September 16, 2008

2008-09 Budget Passed – Time Bomb for 2009-10

Last night and this morning, the Legislature passed a 2008-09 State Budget that relies on: 1) accounting changes for one-time money; 2) advancing income tax payments (which will have to be restored in later refunds); 3) expenditure reductions; and 4) revenue from a tax amnesty (usually a cash flow benefit with tax money collected early and then returned in later refunds).  There also was some limited short-term loophole closing.

The State Budget appears not to have increased borrowing from local government beyond the amount in the May Revision.

Finally, the Legislature passed propositions for a larger state rainy day fund; limited mid-year cut authority for the Governor, and restructuring of lottery revenues to help next year’s budget.  These propositions will require a special election early next year if they are to help the 2009-10 State Budget.

K-12 Funding

Because the State Budget agreement relies on advancing receipt of income tax revenue, the agreement increases the Proposition 98 minimum guarantee above the May Revision level.  This increase provides sufficient funds to fund fully last year’s (2007-08) program level and provides a small (0.6%) revenue limit only Cost-of-Living Adjustment (COLA) increase.  The $155 million in settle-up mandate funding appears to have been deferred.  We will provide more detail in the next update.

2009-10 Time Bomb

The first $5 to $7 billion in new state revenue for 2009-10 will be needed just to stay where we are.  This is the result of the one-time revenues used to balance the 2008-09 ongoing expenditure level.

While the Proposition 98 guarantee should not decline (unless the $5 to $7 billion does not occur) it is almost guaranteed the Proposition 98 minimum for 2009-10 will be calculated on Test 3.  If this is the case, then the unfunded COLA deficit created in 2008-09 probably will not be funded in 2009-10.  Additionally, there might be only enough new Proposition 98 funds to pay a low COLA for 2009-10.

Summary

The 2008-09 K-12 State Budget is much better than the May Revision; however, it contains the seeds of a difficult 2009-10.  As stated in Hosea: “They have sown the wind; they shall reap the whirlwind.” My advice is to build reserves and wait for the 2009-10 budget shoe to drop.

~Dave Walrath

dwalrath@m-w-h.com