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Winter Slump: Controller’s Revenue Update; $165.2 Million Below Projections

Although the governor only just announced his budget for 2012-13, its numbers are already falling below expectations. Controller John Chiang, who released December’s cash update, notes that revenues came in $165.2 million below the latest projections contained in the Governor’s proposed budget. In comparison to the 2011 Budget Act, December revenues were $1.4 billion below estimates. Chiang commented:

“While we saw positive numbers in November, December’s totals failed to meet even the latest revenue projections. Coupled with higher spending tied to unrealized cost savings, these latest revenue figures create growing concern that legislative action may be needed in the near future to ensure that the State can meet its payment obligations.”

There was one bright spot: December’s sales tax totals came in above estimates by $17 million (1.1 percent). Still, personal income taxes were $69.8 million down (-1.4 percent), and corporate taxes also dropped by $19.5 million (-1.4 percent). Hope is on the horizon though, as the Controller notes, “The balance of holiday sales tax receipts will be seen in late January and early February.” As for local governments, and specifically counties, it’s a good sign that sales tax revenues are up, which translates to higher revenues for realignment and since vehicle license registrations have also increased, funds for realignment will also receive another boost.

See December’s financial statement here.

Summary analysis is available here.

Concerns about Double-Taxation Remain as Rural Fire Fee is Revised

The much-hated rural fire fee is back in the news, as a new draft was recently released with several new provisions. The state Board of Forestry and Fire Protection will hold a hearing on January 11th to determine if the latest incarnation will move forward. As a refresher, property owners who fall under State Responsibility Areas (SRA) will have to dole out $150 annually and additional stipulations are sure to enrage critics. For instance, the fee will be $300 if a parcel of land has two single-family homes on it and duplexes will also be subject to the $150 fee. The governor also rejected a smaller fee that was proposed, which would have been $90 due to a series of credits.

There were also previously concerns that jails or hospitals would be charged extra due to ambiguously worded provisions, but new changes state that these types of buildings will be charged the same $150 fee.

Despite strong objections from local government leaders, the administration is sticking to its guns, with Brown commenting that “To me it’s just simple. People need to share the burden of the benefits they receive. That’s the principle.” However, CSAC has called the fee "double-taxation without any additional benefit" for communities that already support local fire stations. The Half Moon Bay reports on how rural residents regard the fee due to concerns about double taxation:

“The city of La Honda stays relatively moist even during the hot summer months and hasn't experienced a major forest fire in over 50 years. Nonetheless, local homeowners agree to pay 1 percent of their property taxes to support the La Honda Fire Brigade, a volunteer fire department that derives most of its annual budget from donations and fundraising. The same goes for Kings Mountain, where residents for decades have held a successful annual art fair to raise money for the local fire station. [A resident] points out a $150 state surcharge would be more than double what he annually pays through taxes and donations for local fire protection.”

Reportedly the fees could take full effect by April. Expect legal challenges, as has been the case with many aspects of the state budget. Taxpayers may be less-than-pleased to hear that of the millions collected, over $3 million will go to the State Board of Equalization as a fee for doing the billing. We relayed previously that while the California Board of Forestry and Fire Protection originally revised the fee structure so that rural residents could only be charged a maximum of $90, new appointees to the Board allowed the ultimate fee amount to go higher, as the board was restocked with Brown appointees. The governor took issue with the lowered fee back in August because the Administration and legislators are relying on the revenue for the patched up state budget.

A fact sheet on Cal Fire’s coverage across the state can be seen here.

LAO Disputes Revenues Outlined in Guv’s Tax Plan; Guv’s Comments on Local Govt.

Governor Brown is doing all he can to hype his tax initiative, which he has proposed in order to raise $7 billion annually in revenues. When he announced his budget, Brown stated he was really committed to paying back the wall of debt and eliminating the deficit, which he argues could be accomplished through the approval of his measure. Then the governor laid out the threats, noting that he would be forced to pull additional trigger cuts if the initiative does not succeed. The Administration’s new budget is a $92.6 billion spending plan and experts have called it the largest ransom note in California political history due to the consequences that have been outlined if Brown doesn’t get his way on the initiative.

However, it’s now been revealed that the LAO and the Department of Finance don’t see eye-to-eye on the amount of revenues the tax proposal will actually generate. According to the LAO’s analysis, the initiative would only raise $4.8 billion, which is $2.1 billion less than what the governor has put forth. The discrepancy in numbers is notable because it could mean deeper cuts or the need for even more revenues. In a joint letter, Legislative Analyst Marc Taylor comments, “The volatility described above makes it difficult to forecast this measure's state revenue gains from high-income taxpayers. As a result, the estimates from our two offices of this measure's annual revenue increases vary."

