by Sheila Kuehl
March 11, 2009

This is the second in a series of essays on the legislature's actions related to California's 08-09 budget from the time it was finally adopted in September of 2008 until it was finally modified in February of 2009.  My first essay on this subject detailed steps taken in October and early November because of the need to immediately amend the budget adopted in September of last year.  This essay sets out the failure to adopt an amended budget in November, the urgent consequences of this failure in December and the continuing partisan tug of war.

Nov 25, 2008: The Governor calls a "Hail Mary" session right before the Thanksgiving football games.

As set out in my last essay, plummeting revenues and collapsing credit threw the new budget immediately out of balance.  Early in November, the Governor presented the Legislature with a new raft of cuts, temporary tax increases, increases in unemployment funds, and "stimulus" ideas, most of which involved relaxing environmental and labor laws.

California legislators were called back into session two days before Thanksgiving to consider a hastily drawn amended budget without any agreement by the Republican leadership in either house.  The new budget reflected most of the Governor's proposed special session fixes except that it somewhat reduced his steep additional cuts for the poor and education.  As legislators milled restlessly on their respective Floors, waiting for "The Big Five" to decide the final language, there was no movement.

After many hours, a vote was held anyway, garnered no Republican votes and, given the requirement that the California budget must be adopted by a 2/3 vote of each house, failed.  On November 30, one-third of the legislators in the Assembly and a quarter of the Senate termed out.

The New Legislative Year dawns, cold and grey
 
In early December, the regular session began.  Governor Schwarzenegger called a new Special Session (which runs concurrently with the regular session but addresses specific topics) to address the fiscal emergency, and presented his proposals again, to the newly sworn in legislators.
  
The new President pro Tempore of the Senate, Darrell Steinberg, and the Speaker of the Assembly, Karen Bass, decided the best way to bring both new and old members up to speed was to ask the Governor's Department of Finance, the Legislative Analyst, the Controller and the Treasurer to present full information to a joint session of the Legislature.

What They Said
  
Since so many of the legislators were brand new, the Legislative Analyst set the stage by giving basic information about the state budget, as follows:

The general fund, which does not include all the special funds collected for prescriptive purposes, is the largest revenue fund and the largest expenditure source.  It supports everything except transportation and some resource and environmental programs.  Most of the revenue comes from income tax and capitol gains and is, therefore, extremely volatile.
  
The 08-09 budget that was adopted in September quickly had an operating deficit of over 4 billion dollars and, in addition, had largely relied on one time revenues to close gaps between revenue and spending, which is a problem when these funds are used for programs that will continue year after year.  Although there had been over 25 billion dollars in cuts over the last few years, more would be required if no new sources of revenue were adopted.   It was extremely difficult to think of cutting education and healthcare even more, but such cuts were seen as absolutely necessary, if balanced with new revenue.  Cuts alone would not be enough, the Leg Analyst reported, because balancing the sinking budget with cuts alone would require the elimination of the entire UC and CSU education systems, plus elimination of all welfare payments plus elimination of all developmental services, mental health and In-Home Supportive Services.

National Economy Tanking, California Even Worse

The projected deficit for 09-10 was several billion even without the worsening economy, which hit with a vengeance.  Jobs were lost, production and car sales were  down and, in California, the turmoil in the housing and mortgage markets was even worse than in the nation as a whole.
  
The Legislative Analyst predicted that there would be very slow personal income growth, further downturns in construction and an even deeper fiscal slide, all very familiar topics today.  At the same time, the downturn in the economy meant that expenditures for Medical and State Supplemental Programs (SSP), CalWorks and other Health and Human Services programs would grow.  Prison expenses were also expected to grow. The greatest growth, however, would be in the amount the state would be required to pay in interest on all the money already borrowed as well as that owed to bond investors--a growth of almost 10%.

08-09 budget combined with 09-10
  
The Legislative Analyst opined that the problem was really an 18 month problem because the analysis had to combine the deficit for the remainder of 2008-09 with problems already apparent in the 2009-10 budget, which was to be sent to the Legislature almost immediately, in January of 2009.  Ever evolving estimates showed the 18 month gap to be about 28 billion dollars of deficit due to fixed and so-far-unamended expenditures in the current budget and rapidly decreasing revenues. 

Had the Special Session package been adopted in November, the Leg Analyst reported, it would have solved about half of the problem.  The Governor's proposals, if they were passed immediately in December, would reduce the deficit by about 23 billion.  If an amended budget was not immediately passed, every piece of the solution would lose value in the future.  A nine billion dollar savings in December would amount to only a seven billion dollar savings in February, because of the spending required in between, and no new revenue.
  
All the proposed solutions looked to be doomed to failure.  The Republicans said no taxes.  The Democrats didn't like the Governor's "economic stimulus" package.  No one knew how much money Washington might send in an as-yet-unadopted stimulus package.  No one could even put a serious dollar figure on what might be realized by selling future lottery income (one of the solutions already in the September budget).

The Controller's Report
  
Controller John Chiang then told the joint session that he would be forced to identify priorities in payments the state would make if there was no budget solution: schools, debt service, repayment of internal borrowing and court required payments, such as payroll, retirement and MediCal.  Non-priority payments would not be made: external borrowing, vendor bills, income tax refunds, and payments to local governments.

The Treasurer's Report
  
Treasurer Bill Lockyer then reported that the Pooled Money Investment Account, a kind of "rainy-day" fund for the state was already running dry and that our cash flow problems were making it impossible to borrow in the short-term debt markets. The Pooled Account allows state agencies like CalTrans, Water Resources and others to draw out monies as loans when projects are ready to go.  The fund is replenished by bond sales.  Unfortunately, we couldn't sell our bonds.  This meant that nine days after he reported to the Legislature (mid-December), the state would be forced to shut down planned expenditures for highways, schools, flood control, etc.

The Republican Proposal
  
On December 15, the Republicans (finally, as the Sacramento Bee put it) put dtheir proposal on the table: a no-new-taxes proposal that called for even deeper cuts to schools and social service programs.  They proposed a raid on voter-approved preschool and mental health funds (yes, this does sound familiar and will be even more familiar when we vote it up or down in May).  On December 16, the Governor and the Dems said no to the Republican budget, proposed an alternative very similar to what they had put up for a vote before, and the Reeps said no.  Standoff.

State Officials Pull the Plug
  
On December 17, funds were cut off for thousands of public work projects statewide, including roads, levees, schools and prisons. 

Next:  Democrats propose a magical mystery majority-vote budget.