Cal­i­for­nia Bud­get Process Gets Go­ing With a Fo­cus on Sur­plus

The Bond Buyer - - Front Page - By Kee­ley WeB­ster

The big­gest bat­tle in this year’s Cal­i­for­nia bud­get process is likely to be about what to do with an es­ti­mated $7.5 bil­lion bud­get sur­plus.

Cal­i­for­nia Gov. Jerry Brown’s in­cli­na­tion, demon­strated in the $190.3 bil­lion 2018-19 spend­ing plan he re­leased Wed­nes­day, is to put a sig­nif­i­cant amount into a rainy day fund and op­er­at­ing re­serve fund.

“The whole point is to think ahead and min­i­mize the pain that is com­ing, be­cause of the way our busi­ness cy­cle works,” Brown said dur­ing his bud­get press con­fer­ence Wed­nes­day. “That is just the re­al­ity.”

Brown said his ad­min­is­tra­tion had turned what he de­scribed as a $27 bil­lion deficit when he took of­fice in 2011 into a sur­plus, adding that he doesn’t want to leave a fis­cal mess for his suc­ces­sor when he terms out af­ter this year’s elec­tion.

The gover­nor’s bud­get would di­rect $3.5 bil­lion into the rainy day fund in ad­di­tion to the $1.5 bil­lion con­sti­tu­tion­ally re­quired through leg­is­la­tion that cre­ated the fund in 2014. That pro­posal would re­sult in a $13.5 bil­lion rainy day fund, hit­ting Brown’s goal of hav­ing 10% of tax rev­enues in re­serve.

The Leg­is­la­ture’s Demo­cratic ma­jori­ties have sig­naled that they think some of the sur­plus should be used to bol­ster so­cial pro­grams, par­tic­u­larly those for the very poor.

“As it re­lates to poverty, the gover­nor stated that un­like other states, Cal­i­for­nia has a good sys­tem of sup­port, but it is mod­est,” said Sen. Holly Mitchell, D-Los An­ge­les, who chairs the Se­nate Bud­get Com­mit­tee. “Here, mod­esty is not good enough. I would like to see more in­creases in Sup­ple­men­tal Se­cu­rity In­come cost of liv­ing al­lowances, and in­vest­ments in hu­man services, par­tic­u­larly as it re­lates to deep poverty and CalWORKS,” re­fer­ring to the state’s pro­gram for im­pov­er­ished fam­i­lies.

“I have al­ways said that the bud­get is a value state­ment of what we as Cal­i­for­ni­ans pri­or­i­tize,” Mitchell said.

Given the un­cer­tainty at the fed­eral level and the like­li­hood of more fed­eral cuts to so­cial pro­grams, the gover­nor could strike “a bet­ter balance be­tween putting funds away for later and boost­ing state in­vest­ment now to help more house­holds to make ends meet and climb the eco­nomic lad­der, es­pe­cially in light of our state’s high­est-in-the-na­tion poverty rate,” said Chris Hoene, di­rec­tor of the Cal­i­for­nia Bud­get & Pol­icy Cen­ter, a think tank that fo­cuses on how the state’s bud­get poli­cies im­pact poor and mid­dle-class res­i­dents.

The much out­num­bered Repub­li­can cau­cuses have their own ideas for the sur­plus.

They want $2 bil­lion to be used for re­serves, $2 bil­lion to pay down pen­sion li­a­bil­i­ties and $2 bil­lion to go to lo­cal gov­ern­ment to fund hous­ing in­cen­tives, home­less shel­ters and fix lo­cal streets and roads.

“Cal­i­for­ni­ans worked in­cred­i­bly hard to pay these record high taxes and de­serve the ab­so­lute best re­turn for their hard work,” said Se­nate Repub­li­can Leader Pa­tri­cia Bates, R-La­guna Niguel.

Brown’s bud­get would also send money to lo­cal gov­ern­ments with $8 bil­lion in flex­i­ble fund­ing to help coun­ties as they con­tinue to deal with the shift that be­gan in 2011 of non-vi­o­lent of­fend­ers from state prison to county jails.

He also would al­lo­cate $3 bil­lion for K-12 schools through lo­cal con­trol fund­ing to put more money in the hands of schools that have higher con­cen­tra­tions of im­pov­er­ished stu­dents and English learn­ers.

The gover­nor didn’t ig­nore the soar­ing stock mar­ket and rel­a­tively strong em­ploy­ment fig­ures, but said they don’t de­tract from rea­sons to pre­pare for a down­turn. It might be an­other year or two be­fore the next down­turn, Brown said, but you still need time to re­cover.

The state re­ceives 70% of its rev­enue from in­come taxes and half of that comes from the top 1%, mak­ing the state depen­dent on cap­i­tal gains earned in the stock mar­ket and re­sult­ing in huge rev­enue swings, Brown said.

