May 19, 2008
Overview of the 2008-09 May Revision
Summary
Changes in the May Revision
Changes in Revenues and Expenditures Since January. The state’s sluggish economy has reduced the revenue outlook for 2008–09 by about $6 billion. Combined with rising costs in some areas, the state faces a remaining budget shortfall of $15 billion, after accounting for the $7 billion in solutions adopted as part of the special session.
New Budget Solutions. The administration proposes more than $8 billion in new solutions to close the widening budget gap. By far the largest solution is the securitization of future lottery revenues—expected to provide $15 billion over the next few years ($5.1 billion in 2008–09). The administration also proposes a spending cap and automatic across–the–board reductions in the future. Other proposed solutions include loans from special funds, the redirection of transportation monies to benefit the General Fund, and further reductions to health and social services programs.
LAO Assessment of the May Revision
Most Forecasts Reasonable. While we have some differences from the administration’s forecast of revenues and expenditures, the overall budget–year estimates are reasonable. In total, we project that—if the Legislature adopted all of the administration‘s proposals and they were successfully implemented—the state’s year–end reserve in 2008–09 would be about $500 million less than estimated by the administration. However, multibillion dollar shortfalls would reemerge in 2010–11.
Lottery Bond Size and Assumptions Flawed. The administration makes overly optimistic estimates about the potential growth in lottery sales and profits. Consequently, its securitization proposal would create the strong likelihood that distributions to public education from the lottery would fall well short of their current levels—perhaps by $5 billion over the next 12 years combined.
Budget Reforms Seriously Flawed. The administration’s overly complicated proposed budget reforms suffer from a variety of problems, including:
- Budget Shortfall Locked In. Under our revenue estimates, the administration‘s revenue cap leads to counterproductive results—the required deposit of General Fund monies into a new reserve at the same time that the state faces multibillion dollar shortfalls. The cap also could prevent the state from accessing some of the lottery proceeds intended to help solve the budget problem. As a result, the administration’s reforms could lock the state’s operating shortfall in place and lead to automatic multibillion dollar across–the–board reductions.
- Loss of Legislative Authority. The proposed across–the–board reductions fail to prioritize which state programs are most essential while undermining the Legislature’s constitutional authority over appropriations.
LAO Alternative Offers Better Approach
Updated Solutions. We have updated our LAO alternative budget to reflect the state’s worsening fiscal situation. We continue to offer a balanced approach between reduced spending and increased revenues, while protecting core state services. Our alternative provides about $900 million more in ongoing programmatic K–14 education support compared to the Governor’s plan.
More Responsible Lottery Plan. Our plan includes a more responsible lottery securitization—resulting in a General Fund benefit of $5.6 billion over two years—with a dramatically reduced risk to education’s lottery funding. The one–time proceeds help our plan to balance in 2008–09 and 2009–10. The plan remains balanced through our forecast period.
Simpler Budget Reform. We offer some much simpler approaches to increasing the size of the state’s reserve in good fiscal times. In addition, the Legislature should consider systematically reviewing budgetary formulas and “unlock” the state budget by changing formulas that no longer meet current state priorities.
LAO Bottom Line
The sluggish economy has severely worsened the state’s ongoing mismatch between revenues and spending. All available solutions involve consequences and trade–offs. A reliance on overly optimistic lottery growth assumptions and a massive bond structure will put school funding from this source at risk. In addition, it could result in unsustainable ongoing spending commitments using a limited–time revenue source. Similarly, pinning the state’s long–term prospects on future multibillion dollar across–the–board reductions is no answer. We continue to offer an alternative approach to assist the Legislature with its budget deliberations.
This report provides an overview of the Governor’s May Revision and an update to our alternative budget approach. It begins with a summary of the administration’s budget plan. We then provide the Legislature with an assessment of the May Revision—with proposed alternative approaches that the Legislature can consider.
Major Features of the May Revision
Overview of Major Changes
Declining Revenues. A declining economic outlook, sagging revenues, and rising costs have created bleak prospects for the state’s 2008–09 budget. In January, the Governor identified a gap of $14.5 billion between revenues and expenditures (over the current and budget years combined) and proposed more than $17 billion in solutions. Since that time, there have been a number of key developments, including:
- A further deterioration of the economic and revenue outlook for 2008–09 ($6 billion).
