California's budget deal, coming 100 days after the protracted budget negotiations began, is anything but cause for celebration. True, the state will be able to start issuing debt, which is needed to pay for a myriad of things, such as public works projects. Localities will also get some much anticipated state funds. However, the legislature closed the state's $19 billion budget gap with unduly optimistic predictions and accounting gimmicks.
Now, on to the rosy predictions contained in the budget deal:
First, California has balanced its budget in part based on the assumption that the state will get $5.4 billion in federal funds. The problem is that the federal government has indicated that it will give something closer to $1.3 billion.
So there is about $4 billion that we can fairly safely assume the state will be short next year.
Second, the budget assumes that California will have higher than expected tax receipts. Why? A cynic would say because the state needs to balance the budget, and utilizing unreasonably optimistic predictions is the way to do it.
Next, where will be remainder of the revenue come from?
The state expects to receive $1.2 billion in revenue from the delay of a corporate tax break. California is also getting approximately $2-3 billion from a transfer of state funds, which the state will eventually have to be paid back. So there is another few billion that the state will have to pay back in the future.
We're now up to $7 billion that the state will have to pay off in the near future.
Next, on deck, the spending cuts:
Forty percent of the $19 billion budget gap is made up in spending cuts. These cuts include: (1) a roll back of benefits to state workers, including a higher retirement age and a requirement for larger employee contributions to pension programs; (2) reductions in medical care to inmates; (3) reductions in pay to state in-home care workers; and (4) a reduction of approximately $3 billion in funding to schools, funding which is in fact voter mandated, and will have to be paid back in the future.
If you're still counting, we've now tallied approximately $10 billion that the state will have to pay back in the coming year or years.
The voters should tell their public officials that the time for accounting gimmicks and unrealistic expectations is gone. California just "closed its budget gap" by employing rosy predictions and accounting gimmicks, which actually demonstrate that the state is in the red to the tune of $10 billion.
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California Debt Triples Under Schwarzenegger
By Louis Freedberg
Despite Gov. Arnold Schwarzenegger's promises to reduce California's indebtedness, the state's debt has nearly tripled during the seven years he has been governor.
Today is the seventh anniversary of the 2003 recall election, so it is an appropriate time to review how
a central pledge in his unlikely race for governor has turned out.
As of July 1, 2003, California had a total of $27.6 billion in general obligation bonds and a total of $23.2 billion in authorized but unissued bonds, according to then-state Treasurer Phil Angelides'
2003 "debt affordability" report [PDF].
But the
latest report [PDF] from current state Treasurer Bill Lockyer says the state now has $77.8 billion in outstanding general obligation bonds - nearly triple the amount of seven years ago - and an additional $42.8 in authorized but unissued bonds.
General obligation bonds must be paid from revenues coming from the state's general fund, meaning that debt payments reduce funds
In fact, along with its overall debt burden, California's debt payments have tripled, from $1.8 billion paid in the fiscal year ending June 30, 2004, to a staggering $5.5 billion in the current fiscal year ending June 30, 2011.
At his first in-depth press conference on his economic plan for California during the recall campaign, with former Secretary of State George Schultz and multibillionaire investor Warren Buffett at his side, Schwarzenegger declared:
Needless to say, the elephant in the room in California's economy is the irresponsible operating deficit and the massive debt that this government has allowed California to incur.
After his election, he promised to "cut up the state's credit card," even brandishing giant-sized scissors as a prop to make his point.
But two of Schwarzenegger's first actions - rolling back the vehicle license fee at a cost to the state of billions of dollars, and getting voter approval through Proposition 57 of a $15 billion Economic Recovery Bond - compounded California's indebtedness problems.
In a stinging message at the time, Angelides argued vociferously against Schwarzenegger's plan to float an "Economic Recovery Bond" to help reduce the deficit he inherited, in effect paying for operating costs with borrowed money.
The nearly $18 billion in borrowings - internal loans and bonds - used to balance the 2003-04 budget and close the fiscal year 2002-03 operating deficit constitutes the largest borrowing package of its kind in state history, and seriously threatens our ability to restore the fiscal integrity so vital to our State's sustained economic success in the 21st Century.
