Assembly hearings expose Brown budget gaps

17 May, 2012 by CalWatchdog Staff

May 17, 2012

By Katy Grimes

Like a woman with a shopping addiction, California politicians are going to bankrupt the Golden State. California has a $16 billion deficit, a $4.6 billion budget spending increase since January, a credit rating which will probably be lowered and a big fat $10 billion debt owed to the K-14 public schools.

It doesn’t look good. Someone needs to cut up the state’s credit cards and put the Legislature on a Weight Watchers plan for big spenders.

May Budget Revision

With nothing but bad news to deliver, on Monday Gov. Jerry Brown gave his May Budget Revision. By Tuesday, the Assembly Budget Committee was dissecting the budget with the help of Legislative Analyst Mac Taylor and the Department of Finance’s Michael Cohen.

And while the budget talk was wonky and dry, one issue kept resurfacing: On top of our $16 billion state debt, the State of California also owes $10 billion to its K-14 public schools.

‘Deferrals’

The Legislature has avoided making actual cuts to programs by using education funding every year to shore up the gaps. But the money taken from education is still owed to the K-14 schools. Robbing Peter to pay Paul, this “deferral” has accumulated to $10 billion. The law states that it must be paid back.

The Legislative Analyst’s Office has warned about the ongoing deferral to education as the state has increasingly relied on education funding to pretend the budget is balanced and avoid unpopular cuts to programs.

But when the Legislature defers funding to schools in order to keep the money for other state programs, it also has to approve additional borrowing.

That’s like paying only the minimum on your MasterCard, and then opening a new credit card for additional spending.

Assemblyman Brian Nestande, R-Palm Desert, took Cohen and Taylor to task on Tuesday after both indicated the need for Gov. Brown’s tax initiative to pass in order to meet the spending in his budget.

Brown’s tax increase initiative would increase the state income tax on those making more than $250,000, for five years, and raise sales and use tax by 1/2-cent for four years, and allocate 89 percent of the tax revenues to K-12 schools, and 11 percent to community colleges.

“What are you doing differently with the budget this time?” Nestande asked Cohen. “You were way off last time.”

Cohen explained that the finance department was taking a conservative approach with ongoing litigation, Medi-Cal payments and “using our best judgment.”

“But revenue projections–how were you so far off?” Nestande asked. “What are you doing now?”

Cohen said that. when they prepared the January budget, they still didn’t have all of the spending data needed from the previous June.

“It doesn’t sound like you are learning from last year,” Nestande said.

“You keep hoping the economy will bail you out,” Assemblywoman Diane Harkey, R-Dana Point, added. “82 percent of the general fund goes to Health and Human Services and education.”

But the budget talks with Cohen and Taylor were rather unusual. In the past, they often have disagreed about budget issues. On Tuesday, they appeared to be working for the same department.

Spend, spend, spend

Parroting Brown during the May Revision press conference, Assemblyman Bob Blumenfield, D-Los Angeles, the committee chairman, began the meeting on Tuesday by speaking of the importance of working with the governor to balance the budget. Fortunately, the committee vice chairman, Assemblyman Jim Nielsen, R-Gerber, ended the rhetoric. “I rather doubt what we can agree on is funding what’s broken,” Nielsen said about the budget revision. “We cannot fix the budget without pension reform.”

There was no pension reform in Brown’s budget. In fact, there were no spending reforms at all.

Cohen explained the wonky financial issues and procedures to the committee, and how the finance department didn’t have enough data with the last budget. They overshot revenue estimates in January, ultimately having to adjust revenues down again with the May Budget Revision.

However, Cohen said that even with revenues down, Proposition 98 costs–school funding–were up by $2.4 billion.

Ironically, it was only in January during budget talks that Brown said he wanted to pay down the Proposition 98 deferral debt by $2.4 billion.

In the February, LAO Proposition 98 analysis said, “Paying Down Deferrals Makes Sense. The largest component of the Governor’s basic plan is to pay down $2.4 billion in K-14 payment deferrals. If the state has additional Proposition 98 resources to spend in 2012-13, we think paying down these deferrals is reasonable. This would not only help reduce the significant cash management challenges now facing districts but also would be less disruptive than programmatic cuts were the tax measure to fail.”

Corporate profits ‘up’

Cohen insisted that “corporate profits are way up” in California, based on corporations claiming state tax credits.

And Cohen said that, before Brown does any pension reform, he wants a balanced budget.

This is where Nestande jumped in. He said, “We have a legal mechanism in this budget to pay back $10 billion of deferrals. Do we have a repayment plan?”

Cohen said that, without passage of Gov. Brown’s tax initiative, the finance department will continue to shift funds.

“If the Governor’s tax measure is not approved by voters, the Governor proposes $5.4 billion in midyear trigger cuts,” the LAO reported in February. “Of this amount, $4.8 billion, or 90 percent, would come from Proposition 98 cuts. To achieve these savings, the Governor begins funding K-14 debt service payments within Proposition 98. We have serious policy concerns with this proposal. Because debt service payments are volatile, the proposal would result in notably greater volatility for education programs. Absent a clear, compelling policy rationale, we question why the state would want to change its longstanding facility funding practices, particularly when the change results in a significant cut in programmatic funding.

“The Governor’s back-up plan also excludes the 2011-realignment related sales tax revenue from the Proposition 98 calculations. We believe such treatment is risky. If the realignment revenues were to count toward the guarantee, the guarantee would increase roughly by $1.7 billion. As a result, the Governor’s back-up plan would need to be modified—either by suspending the guarantee or by funding the higher guarantee and implementing $1.7 billion in reductions in other areas of the budget.”

This hardly sounds like a sound budget plan.

Nestande continued questioning Cohen and Taylor about the Prop 98 fund shifts, and asked if the Legislature could change the law in order to not have to pay back the money.

“Yes,” said Cohen. “Deferrals are a spending choice.”

Cohen explained that if Proposition 98 was suspended by the Legislature, lawmakers could fund K-14 schools at any level it chose. But the $10 billion would still be owed.

“I don’t think you want to go there,” added Taylor.

Nestande pointed out that the state has not paid back any of the deferred education funding. “We don’t pay it, we defer it,” he said. “We are playing a shell game with the deferrals, and it’s a sham on schools.”

“The governor has made clear that he wants to honor the deferals,” said Assemblyman Sandre Swanson, D-Alameda. “The process needs to have credibility. We can’t defer and then break the promise.”

“But we don’t have $10 billion,” said Nestande.

The system is broken

“Nobody can understand what’s going on,” Nestande said after the hearing. “The system is broken.”

“If we want to short education funding, then we should suspend Proposition 98,” he added. “We are just digging a bigger hole.”

Nestande explained that, with no end game to the money shifts and budget games, the Legislature will be forced to shorten the school year. “With the wealth of innovation in this state, what an embarrassment. We once led the country. Now we are leading it to a grinding halt.”