- Rising state expenditures in a number of state programs ($1.7 billion).
The net effect of these developments is that, compared to the Governor’s January proposal, the administration view of the state’s budget outlook—absent any action—has worsened to a total of $22 billion. We describe the calculation of this budget problem in more detail in the box below.
What Is the Size of the Budget Problem?
There are several ways to identify the size of the state’s budget problem. The simplest way, however, is to ask the question: If the Legislature and Governor did nothing, how large would the state’s deficit be at the end of the budget year? This is the approach that the administration took in January in identifying a $14.5 billion problem. In February, due principally to a declining revenue outlook, our office increased that amount to $16 billion. Since that time, the administration projects that revenues have decreased and spending has increased by a total of $7.7 billion. The budget problem, therefore, is $22.2 billion under the administration’s view. (The May Revision documents use an amount of $24.2 billion. This amount, however, includes its desire to build a $2 billion reserve.)
The Legislature and the Governor began to address the budget shortfall by adopting more than $7 billion in solutions in the special session earlier this year. (The administration’s problem and solution statements exclude the loss of a lawsuit related to the use of $409 million from the Public Transportation Account, which was corrected by the Legislature in the special session.) An equally important question, therefore, is: How much more of a problem remains to be solved after accounting for special session actions? As shown in the figure, that amount is $15.2 billion under the administration’s projections. Our calculation of the underlying budget problem is similar to the administration’s.
The State’s Remaining Budget
Shortfall Is $15 Billion |
(In Billions) |
|
Governor’s Estimate |
Problem as of January |
-$14.5 |
+ |
May Forecast |
|
Lower revenues |
-$6.0 |
Higher spending |
-1.7 |
= |
Revised Problem |
-$22.2 |
- |
Special Session Solutions |
$7.0 |
= |
Remaining Problem |
-$15.2 |
+ |
Proposed Solutions |
$17.2 |
= |
May Revision Reserve |
$2.0 |
|
Special Session. Responding to the worsening budget situation, the Legislature and the Governor in February agreed to the adoption of more than $7 billion in solutions, as summarized in Figure 1.
Figure 1
Special Session Actions |
2007‑08 and 2008‑09 Savings
(In Millions) |
|
|
Sale of additional deficit-financing bonds |
$3,313 |
Suspension of Budget Stabilization Account transfer |
1,509 |
Reduction of Medi-Cal provider rates |
508 |
Reduction in current-year Proposition 98 spending |
507 |
Public Transportation Account reimbursement to the General Funda |
409 |
Regional center cost containment measures |
229 |
Higher tideland oil revenue estimate |
218 |
Delay of Medi-Cal checkwrite |
165 |
Delay of SSI/SSP cost-of-living adjustment (COLA) |
91 |
Delay of new judges |
76 |
Shift payment schedule for mandate claims |
75 |
Delay of CalWORKs COLA |
42 |
Elimination of CalWORKs performance incentives |
40 |
Recognition of CDCR program delays |
40 |
Shift of parks maintenance to bond funds |
30 |
Other |
201 |
Total |
$7,452 |
|
a The administration excludes this issue from both its problem and solution definition. |
Erosion of Savings. In January, the administration assumed that many of its proposals would be approved by March 1, 2008. In those cases in which the Legislature has not to date approved the proposals, the savings that are still achievable have been reduced. The administration, therefore, has adjusted its proposals to assume a July 1 approval date—reducing estimated savings by $535 million.
Reversal of Previous Proposals. The administration has also chosen to pull back on earlier reduction proposals in several areas by:
- Providing increased Proposition 98 funding for K–14 schools ($1.1 billion).
- Dropping its early release of state prisoners proposal ($256 million).
- Providing increased funds to the University of California and the California State University ($196 million).
- Dropping its proposal to close 48 state parks ($13 million).
The top portion of Figure 2 summarizes the items which have worsened the General Fund condition.
