Tuesday, July 21, 2009

"The best we can do" budget - more details

First, the big news. Five important Californian's have agreed on a compromised compromise budget for the fiscal year July 2009 - June 2010 that closes the estimated (in May) $26.3 billion gap between revenues and expenditures - the Governor plus the four leaders of the Senate and Assembly Democrats and Republicans.

On the other hand, while the Governor's "vote" is his alone, the other four have to sell the budget to enough of their peers in each house to get it passed. They are going to have to sell it as "the best we can do" because every major interest group is going to bleed some.

I called it a "compromised" compromise budget, that is because it isn't balanced for 2009-10 and doesn't even begin to deal with the reality of the 2010-11 deficit, as less than half of the changes constitute sustainable spending cuts. Thus while these leaders have reached a "compromise", meaning "a settlement of differences by mutual concessions," the settlement is "compromised" meaning the settlement is "impaired, unable to function" because the budget is known to be out of balance.

Let's face it. It is an interim budget. If adopted it could permit State Controller John Chiang to stop issuing Registered Warrants (or IOU's as they are called by the press) in payment of obligations to vendors, local governments, and even employees (expense reimbursements) in lieu of actual money. It could further permit Chiang to actually redeem the several billion dollars in Registered Warrants he has already issued.

But this will only work if "Wall Street" accepts the budget as a basis for buying State revenue anticipation notes. "Wall Street" will have to be willing to ignore the truth. The difference between the agreed budgeted expenditures and what are now expected revenues is at least $10 billion. For instead of a $26.3 billion gap, as I indicated last Friday the budget was likely is out of balance by at least $34 billion and as I indicated yesterday the National Conference of State Legislatures reports that the deficit is actually $38.9 billion and growing.

If there is any truth to these numbers, by sometime between December and March, State Controller Chiang again will be issuing Registered Warrants.

A clearer picture is forming of what's in the compromise.

Schools. New cuts total $6 billion for K-14 on top of the $1.5 billion cut in 2007-08 and an added retroactive $1.6 billion cut for 2008-09. A total repayment of $9.8 billion has been promised at some future date when the economy rebounds, perhaps beginning in 2012. Higher education budget cuts total $3 billion. The deal allows school districts to reduce the school year by five days.

School districts are attempting to find out what this means in terms of detailed numbers. The Los Angeles Times reported today regarding the Los Angeles Unified School District, the nation's second largest school system of 688,000 students:

Pollard-Terry said the school system of 688,000 students thought it had made sufficient — and painful — cuts to get through the next school year. But some conflicting media reports have put the size of the education reductions at levels that could require another round of tough budgeting decisions, she said. And getting a clear answer from officials in Sacramento has been difficult.

Budget actions in L.A. Unified have slashed about $1.29 billion starting with the 2008-09 school year, which ended June 30. On that date, the district laid off about 2,000 teachers; it has since been trying to determine which non-teachers to lay off and how many. The district's general fund, before the wave of cuts, was about $5.9 billion.

The district also is engaged in intense negotiations with its teachers union over compensation concessions that would, if successful, result in hiring back some laid-off teachers. District officials also have talked of placing a parcel tax on the ballot to fund ongoing operations. Until now, the district has asked voters only to approve school-construction bonds, which have to be reserved for building, repairing and upgrading school facilities.

The district’s budget plan, which includes many future reductions, was supposed to take the district through June 2012.

The State's two university systems already have staff, including professors, on mandatory furlough schedules. The California State University system has stopped taking new student applications for mid-year enrollment. Fees and tuition have already been increased.

While the smaller of the state's two major teachers unions, the California Federation of Teachers is urging legislators to vote against the compromise, the 340,000 member California Teachers Association President David Sanchez is supporting the compromise according to the LA Times:

Sanchez and his union had been particularly concerned about an earlier proposal by Gov. Arnold Schwarzenegger to suspend Proposition 98, which guarantees base levels of funding for education. And he was relieved that the budget deal includes a payback of some lost revenue to education.

The settlement “protects the state’s minimum school funding law and restores much needed funds to education once the economy improves,” Sanchez said. “California educators are calling on both houses of the Legislature and the governor to quickly approve the budget plan.”

Local Government. The actual impact on cities, counties and special districts is probably in the neighborhood of $4.7 billion. About $1 billion in gas tax revenues, $1.9 billion in municipal funds (mostly from counties), and at least $1.7 billion in redevelopment agency money will be shifted. It appears that some may be "borrowed" as indicated in yesterday's post, but the details are fuzzy. Discussions apparently included certain exemptions from the shift for small cities and counties.

