November 17, 2008

Assembly Budget Committee Hears Testimony from DOF and LAO

The Assembly Budget Committee met on November 14 to hear testimony from the Department of Finance (DOF) and the Legislative Analyst (LAO) on the Governor’s Special Session Budget proposal.  No public testimony was taken, but Legislators raised a number of important issues.  Among those most important to Education and Education Facilities are discussed below.

Committee Chair Laird asked about whether the economy could get even worse than assumed in the new projections.  The DOF responded that a more dramatic decline is possible, but that the multiple-year strategy is intended to help temper such events.  In addition, there was much discussion about the lack of cash on hand.  Normally, the State keeps $2.5 billion available.  But this will not be available next year.  There was also discussion of the difficulty of obtaining Revenue Anticipation Notes and a recognition of the likelihood that interest rates will be higher than assumed in the budget.  The DOF and the LAO claim that the Governor’s proposal will reduce the need for the Notes.

Questions were asked of the witnesses about the availability of further cuts and the effect of the reforms that resulted from the Governor’s California Performance Review.  The LAO recognized that more could be done.  There were no estimates of actual reductions from past or proposed CPR measures.

Witness Motosantos from the DOF described the level of declines anticipated, $11.2 billion in the current year and $13 billion in 2009-10.  The DOF projects that the “cash cushion” will be below the $2.5 billion level by December.  The Governor’s proposal was briefly summarized highlighting the efforts to reach $9.2 billion by ½ cuts and ½ new revenues.  The Governor’s proposal reduces Proposition 98 by $2.5 billion and makes other cuts including Medi-Cal, CalWorks, SSI-SSP, assistance to immigrants and other reductions in services.

The new Legislative Analyst recognized that his new role was off to a challenging start.  Mac Taylor summarized the LAO’s Overview of the Governor's Special Session Proposals.  The LAO estimated that the budget hole would be $28 billion by 2010.  He compared Figures 1 (page 6) and 10 (page 17) to demonstrate that recovery would be slow.  He offered that the three-year approach consistent with the proposed lottery securitization was a sound one.  He also summarized the options presented in the LAO Report’s Appendix.  He called the budget deficit “terribly serious” as evidenced by its needing a three-year plan to rectify and told legislators that it was “imperative to act early.”

The bulk of the hearing allowed legislators to prod into the feasibility of further cuts and efficiencies leading to a budget resolution, as well as ask questions about how best to distribute tax burdens.  The LAO answered no when Assembly Member Brownley specifically asked if he thought there was a way to get out of the deficit without taxes.  He also answered that even assuming the efficiencies proposed by the Governor were in place by January, the impacts would be minor.

Members Feuer and others encouraged the LAO and DOF to consider the Federal Tax impacts of revenue increases to minimize impacts on California taxpayers.  Options including “surcharge” on income tax instead of sales tax were offered.

Assembly Member Swanson argued that more should be done to align with Federal efforts to stimulate the economy instead of proposing cuts to jobs and schools.  The DOF argued that they were doing this by accelerating bond fund expenditures in the proposal. 

Other members asked the LAO to focus on the costs of cuts, furloughs, and reduced holidays to worker productivity and income.  The DOF replied that despite impacts on unemployment and productivity the savings would outweigh the costs.

Ernie Silva

esilva@m-w-h.com