January 5, 2009

Governor Releases Draft 2009-10 State Budget Proposal

In an unexpected action, on December 31, 2008, the Schwarzenegger administration released summary documents of the proposed 2009-10 state budget. The California Constitution requires the budget to be presented by January 10th of each year. The Governor’s actions are unprecedented in providing budget information well in advance of presenting the actual Budget.

Cash Flow

The material states “….. even if the Legislature enacts all of the special session solutions by February 1, 2009, the State will be unable to pay all of its bills beginning in March.” The state cash flow is continuing to deteriorate and the budget expects that Reimbursement Warrants (RAWs) in July 2009 to provide sufficient cash flow for 2009-10.  This means the Pooled Money Investment Account might not have sufficient funds for school facility apportionment fund releases prior to July unless the state cash flow improves.

Federal Stimulus

The proposal does not include any adjustment for a federal stimulus package that is expected to be enacted in January or early February.

Revenues—2008-09 Without Additional Action

The Budget projects a $14.5 billion decrease in 2008-09 State General Fund proceeds of tax revenues compared to the anticipated revenues when the budget was passed in September. This decrease results in a $7.9 billion reduction (13.6%) to the Proposition 98 minimum guarantee unless there are new revenues.

2008-09 Additional Revenue

The Governor’s proposal continues to contain the new revenues he proposed for the special session but the revenue amount is reduced to reflect that the tax increase would not occur until February, rather than last November. The effect is a projected $3.6 billion which would result in a reduction in General Fund revenues of $10.9 billion, rather than the $14.5 billion if no new tax revenues were collected. The additional revenues result in a new Proposition 98 minimum guarantee that is a $6.6 billion lower than the estimate used for the September budget.

2009-10 Revenues

The Budget proposal assumes new taxes and revenues will result in $11.2 billion in new revenue of which $6.6 billion would be from the proceeds of taxes that are used to calculate the Proposition 98 minimum guarantee.

2008-09 Proposition 98 

• Changes from Budget as adopted in September:
• Reduces the 2008-09 Proposition 98 minimum guarantee from $58.1 billion to $51.5 billion, but because of deferrals and redefining funds the actual expenditure level would be $55.4 billion.
• Cuts $2.1 billion in the current year (same as proposed for the special session)
• Redesignates $1.7 billion (settle-up funds and Public Transportation Account) as an appropriation for 2008-09. This reduces the 2008-09 minimum guarantee, but does not require a program cut.
• Defers $2.8 billion in already appropriated 2008-09 funds into 2009-10. This also is a cut in the minimum guarantee and creates a cash flow problem for schools, but does not create an actual program cut.
• Provides more categorical aid funding flexibility.

2009-10 Proposition 98    

The proposal estimates a $4.4 billion increase to the new proposed $51.5 billion minimum guarantee to $55.9 billion with an expenditure level of $56.3 after other adjustments that do not increase the guarantee. The $56.3 billion level is still approximately 3% below the budget as approved in September. The proposal makes numerous adjustments. The most interesting is a proposed five-day reduction in the school year for a $1.1 billion savings. Of course when the school year was extended schools did not receive the same proportionate increase but that is for later discussion.

This is an initial proposal that does not reflect any possible legislative action to further increase revenues or other actions such as a federal stimulus package. It should be considered as the worst case scenario but not as an unrealistic scenario.

~Dave Walrath
dwalrath@m-w-h.com

~Dave Walrath

dwalrath@m-w-h.com