Figure 2
May Revision Proposes More Than $8 Billion in
New Solutions |
(In Millions) |
Governor’s January 10 Reserve |
$2,778 |
|
|
Items Worsening General Fund Condition |
-$9,224 |
Lower Revenues |
|
Updated major revenues forecast |
-$5,201 |
EdFund sale delayed |
-500 |
Other revenues |
-296 |
Erosion of Savings From January Proposals |
-$535 |
Changes to Proposition 98 |
|
Lower property taxes |
-$740 |
Increased funding |
-1,130 |
Other Restorations and Increased Costs |
|
Higher Receiver spending |
-$453 |
Elimination of unidentifiable savings estimate |
-270 |
Drop correctional early release proposal |
-256 |
Restoration of university spending |
-196 |
Medi-Cal managed care rates |
-170 |
County reimbursement for presidential primary costs |
-89 |
Higher firefighting costs |
-80 |
Various Workload and Other Adjustments (Net Savings) |
693 |
New Solutions Improving General Fund Condition |
$8,455 |
Sell lottery bonds |
$5,122 |
Expand use of transportation funds to benefit General Fund |
828 |
Special fund loans |
564 |
Reduce funding for correctional officers pay offer |
421 |
CalWORKs grant reductions and policy changes |
370 |
Accelerate limited liability company fee payment |
360 |
Reduce IHSS state participation to minimum wage |
187 |
Eliminate Cash Assistance Program for Immigrants |
111 |
Do not pass through federal SSI cost-of-living adjustment |
109 |
Reduce health services for newly qualified immigrants |
87 |
Defer mandates repayment |
75 |
Other (net) |
221 |
May Revision Reserve |
$2,009 |
|
Note: Positive numbers help the state’s bottom line and negative numbers hurt the state’s bottom line. |
New Solutions. Accounting for the declining revenues, special session actions, and changes to its earlier proposed solutions, the administration has proposed new solutions in the May Revision totaling more than $8 billion. These changes are summarized in Figure 2 and include:
- The securitization of future proceeds from the state lottery—yielding $15 billion in proceeds available for a proposed new reserve fund (described below). The May Revision proposes using $5.1 billion of this amount in 2008–09.
- A redirection of public transportation funds to benefit the General Fund ($828 million).
- Loans from state special funds, to be paid back in 2010–11 and later years ($564 million).
- Various reductions to health and social services programs (about $1.1 billion).
General Fund Condition
Figure 3 shows the administration’s estimate of the General Fund’s condition taking into consideration its May Revision proposals. Accounting for the special session solutions, 2007–08 spending exceeds revenues by $2.8 billion—leaving less than a $1 billion reserve at the end of the year. For 2008–09, the administration proposes $103 billion in revenues and $101.8 billion in spending. Consequently, the reserve would grow to $2 billion at the end of the budget year.
Figure 3
Governor’s May Revision General Fund Condition |
(Dollars in Millions) |
|
|
2008‑09 |
|
2007‑08 |
Amount |
Percent Change |
Prior-year fund balance |
$4,568 |
$1,743 |
|
Revenues and transfersa |
100,718 |
102,987 |
2.3% |
Total resources available |
$105,286 |
$104,730 |
|
Expenditures |
$103,543 |
$101,836 |
-1.6% |
Ending fund balance |
$1,743 |
$2,894 |
|
Encumbrances |
$885 |
$885 |
|
Reserve |
$858 |
$2,009 |
|
Budget Stabilization Account (BSA) |
— |
— |
|
Special Fund for Economic Uncertainties |
$858 |
$2,009 |
|
|
a Display of revenues related to the BSA is different than the administration’s. The 2006-07 revenue amount (reflected in the prior-year fund balance) includes $472 million and the 2007-08 revenue amount includes $1.023 billion in General Fund revenues received in those years and transferred to the BSA. The administration instead shows the entire $1.494 billion as 2007‑08 revenues, when the funds were transferred back to the General Fund. |
Administration’s Economic And Revenue Outlook
Economic Forecast
The economic forecast underlying the May Revision’s fiscal estimates assumes that California will feel the effects of the economic slowdown somewhat more than the rest of the nation, with little growth in the current year before picking up to moderate growth within a couple of years. The state’s economy is expected to slow in 2008, with personal income growth of 4.5 percent and a slight loss in jobs. The housing sector’s woes would continue into 2009, providing a significant drag on economic growth in the state. Beginning in mid–2009, the pace of growth is expected to accelerate.