If the governor’s initiative does in fact take in less revenue than projected by the Administration, it could undercut his promises to the local government group CSAC (California State Association of Counties). Brown recently convinced CSAC to drop its own initiative, which was a competing plan that sought to secure funding for realignment. One of the governor’s points of persuasion was that his initiative would have a broader coalition of support and raise more revenue.

On the topic of local government, the governor also made a few comments during his press conference about the release of his budget. He outlined that he wishes to expand realignment and commented, “We should be giving more discretion to cities, counties, and school districts [...] local democracy is as responsive and vigorous as state democracy.”
 
The governor was also asked about redevelopment and he reiterated previous statements made by administration officials. But he did note, “I understand concerns about economic development.” The governor went on to say he cut out redevelopment because the state is short of money, not because he dislikes RDAs. He posited that other services simply must trump the need for redevelopment and that the money has to come from somewhere, noting the state was in a box.

If you haven’t seen it, you can read the governor’s budget here.

Recipe for Revenge: Local Govt Political Leverage in the Battle over Redevelopment

The dust is far from settled on the redevelopment front as local officials make their legislative push to revive the agencies in the aftermath of the Supreme Court’s recent ruling. In addition, the City of Cerritos, along with nine other cities, filed a separate legal challenge in Sacramento Superior Court in order to raise constitutional claims that were not addressed in the court’s decision (a copy of the complaint can be seen here).

However, writer Joe Mathews over at NBC’s Prop Zero argues in an interesting article that the court’s ruling provides a recipe of revenge for local governments if they’re willing to consider another route in light of the governor’s staunch position on the matter and the inevitable budgetary tug-of-war that could decrease agencies’ slice of the pie every year if they are preserved in some other (i.e. weaker) form.

Mathews posits that local governments should use their political leverage in upcoming battles over pension reform and the governor’s desire to raise taxes by demanding greater power to raise their own revenues. An excerpt from Mathews’ article reads:

“The smarter move would be to launch a long-term campaign to return the power to set tax rates to local officials. Yes, that's a game-changer. And yes, that would change one provision of Prop 13. But the policy is right, and the strange politics of 2012 offer an opportunity. Gov. Jerry Brown and the Democrats are desperate to pass tax initiatives. But to do so, they'll need support from local elected officials -- for political cover and because the money from Brown's tax initiatives is supposed to go to local governments. By the same token, Republicans want pension reform and a new spending limit, and will have trouble getting them if local governments oppose the measure.”

“Locals should leverage Democrats' need for support for the tax initiatives -- and Republicans' desire for pension reform and spending changes -- to demand more flexibility to set tax rates themselves. The specifics of such a change would involve everything from tweaks of existing laws to the possibility of a future ballot measure or a constitutional revision process.  If Brown and Democrats balk, then the local governments should threaten to oppose -- loudly -- the tax initiatives, and to continue to use the courts to frustrate state budget-balancing efforts.”

Mathews concludes that without greater revenue-raising power, local governments will find themselves stuck in the same position, meaning the state will balance its budget on the backs of locals while offloading greater responsibility without the funds needed to cover the costs. Read the whole article here. Let us know what you think of Mathew’s arguments by leaving a comment below.

Millionaires Tax Campaign Says Fund Local Services by Taxing a Kardashian

Last week it was announced that Governor Brown’s campaign to raise taxes was rolling in the dough, with $1.2 million collected in two weeks. You’ll recall that Brown wants to pass a ballot measure that would raise $7 billion annually for five years. While the campaign’s early contributions certainly grabbed plenty of notice, a rival tax plan has come up with another way to make headlines: The Courage Campaign and the California Federation of Teachers have apparently figured out that if you really want attention, then nowadays it seems -- for some inexplicable reason -- all you have to do is throw a Kardashian in the mix (logic is no help when trying to find a rationale for the fame of the omnipresent clan known as the Kardashians. If you haven’t heard of them, then count yourself blessed).

This rival tax plan to the governor’s proposal is being called the “Millionaires Tax of 2012” and it’s using “celebrity” Kim Kardashian’s name (or more aptly, hatred for her) to generate support for its cause. This tax would raise $6 billion annually by raising income tax 3% on those who earn $1 to $2 million; in addition, it would raise the rate by 5% on those who earn over $2 million. The campaign contends that a higher tax rate on wealthy Californians could help fund schools and local services. To drum up support for the millionaire’s tax, the Courage Campaign has made a video called “Tax Kim” that claims she made more than $12 million in 2010, but she only pays one percentage point more in state income taxes than a middle-class Californian.

The video’s subtitle reads: “That's not OK, especially when budget cuts are decimating schools and critical programs for children and the elderly. Don't you think she could pay a little more?” More info on the campaign can be seen here.

