Special Session Update—November 14, 2008
Despite the large hearing room and gallery seating above, it was hard to find a seat in this morning’s Assembly Budget Committee hearing on the special session proposals. Assembly Budget Chair John Laird (D-Santa Cruz) began by saying that a 10% problem with the Budget had emerged only seven weeks after the 2008-09 Budget had been signed. He suggested that members need to avoid making lines in the sand and taking any pledges—an apparent reference to the many Republican members who’ve signed no new taxes pledges. Laird said there are three critical components that must be addressed:
Vice-Chair Roger Niello (R-Sacramento) concurred with Laird’s message that there’s been a horrendous deterioration of the economy over the last 30-45 days. But Niello said that we should not immediately look at taxes when we haven’t reviewed ineffective programs that should be eliminated. He argued that we should look at inefficiencies, and look at contracting out non-core services. (In fact, his Republican colleague, John Benoit (R-Palm Desert) introduced a special session bill—ABX4 1—on November 12, which would authorize K-14 districts to contract out for any non-instructional service.) California should reform its Budget structure to avoid future feast or famine proposals, according to Niello, who cited the Republicans’ previously rejected spending cap. Niello ended on a consensus note, agreeing that the Legislature should act as quickly as possible.
There were two witnesses on today’s Agenda, the Chief Deputy Finance Director, Budget, with the Department of Finance (DOF), and the state’s new Legislative Analyst (LAO), although other individuals from those offices weighed in on several occasions. As expected, the hearing was dubbed an Overview of the Special Session Budget Proposal, and no public comment was taken. The witnesses provided very brief descriptions of the Governor’s proposals. Most of their testimony was focused on the magnitude of the problem—about $28 billion by June 30, 2010 if the Legislature took no action—which the LAO described as “very serious.” The DOF said the biggest factor in the 2008-09 $11.2 billion revenue loss is the 50% decline in capital gains last year and this year. Even so, the smaller gains represented the seventh largest capital gains increase the state has realized.
What proved to be most interesting were the questions members asked, and the witness’ responses; we’ve summarized some of the more interesting issues and comments below.
Laird asked if the witnesses thought the problem would get worse. DOF said that when they receive updated estimates on costs, the Budget gap number will get worse. Cost items likely to have increased during the revenue downturn include MediCAL, with lost health care due to unemployment, and increased demand on CalWORKs. The state also sees increases in Corrections during economic downturns. Updated cost estimates are due to be provided DOF on December 1. The LAO suggested there might be more downside risk to revenue estimates given the recent course of the economy. He explained that the normal revenue growth trend line is 6% to 7% a year. We don’t have normal growth in revenues, and have a higher structural problem.
The DOF cautioned that the revenue drop has created associated cash challenges. The state normally maintains a monthly cash cushion of $2.5 billion, but will fall below that in December and February, and will have insufficient cash to meet all of its obligations by March if no solution is achieved. The DOF is looking at additional internal funds that might be borrowable. The problem with going out for additional Revenue Anticipation Notes (RANs) is that the market looks at the year end cash balances, and looks at the state having a 2:1 ability to repay the RANs.
The LAO also mentioned that if we don’t have Budget solutions in place, it will be difficult to accelerate the sale of infrastructure bonds as the Governor has proposed to do.
The LAO suggested that Legislators take another look at the Governor’s ill-fated California Performance Review. Early in his term of office, Schwarzenegger had suggested a need to “blow up the boxes” and had a commission of reassigned state employees put together numerous proposals to reform state government. Many of the proposals were controversial, and almost none were implemented. DOF also suggested it is a good time to look at how we do business.
If the voters do not approve the Lottery securitization proposal, under which Wall Street would front the state $5 billion in 2009-10, Legislators will have to come up with an additional $5 billion in solutions in the Budget year.
Assembly Member Swanson asked what California’s recovery strategy is. He asked, “Why reduce spending as a priority expenditure to schools, community colleges, and state universities?” The DOF cited the handful of proposals the Governor has made regarding things like meal and rest breaks, or flexible scheduling; neither of those would have a direct General Fund impact however.
Members clearly want to be strategic about cuts, and evaluate proposed cuts that leave federal matching dollars on the table. Members also want more information about how quickly particular cuts could be implemented.
Republican members want education to be locally controlled, and complained that there was nothing in the Governor’s proposal about consolidating categorical funding. The LAO responded that their solution would suspend or eliminate many categoricals, but they have not provided a full list of their suggestions. They will distribute a more comprehensive list November 20.
The bad news about the magnitude of the problem was dwarfed however by the witness’ projections that economic recovery will be slow. Many of the financial systems’ problems are structural, the housing problems are deep, and consumer confidence is extremely low.
The LAO will be speaking about the public employee retirement systems’ pension portfolios when it releases its fiscal outlook next week, and cautioned that cost pressures in the out years will make that situation worse.
Procedurally, it appears that no further Assembly Budget hearings will be scheduled until after the Big 6 has reached agreement. The Big 6 plans to meet again Monday, along with their staff. Stay tuned . . .
—Deborah Harmon