Revenue Forecast
The May Revision projects General Fund revenues and transfers of $100.7 billion in 2007–08 and $103 billion in 2008–09, for a budget–year growth of $2.2 billion (2.3 percent). The revenue totals for each of the two years is virtually unchanged since the January Governor’s budget (see Figure 4). This masks large offsetting changes, particularly in 2008–09, where significant decreases in tax revenues ($5.7 billion) are offset by the administration’s lottery securitization proposal and proposed fund transfers.
Figure 4
May Revision Revenue Changes
Compared to January Forecast |
(In Millions) |
|
2007‑08 |
2008‑09 |
Two-Year Total |
Tax Revenues: |
|
|
|
Personal income tax |
$1,407 |
-$2,725 |
-$1,318 |
Sales and use taxes |
-589 |
-1,854 |
-2,443 |
Corporation tax |
-540 |
-898 |
-1,438 |
Insurance tax |
96 |
-247 |
-151 |
Other |
-3 |
-5 |
-8 |
Subtotals, Taxes |
($371) |
(-$5,729) |
(-$5,358) |
Other Revenues: |
|
|
|
EdFund |
-$500 |
— |
-$500 |
Lottery securitization |
— |
$5,122 |
5,122 |
Tribal gambling |
-7 |
16 |
9 |
All other |
95 |
674 |
769 |
Subtotals, Other Revenues |
(-$412) |
($5,812) |
($5,400) |
Totals |
-$40 |
$83 |
$43 |
|
Detail may not total due to rounding. |
As reflected in Figure 4:
- Sales and use taxes are reduced by $2.4 billion for the current and budget years combined. This is primarily due to the weak economy, reflecting the negative effect of the soft housing markets on taxable sales. Also, significantly higher gas prices in 2008 result in an increased amount of gasoline and diesel sales tax revenues that are diverted from the General Fund.
- Corporation taxes decline by $1.4 billion for the two years combined. This reduction mainly reflects the weakness in cash receipts and corporate profits.
- Personal income taxes fall $1.3 billion over the two years. Collections are up in 2007–08 by $1.4 billion due to higher payments made in April 2008. This increase is offset by a $2.7 billion reduction in payments in the budget year, caused in part by a significant estimated reduction in capital gains in 2008–09.
- Other revenues and transfers are up by a net of $5.4 billion. This mainly reflects the $5.1 billion the administration expects to receive from the securitization of the lottery. Increased special fund borrowing and transfers offset the loss of $500 million in revenues from the delayed sale of EdFund.
Programmatic Features of the May Revision
Figure 5 provides a summary of the major programmatic features of the May Revision affecting the state’s General Fund. Below, we describe the administration’s key proposals related to budget reform, the lottery, and Proposition 98.