The shifting of redevelopment tax increment funds could be extended into future years.

According to the San Francisco Chronicle, Paul McIntosh, executive director of the California State Association of Counties, said the plan to take money from counties would be devastating and called it "one of the largest takes of local government monies ever in the state." The LA Times reporteds that the Los Angeles County Board of Supervisors today voted to sue the state.

The Times also reported that the City of Los Angeles likely will join statewide lawsuits to block the taking of redevelopment and gat tax funds. Chris McKenzie, Executive Director of the League of California Cities called the budget proposal a "Ponzi Scheme" and stated: "We have assured state officials we will see them in court the day after a budget is signed if it contains illegal provisions." Judith Mitchell, Mayor of Rolling Hills Estates and President of the League stated:

While some at the state level will try to pass this proposed state budget off as a major breakthrough, city leaders know it only passes the buck and the problem to the future. As an elected official who took an oath to protect and defend the state constitution, I am embarrassed that any state officials would propose a blatantly unconstitutional budget that promises to fail within weeks of its adoption.

Lawsuits would, of course, put the $4.7 billion in doubt. It is unclear if that would affect the State's ability to issue Revenue Anticipation Notes.

Health and Welfare. Dealing the health and welfare programs was a difficult task. The primary problem was not to take action that would result in the loss of federal funds. Still, the budget agreement offers $850 million in cuts to In-Home Supportive Services, CalWorks, and Healthy Families which means many seniors and children will lose access to health care while the safety net for families in a major recession would become out of reach for many.

That part of the budget deal is confusing and odd, and has future elements. For instance, apparently there was an agreement to look at a proposal to centralize enrollment possibly using a private contractor even though other states have experienced higher costs and operational problems. Republican leaders are assuring their members that increased sanctions to enforce welfare recipients into work will take effect in July 2011 including more interviews as well as benefit reductions. And In-Home Supportive Services providers and recipients would be fingerprinted to facilitate new background checks, though the deal would exempt amputees with no hands from the fingerprint requirement.

Apparently $1.3 billion is to be saved in the Medi-Cal system.

Prison System. Supposedly $1.2 million will be cut from prison system spending, but no information on how that will be accomplished. Law enforcement groups say that could only be accomplished by allowing the early release of up to 20,000 prisoners. But reports indicate that would not be part of the deal.

Gimmicks. About $1.2 billion will come from changing the date on the June 2010 payroll checks to July 1.

While taxes are not increasing, withholding will go up 10% beginning January 2010 as will quarterly estimates. This will not generate any new tax revenue, but result in some increase in collections from January through June. However, lower than normal revenues in 2010-11 will make up for it when those who didn't opt out receive a large refund in April 2011. It is unclear how much revenue will be shifted into 2009-10 as one can opt out of the increased withholding and income tax revenue has already dropped faster than projected in May.

The deal includes the sale and leaseback of 17 state office buildings and the Orange County Fairgrounds, but did not allow the sale of CalExpo or San Quentin Prison as proposed by the Governor.

An effort would be made to sell of part of the State Compensation Insurance Fund which would supposedly generate $1 billion. But complications with that idea may delay that a year.

State Employee Furloughs. The Governor has already ordered many employees to take three unpaid furlough days per month, reducing their salaries by about 15% and saving $1.3 billion. The budget deal effectively institutionalizes that practice which likely will be carried in to 2011-12.

Other Items. Only a few state parks will be closed rather than the 220 the Governor indicated in May. And those will be offered to local and federal governments and others to keep them open.

The High School Exit Exam will not be suspended except for special education students.

The Integrated Waste Management Board will be eliminated saving six figure paychecks to political appointees but staff would operate as elements of other departments.

The Board of Geologists and Geophysicists would be eliminated.

HIV/AIDS programs would lose some, but not all, funding.

The Bureau of Narcotics Enforcement task forces are cut as are National Guard educational benefits.

Then there is the Santa Barbara coast oil lease mentioned yesterday. Apparently it will bring in $100 million. No mention is made of an oil separation tax.

"But what about" items

As pointed out in previous posts, the State's Unemployment Insurance Fund will be billions in debt by the time repayment has to be made beginning in September 2010.

And then there's this article in today's Los Angeles Times:

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

...The tremendous drop in value is expected to have a direct effect on the amount of money that the state and about 2,000 local governments and school districts must contribute in coming years to pay for pensions and healthcare for 1.6 million government workers, retirees and their families.

As income from the pension investments fall, the governments would have to make up the difference to meet the state's pension obligations.

This isn't a "smoke and mirrors" budget proposal. It is a "put on the blinders and vote" proposal for the Legislature.

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