Legislative Analyst's Office, August 2000

California Spending Plan 2000-01 Chapter 1

The Budget Act and Related Legislation

Introduction and Overview

The 2000-01 Budget Act was signed into law by Governor Davis on June 30, 2000. Together with related implementing legislation (trailer bills), the budget authorizes total spending from all funds of $99.4 billion. As indicated in Figure 1, this total includes $78.8 billion from the General Fund, $15.6 billion from special funds, and $5 billion from bond funds.

The General Fund Condition

Figure 2 (see page 2) summarizes the General Fund budget's condition for 1999-00 and 2000-01. It shows that in 1999-00, revenues were $71.2 billion (a 21 percent increase from 1998-99), while expenditures were $67.2 billion (a 16 percent increase from the prior year). After accounting for $592 million in encumbrances, 1999-00 is estimated to have ended with a reserve of $7.2 billion.

Figure 2
The 2000-01 Budget Estimated General Fund Condition
(Dollars in Millions)
	1999-00	2000-01	Percent Change
Prior-year fund balance	$3,851	$7,827
Revenues and transfers	71,162	73,856	3.8%
Total resources available	$75,013	$81,683
Expenditures	$67,186	$78,816	17.3
Ending fund balance	$7,827	$2,867
Encumbrances	$592	$592
Set-aside for litigation	--	$500
Reserve	$7,235	$1,775
Detail may not total due to rounding.

In 2000-01, revenues are projected to be $73.9 billion (a 3.8 percent increase from 1999-00) and expenditures are estimated to be $78.8 billion (a 17 percent increase from 1999-00). The budget includes a $500 million set-aside for litigation, and $592 million for encumbrances. This leaves a 2000-01 year-end reserve of $1.8 billion, or about 2.3 percent of expenditures for the year.

It should be noted that these figures reflect the budget package signed by the Governor in late June. They do not reflect the fiscal impact of legislation that was pending in late August when this report went to press.

Spending in the Budget Year

General Fund spending in the 2000-01 budget is summarized in Figure 3, by major program area. The budget contains substantial one-time and ongoing funding increases in a variety of program areas, including education, health, and social services. The exceptionally large 48 percent increase shown for the "all other" category is due to several factors, including $1.8 billion to reimburse local governments for the accelerated vehicle license fee (VLF) reduction, one-time increases of $1.5 billion for transportation, about $570 million for housing, and a variety of other increases in resources and environmental protection programs.

General Fund Spending Over The Past Decade

Figure 4 (see page 4) shows General Fund expenditures from 1989-90 through 2000-01, both in current dollars and as adjusted for population and inflation (that is, in real per-capita terms). The figure shows the decline in spending that took place in the early 1990s' recessionary period, as policymakers closed large budget shortfalls through spending cuts, funding shifts to local governments, spending deferrals, and tax increases. It also shows the subsequent spending increases that have taken place during the state's economic expansion. Total expenditures over the full decade have increased by 95 percent, while real per-capita spending has grown by 31 percent during the period.

The Budget's Evolution

In this section, we discuss the development of the budget beginning with the introduction of the Governor's budgetary proposal in January, and continuing through the budget's enactment in late June.

Background--Revenue Increases Dominate Budget Story

Once again, a dominant factor affecting the 2000-01 budget negotiations was the extraordinary performance of California's economy and the resulting dramatic growth in state General Fund revenues. Figure 5 shows the magnitude of the revenue revisions for 1999-00 and 2000-01 made during the 12-month period leading up to the enactment of this year's budget. It shows that:

• The revenue forecast for 1999-00 increased from $63 billion in June 1999 to $65 billion in January 2000, and further to $71 billion in June 2000.
• The revenue forecast for 2000-01 increased from $66 billion in June 1999 to $68 billion in January 2000, and further to $74 billion in June 2000.

These increases--and particularly the over $12 billion two-year revision between January and June of 2000--provided a dramatic increase in the amount of resources available for tax reductions, education, transportation, and other budgetary priorities.

Governor's January Proposal

The January budget proposal devoted significant new resources to education and a relatively modest number of changes in other areas. It included $900 million for new K-12 spending initiatives--targeting student achievement, teacher recruitment/retention/training, and new technology. Funding increases in higher education were targeted for a new partnership agreement, acceleration of the opening of University of California, Merced, and increases in financial aid. In other areas, the budget proposal included new spending and a tax credit aimed at improving senior care. It also included a variety of targeted tax provisions, including increases in net operating loss deductions, expansion of the research and development credit, and a one-time credit for land donations.

One-Time Expenditures. The January budget also included $2.9 billion in funds for one-time purposes, including a rebate of smog impact fees that the courts ruled had been illegally collected, a set-aside for legal contingencies, an increase in the budgetary reserve, and direct appropriations for capital outlay.