Figure 5
Key General Fund Programmatic Features of May Revision |
|
K-14 Education |
Proposition 98. Provides $1.1 billion more for K-14 education in 2008-09 than the January proposal. Funds the Proposition 98 minimum guarantee. |
Community Colleges. Increases budgeted enrollment growth to 1.67 percent ($35 million). Provides
$75 million in one-time funds to backfill a current-year shortfall in property tax revenues. |
Higher Education |
Universities. Augments General Fund support for UC and CSU ($196 million). As a result, both segments would receive the same level of General Fund support in 2008-09 as they are receiving in the current year. |
EdFund. Proposes that the EdFund sale scheduled for 2007-08 be delayed until 2009-10 (at an assumed price of $500 million). |
Health and Social Services |
CalWORKs. Reduces grants by 5 percent ($108 million), conditions eligibility on face-to-face interview every six months ($60 million), and deletes the October 2008 cost-of-living adjustment (COLA) ($121 million). Replaces certain General Fund support for CalGrants, juvenile probation, and Foster Care with TANF block grant funds. |
SSI/SSP. Does not pass through the federal January 2009 COLA ($109 million in 2008-09 and $218 million in 2009-10). Eliminates the state-only cash assistance program for legal immigrants ($111 million). |
IHSS. Reduces state participation in provider wages to the minimum wage ($187 million). Replaces proposal to reduce domestic service hours for all recipients with new proposals that (1) limit eligibility for domestic services to the most severely disabled and (2) increase share-of-cost payments for higher functioning recipients. |
Managed Care. Provides $170 million to fund rate increases for Medi-Cal managed health care plans. |
Reduced Medi-Cal Eligibility. Lowers the allowable income level for persons applying for Medi-Cal eligibility
under Section 1931(b), thereby reducing caseload and generating budget-year savings of $31 million and growing to about $340 million in 2011-12. |
Medi-Cal Changes for Immigrants. Saves $42 million by implementing a monthly eligibility requirement for emergency services for undocumented immigrants. Saves $87 million by limiting benefits for newly qualified immigrants and certain other immigrants to the same level of benefits currently provided to noncitizens. |
Criminal Justice |
Early Release. Increases spending by $256 million due to the withdrawal of a proposal for the early release of some inmates from prison up to 20 months early. |
Transportation |
Revenues to Help General Fund. Relative to the January budget, proposes to use an additional $828 million in gasoline and diesel sales tax revenues to help the General Fund in 2008-09. Specifically, provides: (1) $593 million to reimburse the General Fund for Home-to-School Transportation, and (2) $235 million to pay past- and current-years transportation bond debt service. |
Resources |
State Parks. Drops park closure proposal by restoring General Fund dollars ($12 million) and increasing park fees ($1.5 million). |
General Government |
Correctional Officer Pay Raise. Withdraws most funding to implement last, best, and final offer to correctional officers and proposes to fund costs from reserve ($421 million). |
Insurance Surcharge for Wildland Firefighting. Restructures proposed surcharge on property insurance policies statewide to make it risk-based. Would (1) supplant General Fund reductions ($51 million) and (2) expand wildland firefighting under CalFire and the Office of Emergency Services. |
Budget Reform
In January, the Governor proposed a constitutional measure to make a number of changes to the budget process. The May Revision modifies those changes and proposes interactions with its lottery proposal. While we have not had the opportunity to see the administration’s proposed language, our understanding of the main components is described below.
Ten–Year Revenue Growth Rate. The administration proposes to limit the amount of revenues that the General Fund could receive in any year. Specifically, the amount would be limited by the average growth rate of General Fund revenues over the prior ten years.
Deposits Into New Reserve. In any year in which General Fund revenues were expected to grow by more than the revenue cap set by the ten–year average (based on a Department of Finance [DOF] forecast), the “excess” revenues would be deposited into a new reserve called the Revenue Stabilization Fund (RSF). Of any excess revenue deposits, 40 percent would be deposited into an education subaccount. The RSF would be in addition to the state’s two existing reserves, the Special Fund for Economic Uncertainties and the Budget Stabilization Account (BSA).
Transfers Out of the RSF. Unlike the state’s current reserves, the Legislature could not generally access the funds in the RSF, including in cases of fiscal emergencies. Instead, funds could only be transferred from the RSF to the General Fund (by a two–thirds legislative vote) in years in which General Fund revenues were forecasted to grow less than the cap set by the ten–year average growth rate—up to the amount of the cap. Funds in the education subaccount could be withdrawn in less restricted circumstances (by a majority vote) to cover Proposition 98 expenses (such as maintenance factor or settle–up costs, or to supplement funding in slow growth years).
Building Up Reserve Balance. The aim of the Governor’s proposal is to build up a substantial amount of funds in the RSF—up to 15 percent of annual General Fund revenues (about $15 billion currently). After the 15 percent reserve was met, the measure would require the Legislature to spend any additional funds on a variety of one–time purposes.
