial branch funding by $100 million and reject a proposal to
create new judgeships for additional savings
of $71.4 million.