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Budget Watch

Three Contending Budget Plans . . . Still No Solution

By Nate Rose and Jeff Hudson - June 24, 2010

As the Capitol approaches the start of the new fiscal year, the Democratic leadership faces not only a challenge from the Republicans but also from within their own party.

Since Governor Schwarzenegger released his “May Revise” budget, both the Senate Democrats and Assembly Democrats have released their own separate plans for dealing with the budget shortfall of around $19 billion.  Meanwhile, there has been little indication that the Budget Conference Committee will be able to piece together a budget from these three distinct plans any time soon.

The Governor’s “May Revise” focuses upon program cuts and establishing a rainy-day fund.  As a means to establish a rainy-day fund for the state, Governor Schwarzenegger has proposed securitizing future California lottery revenues to produce $5 billion in funding.  Seeking to balance the $19.1 billion budget deficit, the plan places its main focus upon program cuts, which add up to $12.4 billion in savings.  Most notable among these cuts is the elimination of childcare (excluding preschool) for a savings of $1.5 billion, the elimination of CalWORKS for a savings of $1.2 billion, and the readjustment of Proposition 98 funding to education for a cut worth $1.54 billion.  Interestingly enough, the Governor has retreated from his January proposal to tie the delay of corporate tax cuts worth $2.5 billion to the state receiving approximately $7 billion in expected federal funding (the state is receiving half of the Governor’s expected amount). 

Last Friday, Assembly Speaker John A. Pérez (D-Los Angeles) and members of The Education Coalition rolled out the Assembly Democrats response to the Governor’s May Revise. At the heart of the Assembly Democrat’s plan – dubbed the “The California Jobs Budget” – is the proposed borrowing of $10 billion in revenue against taxes on future oil production.  As a part of this securitization, the Assembly Democrats would use the revenues generated from the Bottles and Beverage fund as collateral.  Nevertheless, Treasurer Bill Lockyer has said that he will be unable to sell these types of bonds to Wall Street without legal backing from the Attorney General’s office. 
The Attorney General and gubernatorial candidate Jerry Brown recently issued an opinion stating that securitizing such funds would be a violation of Proposition 58.  Passed in 2004, Prop. 58 prohibits using a one-time solution to pay for ongoing programs.

In light of the concerns expressed by the Attorney General and Treasurer, the Speaker has quietly reduced the scope of his bond proposal down from almost $10 billion to $4 billion.

Then on Monday, Senate Pro Tem Darrell Steinberg (D-Sacramento) and the Senate Democrats put forward their own plan. Their plan focuses on taxes and structural realignment.  The Senate’s plan would extend various temporary tax hikes while delaying the start of new corporate tax breaks.

Senator Steinberg’s plan also includes a dramatic realignment of state and local government responsibilities for various social services.  By realigning state and local government responsibilities, the state would save $3 or $4 billion.

Specifically, the Steinberg plan calls for the state to shift juvenile parole services for low-level inmate security to counties, and increase local government’s role in implementing CalWORKS grant programs, which provide work-to-welfare assistance and child care programs. 
In fiscal terms, local government would see their CalWORKS costs increase from 2.5% of the total program to 25%.  Counties would receive additional – albeit, not enough - revenue from an oil severance tax to pay for the costs of these additional responsibilities.

After Steinberg and the Senate Democrats put forward their own plan, Assembly Speaker Pérez did his best to sound conciliatory, saying “This has been the most open and deliberative budget process in recent memory, and the two plans put forward by the Assembly and Senate reflect the values and priorities of Californians by closing our deficit without ruining the recovery. I am looking forward to working with the Senate to produce a final budget proposal that saves and creates 465,000 jobs and addresses our long-term structural problems.”

While the Assembly’s plan faces a potential legal battle, the Senate’s plan will have to contend with obtaining the necessary Republican votes to increase taxes — a bartering chip which Republicans claim is off the table.  Besides the challenges facing each plan, both the Assembly plan and the Senate plan would delay the corporate tax breaks Governor Schwarzenegger now seems intent upon protecting, as well as impose an oil severance tax.  Although both Democratic plans share these tax increases, the Senate Democrats would use the oil severance tax revenue to help pay for its suggested local and state government realignment.

At the end of the day, the people of California (and their elected representatives) seem to be left to choose from three different plans which provide no easy answers: devastating cuts, increased debts, or increased taxes.

Stay tuned, it’s shaping up to be a long, hot summer.

Editor's Note:   Nate Rose is a UC San Diego Legislative Intern for Governmental Solutions Group, LLC, and Jeff Hudson is the editor of EdBrief and an award-winning education reporter and writer in print, radio and television media.