Automatic Midyear Budget Reductions. The measure would also establish a system by which the administration could trigger across–the–board reductions if the state’s budget situation declined. If the state’s current–year budget was projected to have a negative reserve, then the administration would trigger reductions. The amount of the reductions—up to 5 percent reductions on an annualized basis—would depend upon the severity of the budget shortfall. The Legislature would be required to pass contingency laws for entitlement programs—where spending is driven by requirements in existing law—to specify how these reductions would be implemented, if triggered. Reductions to Proposition 98 base revenue limits and cost–of–living adjustments (COLAs) would be exempt from any reductions. Virtually all other programs, with certain exceptions such as debt service, would be subject to reductions.
No Suspension of Proposition 98. The measure also would eliminate the provision in the Constitution that allows the Legislature to suspend Proposition 98 in any year. This provision would go into effect once the state’s existing maintenance factor is repaid (currently estimated to be in 2010–11).
State Lottery Securitization And Sales Tax Trigger
As a crucial part of his budget balancing plan, the Governor proposes to raise $15 billion over the next three years from securitizing the lottery. While the administration has not completed legislative language to implement the proposal, we understand that the plan would involve going to voters in November 2008 and asking them to approve (1) changes to the existing Lottery Act intended to allow the lottery to increase its sales volume and (2) provisions to facilitate securitization (or sale) of a portion of future lottery profits to bond investors in exchange for a series of upfront payments. The administration estimates that the bond transactions would generate enough funds to allow deposits to the reserve of up to $15 billion over the next three fiscal years, including $5.1 billion in 2008–09. This 2008–09 deposit to the reserve would be transferred immediately to the General Fund.
Lottery Background
Voters approved Proposition 37 (the Lottery Act) in 1984. The act requires the Lottery Commission to distribute about 50 percent of lottery revenues as prizes each year and about 34 percent of revenues as supplemental funding to public educational entities, including school districts, community college districts, and the two public university systems. Over time, lottery revenues have been volatile, and they have never grown to be a significant percentage of state public education revenues. Currently, lottery distributions are about $1.2 billion per year and provide only about 1.5 percent of total K–12 school funding. Under current law, the state’s General Fund receives no funds from the lottery.
Proposed Changes to the Lottery
Per Capita Sales Lag the National Average. Over the past year, the Governor has repeatedly raised the issue of the California Lottery’s sales performance, relative to the other 41 U.S. states with lotteries. Figure 6 shows that in 2006–07 per capita lottery sales in California ($91) were about 50 percent of the national average ($189). (Western states have always had lower lottery sales, and California’s per capita sales lag the average of these states by a much smaller margin.) The Governor, as well as several industry experts, have attributed at least a part of this sales lag to the lack of flexibility granted the Lottery Commission in its initiative statute to adapt to changes in the state’s economy, demographics, and gambling marketplace.
Voters Would Be Asked to Free Lottery From Restrictions. Unlike the Governor’s prior proposals to lease operations of the lottery to a private entity, the Lottery Commission would continue to operate the enterprise under the May Revision proposal. However, voters would be asked to give the commission the authority to increase the percentage of revenues paid out as prizes above 50 percent. The commission would be granted this authority in order to entice customers to purchase more lottery tickets, thereby increasing sales. Because prizes would consume a larger percentage of lottery revenues, the percentage for administrative expenses and/or profits (currently distributed to public education) would have to be proportionately reduced. Nevertheless, experience in some other jurisdictions suggests that such changes would increase the actual dollar amount of lottery profits by some amount. In addition, the administration proposal may contain changes to allow the lottery to operate a broader variety of games and market them more aggressively. The administration assumes that lottery sales could be roughly doubled—bringing per capita sales to about the national average—in the next five to ten years.
