Governor Releases May Budget Revisions.
Parks Win, but Education Still Takes Huge Hit.

With the April 15 income tax filing deadline past and the state now having a better sense of actual revenues for 2008-09, on May 14 the Governor released his revised state budget proposal based on a worsened projected shortfall of $17.2 billion, up $7.5 billion from January.

The $17.2 billion gap reflects:

  • the $7.5 billion shortfall remaining from January;
  • a $7.7 billion increase to the shortfall consisting of revenue projections being revised downward by $6 billion;
  • a $2 billion proposed reserve.

How does the Governor propose to close the gap?

  • $4.3 billion in cuts to education. While he has backed off his earlier proposal to suspend the 1988 voter-passed Proposition 98 minimum funding guarantee to schools, because of declining revenues he still asks K-12 education and community colleges to take this historic hit.
  • $3.7 billion in other cuts.
  • $828 million of gasoline sales tax diverted from transportation projects to General Fund.
  • $627 million in major new cuts to health and human services, including cutting

In-Home Social Services and provider pay.

  • $5.1 billion in borrowing by “securitizing” (borrowing against) hoped-for increases in state lottery payments.
  • $2 billion in accounting changes.
  • $1 billion in various other one-time revenues.
  • He did withdraw his very unpopular proposals to close 48 state parks and for early release of 22,000 prisoners.

Excerpts from the Legislative Analyst Office (LAO) May 19 Overview:

California’s highly-respected nonpartisan Legislative Analyst, Elizabeth Hill, has released her analysis of the Governor’s revised budget. Her candid assessment is always helpful to the Legislature as the Assembly and Senate budget subcommittees are now meeting to do the line-item review and craft a final budget to be presented to the Governor.

LAO says the state of our economy compared to January is “bleak.”

“A declining economic outlook, sagging revenues, and rising costs have created bleak prospects for the state’s 2008-09 budget. In January, the Governor identified a gap of $14.5 billion between revenues and expenditures…. Since that time, there have been a number of key developments, including 1) a further deterioration of the economic and revenue outlook for 2008-09 ($6 billion), and 2) rising state expenditures in a number of state programs ($1.7 billion.) The net effect of these developments is that, compared to the Governor’s January proposal, the administration view of the state’s budget outlook – absent any action – has worsened to a total of $22 billion.”

Revenue forecasts are down.

“Sales and use taxes are reduced by $2.4 billion for the current and budget years combined. This is primarily due to the weak economy, reflecting the negative effect of the soft housing markets on taxable sales.”


“Corporation taxes decline by $1.4 billion for the two years combined. This reduction mainly reflects the weakness in cash receipts and corporate profits.”

“Personal income taxes fall $1.3 billion over the two years. Collections are up in 2007-08 by $1.4 billion due to higher payments made in April 2008. This increase is offset by a $2.7 billion reduction in payments in the budget year caused in part by a significant estimated reduction in capital gains in 2008-09.”

The LAO expressed particular concern about the Governor’s proposal to raise $15 billion over the next three years by seeking voter approval to sell a portion of future lottery sales to investors gambling on increased lottery revenues in exchange for a series of up-front payments. This would mean, however, that payments to education from the lottery would be subordinated to the obligation to bondholders, putting them first in line ahead of schools. Payments to education would never exceed $1.2 billion, roughly the current amount. However, if lottery sales and profits did not grow as much as the Governor projects, “bondholders would continue to receive payments, but public education would experience a drop in lottery payments.”

The Governor’s revised budget continues to be a complicated set of proposals built on risky assumptions, on what the LAO describes as “overly optimistic estimates about the potential growth in lottery sales and profits… and [the] administration’s overly complicated proposed budget reforms,” while still not offering a long-term solution to the state’s structural budget problems.

Children and many of the most vulnerable people in California will bear a disproportionate burden under the Governor’s scheme. It’s going to be a long and difficult summer as we tackle this grim budget. Stay tuned. [The entire LAO Overview can be accessed at www.lao.ca.gov.]