Gov. Schwarzenegger’s Budget Plan Has Shaky Assumptions

Gov. Schwarzenegger’s sixth and final budget proposal reflects the themes he’s been sounding since December – increased federal funds or elimination of state programs like in-home care and welfare.

While he touted his commitment to children and education, he used some budgetary sleight-of-hand to reduce the amount the state would be required to pay public schools by more than $800 million – that on the heels of some $12 billion in reductions over the past two budget years.

The constitution requires the governor to submit a balanced budget. Schwarzenegger’s balances but at least half of the $10 billion he counts toward closing an estimated $19.9 billion gap between revenues and spending commitments is illusory.

Rather than poring through the details of what is largely a political chess move against the Democratic majority legislature rather than a budgetary solution, the better examination is of what isn’t going to happen and how the legisalture will react to the document.

Key to balancing the GOP governor’s proposal for the fiscal year that begins July 1 is a wildly optimistic combination of $6.9 billion in new federal money for the state and $940 million in savings through a 5 percent reduction in state worker salaries and a 5 percent increase in their retirement contributions.

Neither the federal largesse nor the pay cuts are likely to occur, at least at the monetary level set by Schwarzenegger. If the federal money doesn’t materialize, the  governor proposes $4.6 billion in what he called ‘draconian” cuts. Among them:

Elimination of in-home care to save $500 million, elimination of health care services for poor children and abolishing the state’s welfare system, in which the state’s $1.1 billion contribution is matched nearly three-to-one by the federal government. He would also seek an additional 5 percent cut in the pay of state employees. 

“I will be relentless,” the GOP governor said of his efforts to get “fairness” in the federal government’s payments to California.

Included in the $6.9 billion he seeks is $900 million for the costs of incarcerating undocumented aliens, reimbursement the state has sought with little effect since 1994 during the Pete Wilson administration. What money has flowed to California has been far below the state’s estimated price tag.

“I was hoping to see new and fresh ideas from the governor.  But we got a lot of recycled ideas that the Legislature has already rejected,” said Assemblyman Noreen Evans, a Santa Rosa Democrat and chair of the lower house’s budget committee. “There’s a difference between persistence and denial.  And, there’s a lot of denial in this budget plan.”

Of the additional federal money, Schwarzenegger probably has the best chance of getting some portion of $1 billion in costs he says Medi-Cal, the state’s health care program for the poor, incurred that should be paid for the federal Medicaid program.  

The budget contains $2.4 billion in “new” revenue, largely by keeping temporary tax increases and tax credit reductions approved in the current budget on the books for an additional year.

Half of this revenue comes from extending the suspension of a business being apply net operating losses from previous years to current income.

The state tax deduction for dependents would stay at $102 – down from $319 – to save $500 million.

Subsidiaries of unitary corporations would have their own liability on research & development and other tax credits rather than being able to trade them.

Multi-state corporations would not be able to use the single sales factor, saving $300 million.

Currently, multi-state businesses are taxed based on a methodology that averages its proportion of sales, property and payroll in California. For most businesses, the sales factor is double-weighted.

The budget approved in February allowed most multi-state businesses to determine what income is subject to taxation by California could choose the current method or just base it on percentage of sales.

The change was supposed to occur in the 2011 tax year and is estimated to eventually cost the state $1.5 billion annually in lost revenue.

Additionally, although found nowhere in the budget summary, two tax changes that were sold as temporary are now being described as permanent because repealing them costs the state money it doesn’t have. They are:

Instead of 25 percent every three months, the four quarterly payments of estimated tax liability will stay at 30 percent the first quarter, 40 percent the second quarter, no third quarter and 30 percent the fourth.

Of the $610 million that change accelerates into an earlier fiscal year, $250 million comes from personal income tax receipts and $360 million from corporate taxes.

Employers will also continue to withhold an additional 10 percent of personal income taxes from their employees’ paychecks, a move approved as part of this year’s budget solution.

The budget includes $581 million in state bond funds and $375 million in yet-to-be-awarded federal economic stimulus aid for high speed focusing primarily on the Los Angeles-to-Anaheim, San Francisco-to-San Jose and Fresno-to-Bakersfield parts of the route. 

Also assumed by the governor is that the State Lands Commission will approve additional offshore drilling at Tranquillon Ridge. His nominee for Lieutenant Governor, Sen. Abel Maldonado, who would become a member of the three-member lands commission if he wins approval by the Legislature, has said publicly he opposes the project. State Controller John Chiang, another member of the commission, has previously voted against the proposal.

Of the state’s lease revenue, Schwarzenegger proposes using $140 million to pay for the state parks system instead of the general fund.

There are another $4.3 billion in such “funding shifts,” including reviving the governor’s proposal to pay for the state’s firefighting efforts through a 4.8 percent surcharge on all residential and commercial property insurance.  Previous attempts to win legislative approval of the idea have failed.

And in a budgetary two-fer, Schwarzenegger eliminates the sales tax on gasoline, replacing most of the lost revenue with a 10.8-cent increase in the excise tax on gasoline.

Eliminating the sales tax on gasoline saves the general fund $1.8 billion, nearly half of which would have gone to public schools, boosting the level of financial support the state would need to make schools “whole.”

Additionally, excise taxes apparently can’t be used to pay for public transit, thereby eliminating the state’s Public Transit Account. Democrats, particularly urban ones, will likely fight for restoration of the program.

After the GOP governor’s presentation, Democrats predictably decried the proposed reductions to health and safety programs, which most likely will not occur even if federal aid doesn’t materialize. 

They also complained of the mechanism to reduce required public school funding and the elimination of transit subsidies.

What remains unclear is what they will counter with. The fact that at least half of the governor’s supposed budget solutions are illusory, increases the likelihood Democrats will propose taxes or Sinclair Paint fees on industries that the public doesn’t object to taxing further: tobacco, alcohol, the oil industry, for example.

Republicans would likely block the increases which require a two-thirds vote to pass.

The lack of a realistic budget plan could also increase support for several “loophole closing” initiatives in circulation and generate more Democratic interest in the proposals of Schwarzenegger’s tax commission, which have so far received tepid legislative support but were lauded by the GOP governor in both his State-of-the-State speech and budget presentation.

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