Angelides went on to say:
The path chosen - to authorize an unprecedented amount of bonds to close the budget deficit - is not one that I view as fiscally responsible.
H.D. Palmer, a Department of Finance spokesman, said that at the time Schwarzenegger had no choice but to seek outside financing. "The state was staring at the specter of having no ability to pay $14 billion in short-term borrowing that was coming due that spring," he said. "Prop. 57 saved the state from going off the cliff."
He also said that as Schwarzenegger promised, the state has not sought external financing to help close its operating deficit.
Jean Ross, executive director of the California Budget Project, said that there is good debt and bad debt. Good debt, for example, might be bonds floated at very low interest rates to build schools, which school districts end up owning once they are paid off.
But she said California made a strategic error by borrowing money during the economic recovery between 2002 and 2006. "That was when the state should have grabbed the bull by the horns and balanced its budget," she said. "Other states did it largely through tax increases, but we borrowed money instead. And now we have to pay it back."
By borrowing so heavily when the economy was strong, she said, California had maxed out on its credit limit. She said the amount California is paying in debt repayments is about equivalent to what the state is cutting from its schools.
Today Angelides is heading up the Financial Crisis Inquiry Commission, examining the root causes of the nation's - and California's - economic meltdown. He has emerged
as one of the toughest critics of corporate and government leaders behind the meltdown.
Meanwhile, the elephant is still in the room. Seven years on, Schwarzenegger is in his final months as governor, facing basement-level approval ratings and the certainty of leaving office with California more deeply in debt and with outsize repayment costs for years to come.
Joe DeAnda, a spokesman for Lockyer, said "there should be no concern about the state's ability to pay its bondholders." Rather, he said, Lockyer's concerns are about the impact of borrowing on programs and services in the state.
The Department of Finance's Palmer said that it is fitting that on the anniversary of the recall election, the Legislature is likely to approve two reforms that Schwarzenegger has long sought - increasing its rainy day fund and limiting public employee pensions - which if they had been in place earlier would have made coping with California's economic downturn more manageable. And perhaps allowed it to borrow less money.
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California Budget Relies On Large Dose Of 'Creative Accounting'
SACRAMENTO, Calif. — California lawmakers got their first look Wednesday at a proposal that attempts to end the state's record-long budget impasse and close a $19 billion deficit, primarily through targeted spending cuts and a large dose of creative accounting.
The deal, reached late last week between Gov. Arnold Schwarzenegger and the four Republican and Democratic leaders of the Assembly and Senate, does not contain new taxes or fees. Instead, it relies on a series of assumptions and accounting maneuvers that in all likelihood will punt many of this year's budget problems to the next governor.
It also includes a plan to create a stronger rainy day fund and some pension reforms, both demanded by Schwarzenegger as a condition for his signing any budget bill.
The agreement targets new state employees by rolling back lucrative pension benefits granted 11 years ago and would end a practice in which government workers could boost their pensions by getting raises during their final year of service. The pension rollback would not apply to current employees.
"We always said that there were no good (budget) solutions left, which is why the governor was so adamant about getting the reforms necessary to fix our system," said Schwarzenegger spokesman Aaron McLear. He said the cuts and reforms "will absolutely help future leaders of this state govern more efficiently."
A joint Senate and Assembly budget committee heard testimony from the state's tax collectors and Department of Finance during a brief hearing Wednesday. The committee's chairwoman, Sen. Denise Ducheny, D-San Diego, said much of the budget's technical language was still being written before budget votes scheduled for Thursday in the full Senate and Assembly.
Wednesday's meeting gave the first public airing – however brief – of the agreement reached between the Republican governor and top lawmakers. It is filled with assumptions that may underestimate actual income.
For example, it counts on the state receiving $5.3 billion from the federal government, nearly $2 billion more than Schwarzenegger projected in May. Schwarzenegger and the legislative leaders also assume an economic recovery in California that would be robust enough to send $1.4 billion in additional tax revenue to state coffers.
The deal also would delay nearly $2 billion in payments to K-12 schools and community colleges until the next fiscal year.
