6-8-07 Budget Woes Continue to Plague Governor

Volume 20 For Publication Date: June 8, 2007 No. 13

Budget Woes Continue to Plague Governor

It was just one day after release of the Governor’s May Revision that the $364 million error in funding for K-12 programs was discovered, leading to the elimination or reduction of many of the Governor’s education programs for the new fiscal year. Now, a significant shortfall in state tax receipts below the level of the May Revision forecast adds another challenge to reaching agreement for the 2007-08 spending plan for California.

According to a letter from the Department of Finance to legislative leaders, state tax revenues fell below their projected forecast by $764 million for the current fiscal year. Unexpected state tax refunds totaling $160 million contributed to this shortfall, as did a reduction of $377 million in income tax payments. This report, combined with a shortfall of $227 million in general tax revenues, results in a $764 million reduction in the state’s ending balance, making the work of the Budget Conference Committee that much more difficult as it looks for places to cut spending in hopes of aligning revenues with expenditures.

The Governor is using this shortfall to ratchet up the pressure on the Legislature to adopt many of the cuts and cost-savings proposals he recommended in his January and May versions of the Budget.

According to one news report, the chair of the Budget Conference Committee, Assembly Member John Laird (D-Santa Cruz) has expressed some concern regarding the late notice of this development. Specifically, he wants to know when the Governor was aware of the shortfall, since his Administration recently authorized a $1 billion early repayment of the Proposition 57 bonds.

At this time, it is too early to tell how this new development will affect the state’s General Fund and K-14 appropriations under Proposition 98. Some analysts are speculating that the shortfall is more about the timing of payments, and, with that, revenues will recover in future months.

But a revenue shortfall for the state could result in a reduction to Proposition 98 funding. Much of the one-time funding for K-14 education included in current budget plans was based on the Administration’s projected increase in state tax revenues in 2006-07 that triggered a required increase in Proposition 98 funding for the current year. The lower actual tax receipts in 2006-07 means that that the Proposition 98 minimum funding level will be lower for 2006-07, making some of those additional appropriations discretionary, not mandatory.

At this time, we are not expecting any changes to the total level of Proposition 98 funding included in the 2007-08 State Budget—including appropriations from one-time funds. But the Legislature now has this added issue of lower state tax revenues to consider—or ignore—in finalizing the Budget it sends to the Governor.

And it’s now June 8, 2007, and the constitutional deadline for the Legislature to send the Budget on to the Governor is only seven days away.

—Dave Heckler and Paul Goldfinger