View the video here:

Controller Announces He will Keep Pushing for Expanded Auditing Authority; $3 Billion in Findings

At any given point during the year, the State Controller’s Office is typically conducting 200 to 300 different audits, and local governments have been no stranger to these efforts and increased scrutiny. In fact, since taking office in 2007, the controller’s audit findings through State and local investigations have now totaled more than $3 billion, which is more than any other Controller in recorded State history.

State Controller John Chiang commented the following about the work of his office:

“Unchecked spending is an invitation for misspending. My audits offer an inside-look at state and local checkbooks, and show us where fiscal practices need serious improvement. These findings can lead to real taxpayer savings, and every dollar rescued is one that we don’t have to take away from education, public safety, or other essential services.”

Prominent audit findings at the local level and beyond include:

Bell: Illegal Property Taxes and Unlawful Spending
Hercules: Currently being audited
Montebello: No-bid contracts and lax spending controls
You can find a list of the Controller’s audits of state and local agencies here.
Revenue Audits can be seen here.
Oversight of Independent Auditor Findings of Education and Local Government Agencies: see here.
More here.

Notably, the controller used the announcement about his overall audit findings to note that he would continue to push for expanded authority. Chiang’s press release states the following: “The Controller's office was flooded with requests audits of more than 200 local governments across California. In order to meet those demands and better protect taxpayer dollars at the local level, the Controller introduced legislation to broaden his office's auditing abilities. While those bills stalled in the last legislation session, the Controller will continue to push to expand his office's ability to protect taxpayer dollars through financial audits.”

Pulling the Trigger: Guv Announces Cuts and New Revenue Forecast; $980 Million in Cuts

The fate of the much-maligned trigger cuts was announced by Governor Brown and state finance officials when they released an updated version of the state’s revenue forecast Tuesday. While many programs and services will be impacted, the direct impact to local governments will mostly be felt with respect to library funding and counties will be charged more for housing offenders. Outlining the options before the state, Brown commented, “You either cut or you tax. There’s no other way.” While there were fears that K-12 schools would face major cuts, in fact the reductions slated for education will be far less than anticipated and instead higher education and child care will be among the components that will have slashed funds. According to the Department of Finance, the state’s revenues are $2.2 billion below projections. Cutting to the chase, the state will impose $980 million in mid-year trigger cuts.

You can watch Governor Brown’s press conference on the budget here.

Notably, the figures presented by the Department of Finance were far rosier than the estimates of the Legislative Analyst’s Office, as the LAO stated California would fall $3.7 billion short on revenues and that far more would have to be cut January 1st. However, state officials have pointed to strong November sales taxes and higher revenues as factors that have softened the blow on the trigger cuts. The Department of Finance’s report on the revenue forecast states the following:

• "Personal income tax revenues are estimated to be $1.529 billion higher. High-income wages and salaries were stronger in 2011 and 2012 than previously estimated.  Proprietor’s income is also estimated to be higher.  However, capital gains are mixed: estimated to be slightly lower in 2011 and slightly higher in 2012;
• Sales tax revenues are estimated to be $232 million lower, primarily due to the result of the delay in implementation of use tax collection changes, a lower projection of inflation, and a higher projection of unemployment; and,
• Corporation tax revenues are estimated to be $467 million higher, primarily because of a higher corporate profits forecast.
• This net increase in the state’s biggest three tax sources was insufficient to fully offset the $4 billion in unallocated revenues described above"

 Outlined below are some of the cuts that will take effect in 2012:

• $100 million to the University of California.
• $100 million to California State University.
• $100 million to developmental services.
• $100 million to In-Home Supportive Services.
• $72 million in increased charges to counties for young offenders sent to state prison.
• $30 million to Community Colleges.
• $23 million to child care programs.
• $16 million to local libraries.
• $60 million miscellaneous.

You can read the full report here. For those hoping that the Legislature will rally around a last-minute effort to prevent the trigger cuts, relying on the abilities or efficacy of Sacramento is sure to end in disappointment.

Trigger Happy: St Finance Officials to Update Revenue Forecast; Guv Threatens More Cuts

This week state finance officials will release an updated version of their revenue forecast, and all eyes will fall on the update as the predictor of the extent to which mid-year cuts will impact a range of programs and services. While many affected interests are hoping the trigger cuts will  be avoided by some miracle, top legislators have indicated there is little room to make tweaks in light of the large deficit facing the state. In addition, many Republicans have voiced support for the cuts. The Contra Costa Times reports that “On Thursday, Brown will announce the long-awaited results of his finance team's forecast for the last six months of the fiscal year. The team will determine whether the revenues have improved enough to avert the worst of the potential cutbacks: $1.9 billion to K-12 schools.”

Notably, the latest cash update from State Controller John Chiang did have some good news: the state’s revenues during the month of November were $497.7 million above projections outlined in the state budget. That being said, Chiang was quick to point out that total year-to-date general fund revenues are still behind the budget's estimates by $1 billion.