Proposed Lottery Securitization
Upfront Proceeds for Use in Balancing the Budget. Voters also would be asked to approve provisions that would facilitate securitization of a portion of future lottery profits. Like the state’s prior securitization of tobacco settlement revenues, this one would involve bond investors providing the state with large upfront payments to use for public purposes in exchange for the rights to an ongoing revenue stream. Payments to educational entities would be subordinate to these bond obligations (meaning that the bondholders have the first call on lottery profits). Under the Governor’s plan, these payments to public education would never in any event exceed $1.2 billion—roughly the amount of funding provided now. Excess lottery funds—above those needed to pay debt service to bondholders and meet the $1.2 billion annual payment obligation—would be distributed to the RSF, according to administration officials. During the early years of the new structure, one or more “reserve accounts”—totaling up to several billion dollars—may need to be funded in order to provide greater assurances that the $1.2 billion would be available for education on an annual basis as lottery sales ramp up to a higher level. In order to fund such reserves, the costs of issuing the bonds and the $15 billion transfer to the RSF, the combined amount of bonds to be issued might exceed $20 billion. The bonds would be repaid over roughly a 30–year period.
Administration Forecasts That Education Would Get $1.2 Billion Every Year. While the administration acknowledges that there is no way to know for sure how much the proposed changes would increase lottery profits, its forecast model assumes that such profits would grow from $1.2 billion in 2007–08 to over $2.4 billion at some point between 2013 and 2017. This means that total lottery sales would increase from $3.4 billion to over $7 billion during this five– to ten–year period. In so doing, per capita sales would approach the national average, according to the administration’s assumptions. This assumed increase in lottery sales allows the administration to forecast that debt service will be paid in full each year and public education will receive a distribution of $1.2 billion annually. If, on the other hand, lottery sales and profits did not grow as much as forecast by the administration, bondholders would continue to receive payments, but public education would experience a drop in lottery payments.
“Fail–Safe” Mechanism to Fund New Reserve
Voter Rejection or Lawsuits Could Stall Securitization Plan. If the Legislature agrees to place the administration’s lottery securitization plan on the ballot, either voter rejection or lawsuits (such as those that could be filed by the state’s other gambling interests) could stall implementation of the plan and issuance of the lottery securitization bonds. The Governor, therefore, proposes that the Legislature approve a measure to allow the Director of Finance to trigger a temporary one–cent sales tax increase if he determines that the General Fund needs additional revenues from the RSF to bring the state up to the ten–year average of revenue growth. The triggered increase would remain in place until the RSF has reached 15 percent of General Fund revenues or June 30, 2011, whichever occurs first. A one–cent sales tax increase would provide $6 billion on an annual basis. Following elimination of the temporary tax increase, the administration proposes that residents receive tax rebates at some point in the future that in the aggregate would equal the amount of revenues collected.
Proposition 98— K–14 Education
Provides Roughly $1.1 Billion More Relative to January, Meets Minimum Guarantee. As shown in Figure 7, the Governor’s May proposal provides $1.1 billion more for K–14 education in 2008–09 compared to his January proposal. Under the May proposal, ongoing Proposition 98 spending is $56.8 billion. At this spending level, the administration meets the Proposition 98 minimum guarantee, or K–14 funding requirement, for 2008–09. By comparison, the administration’s January proposal had suspended Proposition 98, providing $4 billion less than otherwise required. Compared to January, the estimated Proposition 98 minimum guarantee has dropped by about $3 billion due to the substantial drop in estimated General Fund revenues.
Figure 7
Proposition 98 Spending:
Comparing January Budget and May Revision |
2008‑09
(In Millions) |
|
January Budget |
May Revision |
Change |
K-12 |
$49,311 |
$50,408 |
$1,097 |
California Community Colleges |
6,223 |
6,251 |
28 |
Othera |
106 |
111 |
5 |
Total Proposition 98 |
$55,640 |
$56,769 |
$1,130 |
|
a Includes Department of Developmental Services, California Department of Corrections and Rehabilitation, and state special schools. |
Year–to–Year Funding Increases Less Than $200 Million. Even with the administration providing $1.1 billion more for K–14 education relative to the January budget, total year–to–year funding would increase by less than $200 million. As shown in Figure 8, funding for K–12 education would increase by about $70 million whereas funding for the California Community Colleges (CCC) would increase by about $130 million year to year.
Figure 8
May Revision Proposition 98 Spending:
Year-to-Year Changes |
(Dollars in Millions) |
|
2007‑08
Revised |
2008‑09
Revised |
Change |
|
Amount |
Percent |
K-12 |
$50,336 |
$50,408 |
$72 |