May 15, 2008

Governor Releases May Revision - More Detail

Yesterday we provided an update on the May Revision’s most significant changes.  There were, however, a number of other changes included within the May Revision.  

There are also significant policy issues that did not change from the introduction of the State Budget until the May Revision.  The most significant policy that was not changed was the categorical aid program funding.  The reductions that had been proposed in January were continued in the May Revision.  The only exceptions were the restoration of special education reductions and the greater cut to deferred maintenance, as noted in the update yesterday. 

The May Revision includes:

• A total of $100 million for the Williams Emergency Repair Program;
• Proposes $3 million in the Proposition 98 General Fund be reappropriated for personal management assistance teams to assist school districts to establish and maintain effective personnel recruitment and hiring processes;
• Proposition 98 maintenance factor of approximately $3 billion;
• $93.4 million for increased unemployment insurance rates;
• $25.3 million for adjustments to the PERS contribution rates;
• $20 million in additional Stage 2 and 3 child care caseload cost;
• $25.5 million in additional Proposition 98 funding to eliminate the federal temporary assistance to needy families holdback;
• The transfer of approximately $15 million from the sale of state relocateable classrooms to the state General Fund.

The budget essentially is balanced between revenues and expenditures with the assumption that $5 billion will be received from bonding increased lottery proceeds.

The May Revision can be considered as the Governor tossing a budget hot potato to the Legislature.  There are no expectations that the Governor’s lottery proposal will be embraced by the Legislature.  For the Democrats, the revenue increase is not sufficient to replace the significant new cuts to health, welfare and social service programs.  For Republicans, the sales tax increase that could occur is unacceptable.  Consequently, the Governor punted the budget balancing decisions to the Legislature and later discussion. 

One significant part of the budget is the anticipated real reduction in state General Fund proceeds of tax revenues between the January and May estimates for 2008-09:

• Personal income tax is anticipated to decline by approximately $2.7 billion. 
• Sales tax is anticipated to decline by approximately $1.9 billion.
• Corporation tax is anticipated to decline by slightly over $900 million. 

Effectively, these losses are an almost $5.5 billion reduction in anticipated state General Fund revenue from the proceeds of tax.  It is this estimated reduction in revenues which has created the significant decline in the Proposition 98 guarantee.  In fact, the decline in the guarantee was such that the Governor could maintain the January education spending level, while still full funding the Proposition 98 guarantee.

The Governor’s proposal to full fund the guarantee creates difficulty in arguing for additional K-12 funding in this budget.  It will be politically challenging to make the case for even greater school funding beyond the minimum guarantee. 

The challenge facing schools will be to define the priority order of restoration if the Governor’s revenue projections are unduly pessimistic.  We will be advocating that the first call on new Proposition 98 revenues should be first used to restore categorical program cuts, and secondly be used to fund COLA deficits for both categorical and revenue limit programs. 

I believe the Governor has been unduly pessimistic in his revenue estimates; however, the Legislative Analyst’s Office (LAO) will be making her report on her review of the Governor’s May Revision.  Most in the education community are waiting until they hear the LAO’s views before responding to the May Revision in front of Budget Subcommittees.

~Dave Walrath

dwalrath@m-w-h.com