California Chaos - Phase 2 - Another Day Older and Deeper in Debt
Summer is in full-swing and not much has changed with our State's finances. Or has it? As of midnight, June 30th, the end of the State's fiscal year, we had failed to balance our ''unbalanced budget'' and reduce our ''expenses'' to meet the declining revenues. Recall the country western tune as we enter Phase 2.
Still ''talking'' the Governor and Legislature are grappling with a growing budget deficit. Understand, the $24-26+ Billion number is where we will be in the future IF we continue to spend at the 2/09 budgeted levels. Therefore, as long as we keep spending at previously projected revenue levels, we will dig deeper and deeper into debt.
We must take action soon, as we are out of cash, our state's credit rating has declined from A- to BBB, and we are issuing IOU's, which are costing you, the taxpayers more in debt expense. And, because personal income tax, our primary source of revenue, continues to decline, rest assured, we will be back again in less than 6 months reassessing our situation and making more revisions.
We in the State Assembly tried to move a piece of the puzzle forward on June 25th. We agreed almost unanimously (Republicans and Democrats) to pass a few measures, one that would have saved us $3 billion immediately, and potential savings in future years. When facing a huge deficit and a decrease in revenues (taxes) we thought it was wise to vote ''yes'' to realigning our Education funding, as we may legally do. No one wants to reduce Education funding, but Education received over $6B in federal stimulus dollars for the year ended June 30, 2009, so backfill dollars were available.
However, ''all or nothing'' won the day as the Governor and Senate held firm on resolving the entire budget issue. Their position is understandable, as we must agree to reduce spending in many other areas and should implement reforms to soften the blow. Unfortunately, now we may be asked to ''Suspend'' the Proposition 98 Guarantee, which is a tad more difficult politically and could be more expensive.
What is Prop 98? Proposition 98, the complex Education initiative voters passed to protect education, is key in all budget decisions. First, it mandates that 40% of all General Fund revenues must be directed to K-14 Education. There are 3 tests, but simply stated the ''Guarantee'' is set with the budget each year based on ''projected revenues.'' (The Legislature usually allocates more that the guarantee each year.) The guarantee may be adjusted at certain intervals when and if ''actual revenues'' fall below projections, such as what happened this year. We had until June 30th to realign the projected level to the actual revenue level.
Here's the catch - Because we did not reduce the base in 2008-09, this year's (2009-10) funding level begins at a higher base. Additionally, if we ''Suspend'' the Proposition 98 guarantee, we will need to pay it back in future years. The extra funding could mean that we may need to reduce spending in other categories such as public safety, health and human services, and college education by a larger amount, and/or borrow more just to balance the ''unbalanced budget'' we put in place for 18 months in February 2009.
The good news is the Governor and finally ''both sides of the aisle'' seem to be unwilling to raise taxes, but fees may be another matter. Recall, 2/3 majority of the legislature raised taxes in February, and we are still taking in less dollars. That's no way to balance a budget!
So, we expect to be hearing and seeing protests, as well-funded special interest groups amass their troops. There are no easy choices and we must reduce spending, just as you have had to do personally and in your cities and counties. The reduction number hovers around 15%+ of what we projected for 2008-09. Serious negotiations are underway at the Big 5 level, so keep your fingers crossed for an action report by the end of this week.