2-2-07 Governor's Budget Proposal Takes Two Hits

Volume 20 For Publication Date: February 2, 2007 No. 3

Governor’s Budget Proposal Takes Two Hits

Just two weeks after the Governor’s Budget Proposal for 2007-08 was issued, two negative factors have emerged that portend things will be worse than the Governor projected.

The first hit on the Governor’s Budget came on Friday, January 19, 2007, when an arbitrator ruled that the state miscalculated wages and benefits for corrections employees. This decision will require the state to spend $200 million for back pay and benefits, plus another $80 million in 2006-07 and $160 million in 2007-08—a total of $440 million. This ruling affects about 30,000 prison guards, probation officers, and other correctional employees. The Department of Finance reported that, to pay for the $200 million in retroactive salaries and benefits, the state will spend down its reserve by $154 million, and the other $46 million will come from unspecified cuts among all state agencies.

Second, Legislative Analyst Liz Hill reported on Wednesday, January 24, that state personal income tax payments came in about $1 billion below budget estimates since December. This loss in personal income tax revenues was offset somewhat by corporate tax payments, which were $350 million above estimates.

In the its January 12 review of the Governor’s Budget Proposal, the Legislative Analyst’s Office (LAO) cited the state’s fourth quarter personal income tax payments, due on January 16, as being a key indicator of the direction of state tax collections. While the real test of the strength of state tax revenues will be the actual April tax payments, the shortfall in fourth quarter personal income tax payments bodes poorly for the state.

The LAO’s January 12 report also cited risks to the state from pending court cases. It is interesting to note that the LAO cited two current legal issues—one concerning CalWORKs grants and the other regarding pension obligation bonds—both of which would put more than a half-billion dollar dent in the Governor’s Budget Proposal if the state lost its appeals of lower court decisions. But the issue of the correctional officers’ salary and benefits is one further risk to the Governor’s Budget above and beyond those cited by the LAO.

Please note that the arbitrator’s decision results in higher costs for the non-Proposition 98 side of the State Budget, and so has no direct impact on schools. But lower state tax revenues could have a negative impact on Proposition 98 funding, depending on the level of actual tax receipts in both 2006-07 and in 2007-08.

—Paul Goldfinger