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Budget Conference Committee
Begins with a Thud
By Paul McIntosh, Executive Director
pmcintosh@counties.org
Three significant events late this week helped to focus on how difficult this year’s budget will be, especially for those who rely on state funds. On Thursday, the Legislative Analyst’s Office (LAO) released its analysis of the Governor’s pre-election May Budget Revision, making several stunning recommendations for balancing the budget. Later that day, the Budget Conference Committee met for the first time to review the general budget situation, where the Department of Finance announced their own list of startling proposals. Today (Friday), the Conference Committee heard several presentations about the state’s cash condition.
None of the news was good, and the three events combined with Tuesday’s election.
Capitol observers have wrung their hands almost every summer for nearly a decade, worrying about how difficult the budget debate would be, and opining that “this time” the state’s leaders would truly have to reconcile revenues and expenditures without too many gimmicks. “This time,” however, unlike before, when the Governor’s representative proposes closing state parks, releasing thousands of prisoners, and eliminating the CalWORKs program, no one is suggesting that she is doing so only to “rattle some cages.”
Except that the state’s position is now so strained that there might not be enough discretion in the budget to avoid short-term solutions that negatively affect the out-years. And the cuts to state programs now proposed are so significant that some of these options or others like them will merit serious consideration among legislators eager for any way forward. These choices include borrowing under the provisions of Propositions 1A or 42, as the LAO has proposed; delaying 12% of funds the state pays local schools from June 2009 to July 2009, as the Governor has proposed; or selling off the profitable parts of SCIFs book of business, another proposal from the Governor. (The Legislature established SCIF in 1914 as the state’s workers’ compensation insurer of last resort.)
Both the LAO and the Department of Finance (DOF) now agree that the state should not issue a multi-billion dollar RAW (revenue anticipation warrant) in the coming fiscal year, as the Governor proposed just a week ago, for reasons of fiscal prudence and constitutionality. Unfortunately, dropping that proposal requires an additional $5.5 billion in “solutions.” Given the dire cash situation, those solutions must be in place at least by the beginning of the new fiscal year, at which time many options either disappear and at which time the state’s cash cushion erodes significantly.
Many of the LAO’s recommendations are outlined in their respective subject areas elsewhere in this Legislative Bulletin, but a few general findings follow here. First, the LAO believes the deficit is about $3 billion higher than the Governor’s estimate of $21 billion. They also find that even if the Legislature adopted all of the Governor’s recommendations – which at the time included the RAW – the state would still face a $15 billion deficit in 2010-11 and bigger ones in the three following years. They also question the legality or wisdom of other of the Governor’s proposals, including the $750 million in Medi-Cal cuts that would require federal waivers. Most importantly, they stress the need for prompt action. This is a time, they say, for the Legislature to truly examine their long-term priorities, and cut or altogether eliminate lower-priority programs.
On Thursday, they heard testimony from DOF Chief Deputy Director of the Budget Ana Matosantos and Legislative Analyst MacTaylor.
Matosantos quickly outlined some of the new cut proposals the Governor’s staff is working to fill the newest portion of the multi-billion dollar projected deficit. In doing so, they are attempting to be sensitive to legislators’ concerns about relinquishing federal funds. The cuts are startling, and include:
· Eliminating CalWORKs.
· Eliminating Healthy Families.
· Decreasing child welfare services funding by $60 million.
· Decreasing funding for mental health managed care.
· Using $750 million of local transportation funding for debt service.
· Decreasing funding for the state prison system by $750 million by releasing prisoners and scaling back rehabilitation programs.
· Decreasing funding for courts and by 10%.
· Eliminating Cal Grants for higher education.
· Eliminating all General Fund support of state parks.
· Decreasing UC/CSU funding from the General Fund by $600 million.
· Saving $210 million in borrowing costs.
The Administration is expected to present its additional cuts to the Conference Committee on Tuesday, May 26. This presentation is anticipated to include additional information about the scope and magnitude of the proposals.
Several people, including State Treasurer Bill Lockyer, have spoken in terms of “resetting” the state’s government and building it more intelligently from now on. He made that comment as part of his testimony before the Budget Conference Committee today.
At that hearing, both he and State Controller John Chiang drove home the point that the state has essentially no cash and no prospects for more. The state has not had a positive cash balance since July 12, 2007. Since that time, the General Fund has relied on internally borrowed money from special funds, which it now owes $20 billion “upon demand.” California, as Controller Chiang pointed out, is one firestorm or earthquake away from complete fiscal meltdown. It also means that, while the budget deficit stands at $20-25 billion, the state’s cash deficit is about $40 billion. He also contextualized the current situation for the Committee by saying that the budget year’s cash flow problem appears to be four times worse than February’s problem could have been.
Treasurer Lockyer listed for committee members and the many other legislators present in the audience, elements of California’s budgets that make investors nervous, including:
· Deficit financing.
· The growing size of state Revenue Anticipation Notes (RANs).
· Reliance on non-recurring revenues.
· Continual impasse.
· Extensive internal borrowing.
Because of these and other issues, he reported that California would have difficulty in borrowing even $10 billion in the short-term market, much less the more-than-$20 billion that the LAO suggests would be necessary if the Legislature fails to act by the end of the fiscal year.
The Budget Conference Committee’s schedule remains aggressive, and they have scheduled hearings Tuesday, Wednesday, and Thursday next week (May 26-28). Counties should brace themselves for serious discussion of further disquieting proposals in the coming days and weeks as the extent of California’s budget woes are further revealed.
PRINTER-FRIENDLY VERSION
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