Increase Revenue, Preserve Welfare, Legislative Analyst Says

The Legislature should reject Gov. Arnold Schwarzenegger’s proposal to eliminate the state’s welfare program and childcare for low-income families, the Legislative Analyst said May 18 in an assessment of the GOP governor’s revised budget plan.

“This year’s budget situation may prove to be the most difficult in recent memory,” the analyst wrote. “All of the major options available to the Legislature to close the budget gap will be difficult.”

Among the analyst’s recommendations is that lawmakers adopt revenue increases to lessen the severity of Schwarzenegger’s $12.4 billion in spending reductions aimed at closing a $19.1 billion budge gap for the fiscal year beginning July 1.

“These are core programs that provide income-based services to lowest income Californians and we should do everything we can to preserve (them),” said Mac Taylor, the Legislative Analyst of welfare and childcare.

Overall, the Legislative Analyst agreed with Schwarzenegger’s assessment of the state’s fiscal mess – a $17.9 billion gap between revenue and spending commitments to which the governor adds a $1.2 billion reserve fund.

As to how that gap should be closed, however, the analyst takes a different view.

Support for public schools – the largest expenditure from the state’s cash-starved general fund – should be reduced through suspending Proposition 98, the 1988 initiative whose formulas dictate the level of state funding for schools, the analyst says.

Schwarzenegger, through a series of convoluted budgetary moves, reduces state support for schools to $48.9 billion in his revised budget — $4.1 billion less than the minimum schools are entitled to under current law.

Instead, the analyst proposes suspension in the current fiscal year which ends June 30. That would allow lawmakers to set the level of school funding. Suspension, as proposed by the analyst, would provide schools with $50.8 billion, $2.2 billion less than the present minimum of $53 billion.

“Under current law, the state would need to provide substantially more money than the governor proposes — $4.1 billion,” the analyst wrote. “We believe the state cannot afford to support K-14 education at this level.”

In its 22-year life, Proposition 98 has been suspended only a handful of times. Doing so can cause political consequences, particularly in an election year.

Lawmakers should also consider reductions in areas the governor either left untouched or augmented, such as the University of California and the California State University system whose budgets he boosted by $800 million.

“The Legislature should achieve substantially more savings from the universities, trial courts and public safety local assistance programs,” the analyst wrote. “These spending reductions – in conjunction with other budget actions – could facilitate maintenance of the state’s core programs.”

Schwarzenegger’s severest cuts could also be blunted through fee increases, making tax exemptions and credits less generous and delaying the implementation date of other tax breaks.

The analyst does not call for increasing the state’s income tax, sales tax or bank and corporations tax – California’s three chief revenue sources.

Among some of the suggestions, doing what the governor said he would do in his January budget plan if additional federal revenue didn’t materialize at sufficient levels to balance the budget – postpone the implementation date of two tax breaks of benefit to large corporations and maintain the less generous levels set in the February 2009 budget of the dependent tax credit and the ability to write off past losses against current income.

Schwarzenegger said the delay and lower levels would continue for one year. The analyst recommends two.

The analyst also proposes a fee on homeowners who live in areas of the state in which the state’s Department of Forestry provides fire protection. And the analyst advocates for a boost in community college fees from the current $26.

Financially needy students would not be affected because they receive a fee waiver and middle-income students would see the increase offset by federal tax credits.

Adjusting the tax on alcohol for inflation – the rates haven’t been changed since 1991 – would raise more than $200 million, the analyst notes.

Also recommended is increasing vehicle license fees – an unlikely proposal to win a gubernatorial signature since Schwarzenegger campaigned on a pledge to lower what he calls the “car tax.”

If lawmakers and the governor close this year’s budget gap whoever inherits the Capitol’s corner office after the November election will still face ongoing budget shortfalls through the fiscal year ending June 30, 2015.

The holes would be smaller than they otherwise would be – single digit billions rather than double – but still represent sizeable amounts each year: $5 billion, $6.5 billion, $4.5 billion and $4 billion.

“We urge elected leaders to use this crisis to better prepare the state’s budget and its government to cope with future economic downturns,” the analyst concludes.

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