Senate President Pro Tem Darrell Steinberg, D-Sacramento, acknowledged last week that the budget negotiators had little choice but to engage in what he called "creative" accounting to reach a deal. That's because Republicans refused anything that could be interpreted as a tax or fee increase, while Democrats were unwilling to cut more than $7.5 billion in spending.
To patch last year's budget gap, the Legislature and Schwarzenegger agreed to temporary increases in the vehicle license fee and sales and income taxes. Voters rejected a proposal to extend those taxes during a May 2009 special election, leading Schwarzenegger to say he would not agree to higher taxes this year.
The assumptions used to reduce the $19 billion deficit in the current plan mean Schwarzenegger is leaving the budget mess to his successor, either Democrat Jerry Brown or Republican Meg Whitman, said Fred Silva, who spent 20 years working on budget issues in the state Senate.
He said the next governor likely will have to redo this year's budget even as he or she proposes a spending plan for the next fiscal year. The amount set aside for reserves, typically used for emergencies, is just $323 million.
"The question, with only a $300 million reserve, is if this holds. With this economy, it's anybody's guess," said Silva, now a senior fiscal adviser at California Forward, a bipartisan group seeking a solution to the state's structural problems.
Similar budgets, based on shaky assumptions and accounting tricks, have imploded within months in recent years, forcing lawmakers to consider midyear spending cuts or revenue increases. The rainy day fund would have to be approved by voters in 2012.
This year's budget impasse represents the longest California has ever gone without an approved spending plan since the July 1 start of its fiscal year.
State tax revenue has been hammered as the national recession has taken a deep toll on California's economy, forcing lawmakers to make deep spending cuts. The deficit represents more than 20 percent of the state's $87.5 billion general fund, which was as high as $103 billion as recently as the 2007-08 fiscal year.
If lawmakers don't pass a budget this week, more than three months into the new fiscal year, the state controller's office says it might have to start issuing IOUs. The treasurer's office says an estimated $7 billion in planned public works projects also could be jeopardized.
The state has been unable to pay thousands of contractors nearly $3 billion without a budget in place.
Some Republican votes are needed in each house to reach the two-thirds legislative vote needed to pass a budget bill.
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California Furloughs Upheld By State Supreme Court
SACRAMENTO, Calif. — The California Supreme Court's ruling Monday upholding Gov. Arnold Schwarzenegger's order to furlough state workers ends an 18-month budget distraction and puts more pressure on public employee unions to negotiate benefit rollbacks with the administration.
The high court handed the governor a unanimous decision, saying he could force employees to take unpaid leave because the state Legislature gave him that authority when it approved the 2009 budget bill.
Legislative leaders are now pushing the unions to accept concessions on pension and other benefits as part of a 2010 budget agreement scheduled for a vote by lawmakers as soon as Thursday.
Schwarzenegger has demanded the concessions as a condition of signing the budget aimed at closing a $19 billion deficit.
Schwarzenegger implemented the two-day-a-month furloughs for more than 200,000 state workers in February 2009. He later expanded it to three days a month, which has translated to a pay cut of roughly 14 percent for government employees.
Schwarzenegger said the move was intended to save money as California faced a severe budget crisis. His order prompted the filing of more than two dozen lawsuits.
"As governor, I have had to make very difficult decisions in response to the worldwide economic collapse, including furloughs for state workers and line-item vetoes to balance our budget," Schwarzenegger, a Republican, said in a statement after the court rulings. "These decisions were absolutely necessary to keep our state functioning."
In another ruling Monday, the state Supreme Court also said Schwarzenegger had the authority to use his line-item veto power to cut $489 million from last year's state budget.
The administration estimates furloughs saved the state's general fund $1.5 billion during the previous two fiscal years and an additional $80 million a month in the fiscal year that began July 1, said H.D. Palmer, spokesman for the governor's Department of Finance.
Bruce Blanning, executive director of the Professional Engineers in California Government, one of the plaintiffs, said he was disappointed by the state Supreme Court ruling.
