Two Broken Budgets: Starting Off in 2010
by Sheila Kuehl

April 28, 2010

This is the first in a series of essays describing the condition of the 2009-10 state budget at the beginning of 2010, the new 2010-11 budget introduced in January, the Special Legislative Sessions called by the Governor to solve the problem of escalating deficits and the tug of war between the Legislature and the Governor on solutions.  You have received this essay either because you joined my general essay list or someone forwarded it to you. 

In this first essay, I provide an overview of the budget situation at the end of 2009, in the middle of the fiscal 2009-10 year and the problems foreseen by the Legislative Analyst as the year began.  In the essays that follow, I will present the 2010-11 budget proposed by the Governor in January, as well as the "fixes" to the 09-10 budget proposed, rejected, passed, vetoed, passed and signed in March, to meet the crisis of plummeting revenues and shaky budget assumptions that were the "solutions" adopted last year for the 09-10 budget.  As you read this, the Legislature is holding hearings on the various provisions of the 2010-11 budget, which is due to be passed (if a 2/3 vote can be achieved) by the end of June.
   
How Low Can You Go: December 2009

In my last set of essays on the state budget, published after the last budget "solution" was adopted in July, 2009, I described the many ways in which the Legislature had attempted to cope with sinking revenues and a bleak future.  In the February 2009 do-over of the 08-09 budget, the Governor had insisted on 14.5 billion in cuts and, in July, had cut an additional 18 billion from the 09-10 budget, for a total drop of 32.5 billion. Since this amount was not sufficient to fill the entire gap, the Legislature had convinced the Governor to temporarily increase revenues through a two year bump in the sales tax which was projected to add a total in the future of 16 billion.  This was, however, a bit of a risky proposition, since consumer spending was already beginning to plummet, along with consumer income. 

In addition, in order to further fill the gap, both the Governor and the Legislature were counting on federal stimulus funds to provide 8.5 billion and planning to borrow an additional 2.5 billion. 

Unfortunately, most of the budget solutions were temporary and short-term, or based on faulty assumptions.  In some cases, spending had simply been deferred into the 2010-11 budget, which didn't prove helpful.  Expected federal funding didn't materialize.  Revenues continued to drop.  Savings in prisons, Medi-Cal and the State Insurance Compensation Fund, assumed to achieve a balanced 2009-10 budget, did not occur.

Several court decisions went against the state, resulting in steeper payouts than expected.  Most importantly, as the recession started to hit in earnest, the social services caseload sharply increased, adding a double whammy to the budget.  Because the state so heavily depends on income tax to fill the general fund, the loss in income, and, therefore, income tax, caused by the recession drained the budget at the very time that those who had been working were forced to turn to the state for services and benefits.

Nothing but Bad News

Some of the 09-10 gap had been filled by turning to the state's diminishing reserves and the Legislative Analysts Office opined that, instead of the reserve of $500,000 that had been predicted for June of 2010, the state would face a deficit of 6.3 billion.

In the meantime, school funding was continuing its downward slide. Spending for K-12 schools had dropped over 6 billion dollars from 2006-7 levels. The Governor called a Special Session, to run concurrently with the second year of the 2009-10 session, beginning in January 2010, to meet, yet again, to solve the crisis of the 2009-10 budget.  He continued to make it clear that he would agree neither to raise revenues nor to revisit the corporate tax cut upon which he had insisted. 

At the same time, the Governor was preparing to present his 2010-11 budget, which the Legislative Analyst's Office predicted would start off with a ten billion dollar deficit.  This already hefty amount would be made worse to the tune of an additional four billion dollars by the fact that predicted savings had failed to materialize in the 09-10 budget.

Federal Constraints and Tolerances

In order to receive federal stimulus funds, states must adopt a number of constraints on spending, while, at the same time, maintaining other forms of social spending.  California was going to have to make certain it met all criteria, but it would be difficult.  The Analyst indicated the Governor would likely be looking for almost 7 billion in federal funds for 2010-11, including monies from an extension of the American Recovery and Reinvestment Act, an increase in Federal Medical Assistance Percentages to 57% for Medi-Cal, federal monies for undocumented inmates in California, reimbursement for special education expenditures owed to the state and increases in Foster Care formulas.  None of these looked realistic.

The Least Among Us

Last July, the state eliminated Medi-Cal coverage for dental, vision and hearing care, counseling, podiatry and four other services that federal law doesn't require states to provide.  Payments to the poorest Californians through the California Work Opportunities and Responsibility to Kids Program (CalWORKS) were cut to $661 a month, less than it had been in 1988.  Stronger sanctions had been enacted for welfare recipients who didn't find work within the prescribed time.  The safety net was almost completely shredded and Democrats indicated they were not willing to further endanger the most vulnerable among us.

The cuts made last year had resulted in a strong message from the Legislative Analyst's Office to consider "more targeted changes" to protect the "most vulnerable".  Waiting for the Governor to present his new budget, however, most everyone thought, as it turned out, correctly, that things would get worse.

Next: The Governor's Proposed 2010-11 Budget: We're Down a Rat Hole