CA Legislature struggles to fill budget gap

Got his note from Sacramento last night regarding the attempts of the legislature to find some solution to the gaping hole in the California Budget. Republicans have been attempting to hold the state hostage while the Democrats are at least trying to come up with solutions while working around the barriers raised by the spoiled “rich kids” of the GOP.

The Legislature is supposed to take things up this morning. We’ll see what happens.

You didn’t think there was just going to be new revenues did you? Both Houses of the Legislature will also be taking-up a series of bills that will cut spending in state programs by approximately $9 billion. Below are the proposed cuts that will be taken-up tonight. These are the same cuts that were taken-up during the “lame-duck” special session in November but failed passage

State Employee Compensation:

State Employee Compensation.  Reduces funding for employee compensation by $240 million in the current year and $417 million in the budget year (furloughs and elimination of two state holidays), however, the savings is required to be negotiated through the collective bargaining process. Democrats told the Governor they would score the savings, however, since this is a collective bargaining issue, it would be incumbent on him to negotiate the savings through the collective bargaining process.

Education Cuts:

Current Year Reductions.  Reduces Proposition 98 spending by the $2.5 billion level proposed by the Governor.  However, this package of reductions does not follow the Governor’s proposal to cut school district revenue limits, and instead targets specific programs that mitigate direct impacts on classroom instruction.

Adopts a variation of the LAO’s proposal to count a portion of current year spending as “settle-up” dollars rather than Proposition 98 dollars.  This does not reduce current year education spending, but does provide additional Proposition 98 flexibility in the budget year.

CSU and UC Reductions.  Adopts the Governor’s proposal to cut $132 million from the UC and the CSU.

Health and Human Services Cuts:

SI/SSP.  Reduces SSI/SSP grants in 2009 back to the 2008 level and suspends the budget year state COLA.  Together these actions will save about $177 million in the current year and about $500 million in the budget year. 

CalWORKS.  Suspends the budget year CalWORKS COLA to save about $100 million.

Regional Centers.  Reduces, by three percent, certain payments for services delivered to individuals with developmental disabilities for the period from December 1, 2008 to June 30, 2010, as proposed by the Governor.  This results in a reduction of $26 million General Fund for 2008-09 and $60 million in 2009-10. 

Also reduces the Regional Center Operations’ budget by $3 million General Fund in 2008-09 and $12.2 million in 2009-10 by suspending certain case management ratios and administrative requirements.

 Local Government Cuts:

Local Public Safety Programs.  Approves the Governor’s proposal to eliminate General Fund support for various local law enforcement programs which saves approximately $189 million in the current year and $500 million in the budget year.  These cuts are mitigated by reallocating Vehicle License Fee revenues ($92 million in the current year and $359 million in the budget year) to support these local programs.

Williamson Act Local Backfill.  Approves the Governor’s proposal to eliminate the $34.7 million backfill to counties.  This does not, however, make any changes to the underlying program to preserve agricultural land.

Transportation Cuts:

State Transit Assistance.  Reduces annual funding for the State Transit Assistance (STA) from $306 million to $150 million.  The Governor had proposed to eliminate the program entirely.

Fund Shifts.  Achieves $185 million in General Fund solutions by shifting eligible Motor Vehicle Account funds and Tribal Compact revenues to the General Fund.

Various Other Cuts:

Judicial Branch Solutions.  Achieves $91 million in solutions from the Judicial Branch with a reduction to the 2008-09 COLA for the trial courts and a one-time transfer from the Trial Court Improvement Fund to the General Fund.

Office of Emergency Services.  Eliminates $30 million in funding for the gang initiative and various other programs. 

And now for the revenue side…

As a result of the stalled budget talks, the Assembly and Senate have scheduled floor sessions for this evening to consider a package of bills crafted to close a $40 billion deficit in the next 18 months with simple majority vote bills. Though state law requires taxes to be passed by a two-thirds majority of each legislative house, the Democratic leaders contend their tax hikes would be excluded because they would be revenue-neutral: Here is how it would work:

  • The state sales tax will rise three-quarters of a percent. Total in new taxes: $4.9 billion through the 2009-10 fiscal year.
  • All residents will pay an additional 2.5 percent on their income tax bills. So if you owed the state $1,000, you would now owe $25 more. Total in new taxes: $1.75 billion through the 2009-10 fiscal year.
  • California would implement an oil severance tax — levied at 9.9 percent — on all oil extracted from the ground in the state. Total in new taxes: $845 million through the 2009-10 fiscal year.
  • The current gas sales and excise taxes would be eliminated and replaced with higher gas “fees.” The new gas fee would be 13.5 cents per gallon higher than users at the pump currently pay. The new funds would be earmarked for transportation spending

How it works as explained to us in a briefing earlier today:

Part One

The first part of the plan is a quarter-cent sales tax hike that will bring in the state an estimated $1.6 billion in the next fiscal year.

This would seem to require a two-thirds vote. However, Democrats insist that technically they won’t be voting to raise the tax. Instead, they will be voting simply to stop paying that amount to local governments. With that money not flowing, local sales taxes have a trigger to automatically rise ¼ of a percent.

So the move is a de facto tax hike and the state saves money by not paying local governments.

Part Two

In a single bill, Democrats will eliminate the sales tax on gas (not diesel) and excise taxes on gasoline and diesel and replace those taxes with higher income taxes, sales tax and an oil severance tax.

The total revenues collected will turn out the same in that bill.

The Democrats will then vote on a different piece of legislation to replace the old gas sales and excise taxes (which only went to transportation needs) with a gasoline “fee,” that will be set at 39 cents per gallon (and indexed to the California Consumer Price Index – CCI every 3-years).

Because they are raising a “fee” and not a “tax,” Democrats believe (and they say their lawyers have approved) they can do this will a majority vote.

In addition to all that, Democrats also plan to implement a new 3 percent income tax withholding on businesses that do independent contracting. This is not a new tax; the state is simply collecting the money earlier. It will result in $2 billion additional money in 2009-10 but will not be a long-term source of revenue.

All told, the package is estimated to raise $9.3 billion in revenues.

The Democratic leaders said the package will contain the same cuts the Legislature rejected on Nov. 25.


The “gas fee” will be set at 39 cents per gallon. This will cover the elimination of the excise tax (18 cents) on gas and diesel and sales tax (8 cents) on gas. It will also provide an extra 13 cents to cover lost purchasing power of the excise tax (provides a new infusion of funding).

In addition to backfilling existing transportation funding, the fee provides an additional $2.4 billion on top of what is currently being generated

  • Additional Transportation projects to stimulate the economy – about $1.8 billion
  • Additional local transportation funding – about $600 million
  • Can also use about $300 million of the funds for transportation debt service payments

The 39 cents is also indexed to the California Consumer Price Index (CCI) in an attempt to provide longer-term transportation financing. Attempts to index the gas tax have always fallen short; this is a way around the roadblocks to doing that. 

The advantages to transportation form this approach according to the Democrats is as follows:

  • User fees can only be used for purposes with a nexus to the fee (can’t be borrowed or suspended, like what currently happens to transportation fund)
  • The fees are subject to the same protections under Article XIX of the state Constitution (
  • State transportation programs and local governments get about $2 billion more that can be used for under funded transportation programs, i.e. SHOPP

In a nutshell, that is it. Lots of politics at play right now.