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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.

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.

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.

Take Two: Guv Files Initiative to Hike Taxes; Cites Partisan Gridlock; Releases Open Letter to CA

As expected, Governor Brown is sticking to his guns: Once again he will try to find support for an increase in taxes, but this time he will take the initiative route. On Monday the Administration officially announced the launch of the Schools and Local Public Safety Protection Act of 2012, as the proposal has now been officially filed with the Attorney General's Office. After Republicans refused to support any tax increases earlier this year, the governor has been forced to take his plans directly to the voters through a signature-gathering campaign. After all, you’d be hard-pressed to find anyone at this point who believes a bipartisan tax deal is likely in 2012. So what’s the gist of Brown’s proposal? Essentially he wants to raise $7 billion annually by taxing the rich and hiking the sales tax by half a cent. Both of these tax hikes would expire at the end of 2016. You can read the full ballot measure's language here.

The text of the measure emphasizes repeatedly that funding will support education as well as realignment, i.e. public safety. The measure states, “This measure gives constitutional protection to the shift of local public safety programs from state to local control and the shift of state revenues to local government to pay for those programs. It guarantees that schools are not harmed by providing even more funding than schools would have received without the shift.”

To corral support around this initiative, the governor also released “An Open Letter to the People of California.” The letter states: “The stark truth is that without new tax revenues, we will have no other choice but to make deeper and more damaging cuts to schools, universities, public safety, and our courts.” The governor also explains that he is resorting to an initiative because he does not want to get bogged down by partisan gridlock and that the stakes are too high.  You can read the full letter here.

But the governor isn’t the only one setting his sights on tax increases, as there are now 4 other efforts in the works as well. To keep you in the know, here’s a quick rundown on what else is out there:

1. CA Federation of Teachers: This outfit is proposing to tax the wealthy also; namely, those earning more than $1 million would see their income taxes go up so that schools would receive more funding. This proposal is projected to raise $6 billion

2. Californians for Clean Energy and Jobs: In an attempt to raise $1.1 billion, out-of-state companies would see their corporate taxes increase so that clean energy projects could be funded.

3. Think Long Committee: This proposal has a few components; one, raise taxes on out-of-state firms; two, extend the sales tax; three, reduce income and corporate taxes. This would reportedly raise $10 billion.

4. Molly Munger’s proposal: In order to rake in $10 billion, this civil rights advocate is getting behind a plan that would raise income taxes for most Californians (except the poor). The funds would go toward education, preschools and early-childhood development programs.

Concerns have already been raised that with 5 tax plans floating, voters may be less receptive or that the different proposals will cancel each other out. Californians traditionally turn down measures that involve taxes, as the Chronicle reports that “Voters have rejected the last seven tax-raising measures put before them, and history shows that when Californians see similar-sounding measures on the ballot, they vote no on all of them.” However, recent polling suggested that voters would support tax increases for education, so the Brown Administration has made sure to emphasize that the new revenues will "be spent only on education."

Getting Our Fair Share? CBP Tracks Federal Spending in CA in New Report

Curious about just how many federal dollars are spent in California? Well, the California Budget Project — a nonpartisan/nonprofit organization seeking fiscal reforms to benefit low and moderate income Californians — has done the research for you in a new report that tracks federal spending, which accounts for more than one-third of the state’s budget. Around 15 cents out of every federal dollar spent through the state budget goes to California’s public schools and universities and over 50 cents out of every federal dollar spent through the state budget supports health and human services for children, seniors, and many other Californians. The CBP points out that Californians received $333.8 billion in federal dollars both through and outside of the state budget in FFY 2010. Notably, social security accounts for nearly one-fifth of federal spending here in California. Here are some other figures and highlights from the CBP’s report:

• "An estimated three-quarters – roughly $240 billion – of the more than $330 billion in federal dollars spent in California in FFY 2010 went directly to individuals, businesses, and others without passing through the state budget
• More than one-fifth (23.6 percent) of federal dollars spent in California in FFY 2010 were provided as grants through federal agencies, including the Department of Education, the Department of Transportation, and the Department of Health and Human Services
• More than one out of six federal dollars (17.2 percent) went to businesses that provide goods and services to the federal government, including defense contractors.
• The federal government provided nearly $50 billion for health and human services programs in 2010-11; Nearly three-quarters (73.5 percent) of these funds – an estimated $36.4 billion – supported the Medi-Cal Program
• $272.9 million for drug abuse prevention, treatment, and recovery programs for approximately 300,000 Californians through the Department of Alcohol and Drug Programs
• The federal government provided $5.0 billion for transportation programs in 2010-11 – more than 5 cents out of every federal dollar spent through the state budget"

Key questions about federal spending in the Golden State concern whether we get our fair share. Not according to the figures: California had 11.9 percent of the US population in FFY 2010, but accounted for 10.2 percent of federal expenditures; in addition, California’s share of federal dollars amounted to $8,960 per capita, well below the national per capita level of $10,460.

You can read the CBP’s full report here.

OC’s Payback Time: Tax Take-Back Faces Backlash from State and School Officials

We relayed recently that the Orange County Board of Supervisors basically told the state to drop dead when it came to grabbing $48 million from the County's coffers as a way to balance the state budget. Supervisors decided to fight back over the funds rather than let the state’s plans create layoffs and major cutbacks, so the county announced its plans to hold onto $73.5 million in local property taxes that are supposed to go toward public schools (the county contends the state will be required to backfill the reduction in local revenue due to a mandate). Supervisor John Moorlach stuck to his guns in a post on his blog about the county’s decision and wrote the following:

“The taxpayers of the OC are due the entire $73.5 million. We must keep our $49.5 million and we rightfully deserve the additional $24 million. The schools must be backfilled by the State. The State has to figure out how to come up with the $73.5 million. Had the Legislature and the Governor simply left the OC alone, it would have been $24 million ahead. Now we have to wait and see how Sacramento responds to our having informed them that we are following the law.”

The so-called "response" that OC is getting could be better characterized as backlash. So what about that claim that funding for schools will be guaranteed anyways? Here’s what H.D. Palmer, deputy director of the state Department of Finance, had to say about it, according to the Voice of OC:

“While the redirection of property tax revenue available from K-12 school districts in Orange County would be automatically backfilled with state general fund, the loss of property tax revenue available to community college districts would not. General apportionment funding for K-12 schools is continuously appropriated, and the state general fund makes up the difference between the amount of property tax revenue received by a school district and the ‘revenue limit’ it is entitled to by state statute. However, the state general-fund portion of community college revenue limits is appropriated each year in the budget act. Orange County's decision to redirect property taxes from schools will result in a funding reduction to community colleges unless the Legislature acts to backfill the money.”

The state has already announced that it is considering its legal options in light of Orange County’s decision. So it would appear a legal challenge is likely since the state argues the move is illegal. But the county has countered that it has accounted for legal issues by verifying the options with a private law firm in addition to the legal research that was conducted by county counsel.

But William M. Habermehl, superintendent of the Orange County Department of Education, is certainly not pleased by the county’s decision either. Habermehl fears the state will not make up the difference and commented, “I find it very disconcerting and almost a slap in the face. How can we assume the State of California with the financial difficulties it has will have the money to pay?” More on the response of school officials can be found at the OC Register.

Guest Feature: A Blueprint to Renew CA; Think Long Committee Sets Sights on Reform

Guest Feature

By Nicolas Berggruen and Nathan Gardels

Nicolas Berggruen is chair of the Think Long Committee for California. Nathan Gardels is a senior advisor to the group. You can find out more about the organization and its coalition here. A brochure on its policies can be seen here.