"Obviously, we had hoped for a better outcome," he said. "But that's the way the court ruled, and we take it and move on."
Assembly Speaker John Perez, D-Los Angeles, complained that the ruling validated a power grab by the governor and pushed the state closer to "an imperial governorship that is unaccountable to the Legislature."
However, Anne Giese, senior attorney for Service Employees International Union 1000, the largest union of state workers with about 95,000 members, said the court made it clear the governor cannot unilaterally impose furloughs without getting permission from unions or lawmakers.
The budget legislation passed in 2009 authorized the furloughs through either collective bargaining or "existing administration authority." The state Supreme Court said those three words gave the governor his authority.
"By enacting this provision, the Legislature, through the exercise of its own legislative prerogative, authorized the substantial reduction in the appropriations for employee compensation, mandated in the revised budget legislation, to be achieved through the two-day-a-month furlough plan," the court said.
State workers dispute that the state has saved money through the furloughs, which have meant most state offices are closed on three Fridays a months. Both nominees for governor, Republican Meg Whitman and Democrat Jerry Brown, have said they would avoid furloughs if elected.
Schwarzenegger and the Democratic and Republican leaders of the Assembly and Senate said last week they had reached a tentative agreement to address California's budget deficit. The spending plan is more than three months late.
The latest furlough order exempts departments that collect revenue, such as the Franchise Tax Board, and provide public safety protection, including the California Highway Patrol.
It also exempts about 37,000 workers in six unions that recently reached tentative labor agreements with the Schwarzenegger administration. Those unions agreed for their members to contribute more of their salaries toward their pension benefits and to take one day of unpaid personal leave a month, the equivalent of a nearly 5 percent pay cut.
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SACRAMENTO, Calif. — Even as California lawmakers passed a budget Friday to end an unprecedented 100-day impasse, their spending plan looked to be so tenuous that the next governor was expected to face a multibillion dollar deficit from the moment he or she steps into office next year.
Two-thirds of the budget solutions signed by Gov. Arnold Schwarzenegger on Friday afternoon are based on one-time or temporary money – some of which may never materialize.
That will leave California to face "sizable annual budget problems in 2011-12 and beyond," the Legislative Analyst's Office said in a report issued after the Senate passed the main budget bill earlier Friday.
Lawmakers bridged a $19 billion shortfall, more than 20 percent of the $87.5 billion general fund spending plan. It includes no tax or fee increases but uses a combination of cuts, funding shifts, delayed corporate tax breaks and assumptions about money the state hopes to receive.
Among those assumptions is $5.4 billion in new federal funding, which is $4 billion more than the state has received so far this year and $2 billion more than Schwarzenegger projected in the revised budget proposal he released in May. Most of the money has not been authorized by Congress, which could change into Republican hands in November.
The heavy reliance on assumed federal money drew criticism from California Republican Rep. Darrell Issa who called California's budget "an embarrassment."
"It's full of false assumptions and failed gimmicks," Issa, R-Vista, said in statement.
Schwarzenegger, a Republican, and state lawmakers acknowledge there are no guarantees the state will collect that much more from the federal government. California was among at least 46 states that faced shortfalls this year due to the negative impact of the economy, according to the Center on Budget and Policy Priorities.
Of the $42 billion that has flowed into California from the stimulus program, about $32 billion has been awarded directly to state government for safety-net programs and to help stabilize the deficit, according to the state's recovery task force.
"California, like many other states, has had to make many tough choices and we look forward to continued cooperation with Gov. Schwarzenegger as we work to create more jobs and move the economy forward for families in California and across the country," said White House spokesman Adam Abrams in a statement.
In crafting their tardy budget deal, the governor and the legislative leaders from the Assembly and Senate also assumed the state will take in $1.4 billion in additional tax revenue if the economy improves and will net $1.2 billion from selling 11 state properties, even though the governor's original projection said the sale would net $660 million.
At the same time, several revenue streams are drying up.
The federal stimulus program is about to end and temporary tax and fee increases the governor and Legislature approved last year will expire in the coming year. That will mean less revenue to cover education and health care spending commitments.
