Lay of the Budget Landscape as the May Revision Approaches

Due in part to lower-than-expected April tax collections, California now faces a budget shortfall of at least $22 billion, Gov. Arnold Schwarzenegger will announce when he unveils his revised spending plan on Friday May 14.

The GOP governor’s estimate of budget gaps has traditionally been larger than the Democratic majority Legislature because Schwarzenegger includes replenishing a reserve account to deal with unexpected disasters, economic and natural.

Democratic budget writers use the figure required to simply close the gap between revenues collected and spending commitments made – something in the area of $19 billion.

The budget gap is an estimate of how much the state would be in the hole at the end of the next fiscal year – June 30, 2011 – if no corrective action is taken to bring spending in line with revenues.

And while the estimates of the gap are rough, a look at the budget landscape and what has transpired since Schwarzenegger introduced his January budget plan, which anticipated a $20 billion hole counting a new reserve, offers a fairly reliable picture of what the fiscal situation lawmakers and the GOP governor will have to grapple with.

To the good, lawmakers reduced spending by $1.3 billion during a special fiscal emergency session called earlier in the year by Schwarzenegger.

By enacting the cuts in the spring, before the beginning of the new fiscal year, several months of additional savings accrued.

State tax revenues – sales, business and income – were above estimates $2.6 billion through March, according to Schwarzenegger’s Department of Finance.

On the minus side, the estimates used in the GOP governor’s January for April tax collections were more than $3.6 billion higher than actual collections.

Income tax receipts, which pay for 50 percent of the state’s cash-starved general fund, were $7.4 billion for April, $3.1 billion lower than Schwarzenegger’s $10.5 billion projection.

Bank and corporations taxes were $529 million lower than the $1.9 billion expected.

Schwarzenegger’s budget was also premised on lawmakers enacting a complete budget by March 1. His budget anticipated savings from those four months before the fiscal year begins July 1. That “lost” savings now will be added onto the budget gap.

Central to Schwarzenegger’s plan was receipt of $6.9 billion in new money from the federal government to pay for the impact of federal court decisions restricting the state’s ability to cut spending and under-funded federal mandates.

As of May 6, California has secured under $3 billion in new federal funds.

In his January budget, Schwarzenegger said if federal money fell short of $6.9 billion, he would turn to a list of additional state spending cuts to make up the difference.

Several of the bigger ticket cuts are either unworkable, fiscally irresponsible or politically infeasible.

For example, Schwarzenegger’s proposed elimination of the state’s welfare program to save $1 billion would end an almost $4 billion federal match.

Democrats won’t support reducing state employee salaries by a second 5 percent – a savings of $508 million – just as they haven’t embraced the initial 5 percent reduction Schwarzenegger called for in January.

Schwarzenegger himself has ruled out additional reductions to the University of California and the California State University system.

Responding to the Gulf of Mexico oil spill, he backed of a proposal to expand drilling at Tranquillion Ridge off the Santa Barbara coast, which his budget said would have yielded $100 million in royalty payments.

That money was to be substituted for general fund spending on state parks. Now, that savings is lost.

“The risk is just much greater than the money is worth. So we will figure out how to deal with that extra $100 million problem,” Schwarzenegger told reporters in announcing his change of position.

Schwarzenegger also listed five tax credits or postponed tax breaks that would also be used to plug the hole left by the less-than-anticipated federal dollars.

Democrats will call for these solutions to be used first before further “catastrophic” reductions to the health and human services programs.

The two largest revenue raisers would prevent businesses from reducing taxable income by applying net operating losses from prior years. That would save $1.2 billion.

Maintaining the reduction in the tax credit for dependants at $102 – down from $319 – saves $504 million.

Large corporations, including those in the Silicon Valley, are eager for a change in how their state taxes are calculated that would reduce their taxes by $300 million. Delaying enactment of the law another year is something those companies will fight, most likely through their GOP allies withholding votes for a budget unless the tax change goes into effect as scheduled.

The GOP governor is likely to hold off on embracing the revenue proposals and use them as a negotiating tool with Democrats as budget negotiations deepen.

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