The Controller commented the following: “While November's totals came in 9 percent above projections, they did not erase the fact that we are still running $1 billion behind in revenues and $2 billion ahead in expenditures. Regardless of whether midyear cuts are enacted next week, the Legislature faces a tremendous fiscal challenge when it returns to session next month."

The combined current year cash deficit stands at $21.5 billion and the State ended last fiscal year with a cash deficit of $8.2 billion. For the month of November, it was primarily income tax revenues that helped boost revenues above projections, as the state took in $531.4 million, or 19.6 percent, more than expected.

Read the Controller’s November financial statement here. Summary analysis can be found here. The Bee reports on the following important point about November’s figures:

“The Legislative Analyst Office's Jason Sisney said the strong November income tax figures were largely due to fewer refunds paid out rather than improvements in the economy. If so, the November total doesn't necessarily foretell greater revenue for California through the rest of the fiscal year, which means the state may still be on track for a significant round of midyear cuts.”

In other budget news, while midyear cuts appear likely, the state could face another round of automatic cuts if the governor doesn’t get his way, according to the administration. Brown recently launched an initiative that would raise taxes and the governor has said if voters reject it, then the state should prepare for even more cuts to address the shortfall. The governor commented, “We’re going to balance the budget. We’ll propose cuts and the taxes, and if the taxes don’t materialize, I will propose we have trigger cuts that go into effect immediately.”

Republicans have criticized the governor’s threat and suggested he is holding taxpayers hostage.

Richmond Could Become First City in CA to Tax Soda in Fight Against Obesity

Richmond could become the first city in California to tax soda; in fact, Richmond would be one of the first cities in the nation to impose a special tax on sugary drinks. This week the City Council approved the preparation of ballot language for a measure to go before voters in November of 2012.

Troubling obesity rates were a motivating factor behind the proposal, which would impose a penny-per-ounce tax. According to Wendel Brunner, Public Health Director of the Contra Costa Health Department, 32 percent of children and 24 percent of adults are considered obese in Richmond.

Reportedly the funds raised by the tax will go toward anti-obesity programs or even new sports fields and other health programs. Councilman Jeff Ritterman is one of the fee’s strongest supporters, as he proposed the measure. Notably, Ritterman is the Chief of Cardiology at Kaiser Richmond Medical Center. During the council’s discussion of the tax, Ritterman commented, “We will be sentencing these kids to lives of early illness and early death if we don’t do something.”

Many residents were clearly divided on the issue and raised concerns about the higher costs in a city that has struggled economically. One resident criticized the council a letter and said the proposal suggested consumers were incapable of thinking for themselves.

Finally, Contra Costa Times reports on one amusing point during the council meeting:

“Before voting to put the tax on the ballot, Councilman Tom Butt held up a can of soda that Councilman Nat Bates had brought him earlier in the evening. ‘He tried to kill me,’ Butt said, shaking the can menacingly. ‘Look at this--150 calories of certain death.’”

Well played, sir.

Anti-Tax Pledge to Target CA Officials; Follows Norquist’s Pledge

If you paid any attention to squabbling over the failures of the super committee at the nation’s capitol, then you’re sure to be familiar with the name of Grover Norquist and his outfit Americans for Tax Reform. Norquist has been criticized for the influence he holds over Congressional Republicans due to a pledge he has circulated that promises no tax hikes under any circumstances. While the impact of the anti-tax campaigner on budget negotiations has been subject to much debate, it would seem similar tax pledges have taken inspiration from Norquist’s efforts, as other pledges have sprung up around the country, including California. Specifically, an organization named Stop Taxing Us, which is based in the city of Carlsbad, has launched a new taxpayer pledge entitled “The Promise to California Taxpayers.” Assembly District candidates have already signed, as has San Diego City Councilman Carl DeMaio, who is a candidate for mayor. Brian Brady, a director with Stop Taxing Us, called the pledge a tool for voters to pressure officials at all levels of government, and he commented the following:

“We intend to solicit as many California lawmakers, from a local mosquito abatement board on up to governor. Stop Taxing Us intends to be a clearinghouse for those groups and compile which lawmakers sign the promise and which lawmakers decline to sign the promise.”

The four-point pledge reads as follows:

“ONE: oppose any and all efforts to increase marginal tax rates for individuals and/or businesses, and
TWO: oppose any and all efforts to amend and/or repeal Proposition 13, and
THREE: oppose any and all efforts to increase the taxpayers’ contribution, to public employee pension plans, and
FOUR: oppose any and all net reduction and/or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

This particular pledge reportedly goes further than the pledge from the Howard Jarvis Taxpayers Association. In addition, it takes language from the pledge circulated by Grover Norquist.