The state stands to lose about $8 billion when the temporary increases in the vehicle license fee, and sales and income taxes expire July 1, said Sen. Denise Ducheny, D-San Diego, chairwoman of the Senate budget committee.
"This budget will have a $10 billion deficit next year," said state Sen. Jeff Denham of Merced, a candidate for a Central Valley congressional seat who particularly criticized the budget's reliance on extra federal money. "I don't expect to see any more bailouts next year. And I certainly don't expect to see a $5 billion bailout for California."
One of the gubernatorial candidates running to replace Schwarzenegger will inherit the ongoing deficit. Democrat Jerry Brown's spokesman Sterling Clifford said Brown will bring all sides together "from the very beginning to reach real solutions," while Republican Meg Whitman's spokesman Darrel Ng said "Californians deserve a strong leader who is willing to make the tough decisions."
Both candidates addressed the state's budgeting during their first debate last month at the University of California, Davis, agreeing that the negotiation process should begin much earlier.
Whitman also advocated for a two-year budgeting cycle, while Brown said he would authorize an 18 percent pay cut for the governor's office and the Legislature.
At a news conference Friday, Schwarzenegger pointed to the rainy day fund and changes to the pension system that were part of the budget at his insistence.
"I'm proud that we used this crisis as an opportunity to pass major reforms that would help ensure we will never have to suffer through a crisis like this again," he said.
Lawmakers agreed to ask voters in 2012 to approve a larger rainy day fund to build a cash reserve for future economic downturns. They also agreed to higher retirement ages and increased pension contributions from state employees.
Schwarzenegger used his veto power to cut an additional $965 million by reducing funding to child care services, AIDS treatment programs and an overdue student date tracking system called the California Longitudinal Pupil Achievement Data System.
"Gov. Schwarzenegger's final actions in office were directed at making life more difficult for California's working parents and the poorest, sickest and most elderly," Assembly Speaker John Perez, D-Los Angeles, said about a cut to services for mentally disabled students.
It's unclear whether the state will have to issue IOUs or cut off funding for road and infrastructure projects. California had been without a budget since July 1, the start of the current fiscal year, which has prompted the state stop to paying thousands of contractors and some state employees.
The budget authorized the state treasurer to defer $5.5 billion in payments to schools and social services until the treasurer's office can obtain short-term loans, a process that state typically undertakes until the majority of tax revenue arrives in the spring. It has not had the authority to get those short-term loans without an approved budget.
___
Associated Press Writers Don Thompson in Sacramento and Kevin Freking in Washington, D.C., contributed to this report.
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California eyes $5 billion bank loan
By Ben Rooney, staff reporterSeptember 28, 2010: 8:40 AM ET
NEW YORK (CNNMoney.com) -- California is in talks with Wall Street banks to secure up to $5 billion in short-term loans following an exceptionally long budget impasse.
Treasurer Bill Lockyer said Monday at a banking conference in New York that he is working on a deal with Bank of America Merrill Lynch (
BAC,
Fortune 500), JPMorgan Chase (
JPM,
Fortune 500), Goldman Sachs (
GS,
Fortune 500) and others.
But the final loan amount will not be known until California's legislature resolves a record-long budget impasse, according to Joe DeAnda, a spokesman for Lockyer.
"$5 billion is a possibility, but it could be more or less than that," he told CNNMoney.com. "The numbers will depend on the timing of the budget and the state's cash flow situation at the time of signing."
California has been without a budget since July 1, as state lawmakers grapple with a $19.1 billion shortfall. The impasse has resulted in
state workers being furloughed and raised the possibility that the state would have to
issue I.O.U.s to creditors.
The bank loans would be in lieu of money the state normally raises by selling short-term "revenue anticipation notes" to investors. But California cannot issue such debt due to disclosure requirements that it cannot fulfill without a budget.
Once the budget is passed, the state would issue notes within weeks to repay the bank loans, according to DeAnda. After a drawn-out budget stalemate in 2009, he said, California borrowed $1.5 billion which was repaid one month later.
Gov. Arnold Schwarzenegger said last week that state officials have reached "a framework of an agreement" on how to close the deficit.
