Alert October 29, 2010

California's New Budget: Good Medicine or Temporary Relief?

Governor Schwarzenegger has finally signed a budget for California, a record 100 days after the deadline. However, according to a report recently released by California’s Legislative Analyst’s Office, most of the solutions for the current $19 billion budget deficit are “one-time or temporary in nature,” which means California will likely face similarly large budget deficits in upcoming fiscal years. In fact, the most favorable projections show the new budget producing a $10 billion revenue shortfall for fiscal year 2011-12.

The new budget provides for approximately $87.5 billion in spending, expunging a previously projected $19 billion deficit, and Governor Schwarzenegger employed his line-item veto to cut an additional $965 million before signing the budget bills. Passage of the budget frees California Treasurer Bill Lockyer to begin issuing $10 billion in short term notes and to continue pursuing a $5 billion bridge loan from Wall Street banks that is hoped to eliminate the need for IOUs to pay upcoming State expenses.

Some of the assumptions and spending provisions in the new budget include the following:

Revenue Projections

  • $5.3 billion in federal aid ($2 billion more than Governor Schwarzenegger’s May projection)
  • $1.4 billion in additional tax revenue (based on presumption of economic improvement)
  • $1.2 billion from sale of 11 state properties – the so-called “Golden State Portfolio”

Budgetary Adjustments

  • Deferment of $1.8 billion owed to K-14 schools
  • Reduction of budget reserve to $200 million (Governor Schwarzenegger requested $1.2 billion)
  • $1.4 billion from the delay of a corporate tax break for two years

Spending Reductions

  • $3.1 billion in Proposition 98 school funding
  • $1.5 billion in State employee pay and pension benefits
  • $1.1 billion in Department of Corrections and Rehabilitation expenses
  • $937 million in health and human services programs
  • $212 million from higher education (presuming increased federal funding)