“We can’t turn on a dime in a down­turn,” he said.

Brown’s bud­get would place $2.3 bil­lion into an op­er­at­ing re­serve fund in ad­di­tion to the money go­ing into the rainy day fund.

“We have to have a re­serve,” said Michael Co­hen, state’s De­part­ment of Fi­nance di­rec­tor. “This year shows that, be­cause if we didn’t start with a $1 bil­lion re­serve we would be in deficit.

“We have to set some money aside whether it’s for wild­fire costs or Medi­care,” Co­hen said.

Sen. Jeff Stone, R-River­side County, sup­ported the gover­nor’s plan to bol­ster the rainy day fund, but sug­gested that the level of the sur­plus gives the state plenty of room to re­turn some of the money to tax­pay­ers “to mit­i­gate any neg­a­tive im­pacts that may come from the re­cently adopted fed­eral tax re­form leg­is­la­tion.”

The gover­nor’s Jan­uary pro­posal is an open­ing gam­bit in the long march to­ward a bud­get that is to be adopted in June, be­fore the July 1 be­gin­ning of the fis­cal year.

The gover­nor will re­lease a re­vised bud­get pro­posal in May us­ing up­dated rev­enue fig­ures from April’s in­come tax fil­ings.

In ad­di­tion to trans­porta­tion, Brown’s bud­get also takes aim at the state’s es­ti­mated $67 bil­lion in de­ferred main­te­nance.

The 2015 and 2016 bud­gets al­lo­cated $960 mil­lion to the most crit­i­cal de­ferred main­te­nance projects such as lev­ees and high-pri­or­ity state fa­cil­i­ties in­clud­ing of­fice build­ings and the Capi­tol An­nex, ac­cord­ing to the bud­get doc­u­ment.

This bud­get takes into ac­count the pas­sage of Se­nate Bill 1, the gas tax, which it says will pro­vide $55 bil­lion in new trans­porta­tion fund­ing over the next 10 years, split equally be­tween state and lo­cal projects.

The gover­nor’s spend­ing plan would al­lo­cate $4.6 bil­lion in new trans­porta­tion fund­ing in fis­cal 2018-19 in­clud­ing $2.8 bil­lion to re­pair neigh­bor­hood roads, state high­ways and bridges, $556 mil­lion for trade and com­mute cor­ri­dors, $200 mil­lion for high-pri­or­ity trans­porta­tion projects and $721 mil­lion for pas­sen­ger rail and pub­lic tran­sit mod­ern­iza­tion.

The bud­get also would in­clude fund­ing to restart the state’s court con­struc­tion pro­gram to com­plete 10 court­houses.

Brown’s bud­get would di­rect $1.3 bil­lion to nat­u­ral re­sources and hous­ing in­fra­struc­ture spend­ing pre­sum­ing that state bond mea­sures passed by the Leg­is­la­ture last year will be ap­proved by vot­ers in Novem­ber.

The Leg­is­la­ture ap­proved 15 bills last year to en­cour­age hous­ing con­struc­tion to help fill an an­nual 180,000-unit of homes that need to be built over the next 10 years to al­le­vi­ate the hous­ing cri­sis.

One placed a $4 bil­lion gen­eral obli­ga­tion hous­ing bond mea­sure on the statewide bal­lot in Novem­ber, while the other is ex­pected to bring in $250 mil­lion a year through a $75 fee to most real es­tate trans­ac­tion doc­u­ments, ex­cept on the pur­chase or sale of prop­erty.

Con­troller Betty Yee re­leased her De­cem­ber cash re­port Wed­nes­day that showed rev­enues for the fis­cal year so far are $2.79 bil­lion above June’s bud­get ex­pec­ta­tions of $16.25 bil­lion.

“I can sum up the gover­nor’s bud­get in one word: smart,” Yee said. “The fed­eral tax mea­sure did not just stick it to Cal­i­for­nia’s in­di­vid­ual tax­pay­ers – it will also likely have a dev­as­tat­ing im­pact on our state bud­get.”

State of­fi­cials are in a bit of a wai­t­and-see mode on the sur­plus, be­cause part of the boost in De­cem­ber could be from tax­pay­ers mak­ing early pay­ments on tax bills they won’t be able to deduct in 2018. The GOP tax bill places a $10,000 cap on the amount of lo­cal and state taxes that can be de­ducted from fed­eral taxes.

Per­sonal in­come taxes came in 25% higher at $11 bil­lion in De­cem­ber. Cor­po­ra­tion taxes were 40% higher at $2.47 bil­lion for the month. Sales tax re­ceipts came in $272.4 mil­lion lower than ex­pected.

As the state won’t know for months the im­pact of the GOP tax bill, Yee said, “Brown is wise in ex­er­cis­ing cau­tion with re­spon­si­ble short-term spend­ing, boost­ing rainy day fund re­serves, and pay­ing down debt.” ◽

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