A dispiriting gridlock continues to grip Washington and Sacramento, undermining the public’s faith that democracy can solve our problems. As we write the so-called “super-committee” of Congress, convened to figure a way out of the nation’s fiscal crisis, remains hopelessly paralyzed along the familiar partisan lines. Everyone knows the sad story in Sacramento.

However, an independent group of dedicated California citizens -- ranging among others from retired California Supreme Court Chief Justice Ron George to former US Secretary of State George Shultz to Clinton-era chair of the Council of Economic Advisors Laura Tyson to Antonia Hernandez, former president of the Mexican-American Legal Defense and Education Fund, to Google chairman Eric Schmidt and former Governor Gray Davis -- has succeeded in breaking out of the untenable status quo.  Along with other members of the Think Long Committee for California*, they have put politics aside, bridged philosophical divides and agreed to a bi-partisan plan to reboot California’s dysfunctional democracy.

Unlike many other piecemeal reform efforts over recent years, the Think Long Committee plan seeks to modernize California’s system of governance by installing a new civic software more suited to the realities of the decades ahead.

Our integrated set of recommendations range from common sense practices such as a Rainy Day reserve fund to multi-year budgeting; two-year legislative sessions with one year dedicated to oversight; transparency on initiative funding; K-12 school reform; aligning the skills and educational outcomes of California’s master plan institutions with the needs of our cutting edge industry; and speeding up regulatory approval to foster job creation.

But the core of our proposal has three parts:

* LOCAL EMPOWERMENT. Returning decision-making power and resources where appropriate from Sacramento to localities and regions where the real economy functions and government is closer to the people --- and thus more responsive, flexible and accountable. By helping to cover the costs of devolving public safety from the state to the counties, our plan will also help reduce the high costs associated with prisons – on which we absurdly spend more these days than on higher education. The Think Long plan would dedicate new revenues annually to counties for public safety and as block grants to cities for infrastructure and other locally determined uses.

LAO Releases its Fiscal Outlook in Highly Anticipated Report; St Faces Deficit of $13 Billion

The state Finance Department and Controller John Chiang have already had their say about the state’s revenue forecast and troubling fiscal outlook and now the Legislative Analyst's Office has released its take on the numbers, which are garnering so much attention because the status of the state’s shortfall will affect the likelihood of dreaded trigger cuts. As a refresher, Chiang reported the state has a gap of $1.5 billion in revenues and soon after the Finance Department said the state was $1.3 billion behind projections. Under the budget, it was estimated that the state would take in $88.5 billion in revenues, but the LAO has concluded revenues will only amount to $84.8 billion, which means the numbers will be $3.7 billion short of the $4 billion officials were hoping to receive in order to close the budget and avoid mid-year cuts. The revenue shortfall is supposed to translate into $2 billion in trigger cuts to various state programs, but while the governor’s administration is now acknowledging that some cuts will be necessary, they are not committing to a precise number and will gather further details come December. On December 15th the Department of Finance will release its final revenue projections, and its report will play a major factor in deciding cuts.

Overall the LAO has posited that the state's deficit will be nearly $13 billion through June 2013. The report concisely states: “The remaining work of eliminating the state's persistent, annual deficit will require more difficult cuts in expenditures and/or increases in revenues.”

In response to the LAO’s projections, Controller Chiang released the following statement:

“Today’s news is no surprise.  Our economy’s sluggish growth means a tax windfall is unlikely, and not a penny of the estimated $4 billion has been collected to date. The Governor and lawmakers were smart to backstop their hopeful budget projections with mid-year cuts, but they may not have gone far enough.  Today’s report tracks with the troublesome pattern we have seen in the State’s receipts and spending, which could mean a cash-flow problem in California’s near future.”

The LAO’s outlook has also reenergized debate about how the state should tackle its deficit, with Democratic leaders calling for tax hikes and Republicans unsurprisingly disagreeing with that assessment and criticizing the shaky budget that Democrats passed on their own. You can read the LAO’s full report here.

Finally, the LAO released the following video to explain the conclusions it reached:

Download Video as MP4