Developments Following the January Proposal

Immediately following the release of the January budget proposal, it became clear that revenues were significantly outpacing projections and that dramatically more resources would be available in 1999-00 and 2000-01. Year-end personal income tax payments received in late December and early January far surpassed the budget's projections, and economic revisions indicated that both the U.S. and California economies were performing at a stronger level than previously thought. Based on these developments, our office projected in February that receipts in 1999-00 and 2000-01 would exceed the budget forecast by a combined total of $4.2 billion. In subsequent months, revenues continued to outpace the January projections, and exceeded even our February forecast, by substantial margins. For example, final personal income tax payments exceeded their budget forecast by about $2 billion in the month of April alone.

The May Revision

In May, reflecting the extraordinary improvement in revenues, the administration raised its revenue forecast for 1999-00 by $5.8 billion and for 2000-01 by $6.5 billion, for a combined two-year total of $12.3 billion. The administration proposed that over two-thirds of the new funds be used for three main purposes:

• Proposition 98 education ($3.9 billion)--where the Governor proposed over $1.8 billion to eliminate a deficit in school district and county office of education revenue limits that existed since the early 1990s, when the state did not fully fund cost-of-living adjustments. These funds are general purpose revenues which are available for locally determined purposes. In addition, the proposal included one-time funds of over $1.4 billion for such purposes as teacher performance bonuses, computers, and English literacy.
• Tax reductions ($2.5 billion)--including $1.8 billion for a one-time personal income tax rebate, and an ongoing exemption of K-12 public school teachers' salaries from state income taxation.
• Transportation ($1.9 billion)--where the Governor proposed a $1.5 billion one-time General Fund appropriation plus an ongoing diversion for five years of $440 million in sales taxes to support various rail, mass transit, road, and street projects.

Other program areas proposed for funding increases in the May Revision included health and social services programs--where the Governor proposed about $1.2 billion for provider rate increases, In-Home Supportive Services wage increases, and expansions for various mental health programs. The May Revision also included funding for new housing programs, resources, higher education, a one-time subvention of $250 million for local governments, and about a $500 million augmentation to the reserve.

Legislative Versions of the Budget

In general, the Assembly and Senate versions of the budget included the same major program priorities as the administration, although they differed in many of their details. For example:

• The Senate approved a one-time sales tax rebate of $1.4 billion (in place of the Governor's $1.8 billion personal income tax rebate) and rejected most of the Governor's other major tax provisions. It also included additional funds for mental health, education, and local fiscal relief.
• The Assembly provided $2.7 billion for unspecified tax relief (slightly more than the administration's $2.6 billion proposed package). However, the Assembly did not take specific actions on the individual elements of the Governor's tax package. The Assembly also added funds for transportation, housing, and community colleges. These increases were partly funded through the elimination of the Governor's proposed set-asides for litigation and a lower budgetary reserve.

Conference Committee Actions

The Assembly and Senate versions of the budget were sent to the legislative Budget Conference Committee for reconciliation in early June. Following two weeks of negotiations, the Conference Committee passed a compromise version of the budget on June 12. The key elements of the compromise plan included:

• About $2.7 billion in tax relief, including a one-time $1.7 billion sales tax rebate, a modest personal income tax rate reduction, and an ongoing child care credit. The compromise budget rejected the Governor's proposal for an exemption of teachers' salaries from state income taxation. In its place, the Conference package included a teachers' credit ranging from $250 to $1,500, depending on the number of years served.
• About $27.4 billion in Proposition 98 K-12 education General Fund spending (approximately $250 million more than proposed in the May Revision). The Conference version approved the May Revision proposal for $1.8 billion in general purpose funding (deficit reduction).
• A total of $2 billion for transportation from a combination of increased General Fund expenditures and diversion of gasoline-related sales tax revenues to a special fund.
• About $575 million ($75 million more than in the May Revision) for various housing-related programs, with emphasis on multifamily housing.

Post-Conference Committee Negotiations

Following approval by the Conference Committee of its budget version, negotiations continued between legislative leaders and the Governor on a number of items involving trailer bill legislation to accompany the budget bill. The main area of negotiation involved the tax package, for which several alternative measures were proposed. A  related issue that emerged was the extent to which the VLF trigger reductions provided for in 1998 legislation were to be reduced by other tax relief measures enacted in 1999-00 and 2000-01.

After several days of negotiations, the Governor and Legislature reached a new tax agreement. Under this agreement, the one-time sales tax rebate adopted by the Conference Committee and the proposed personal credit increase were both dropped and replaced by an acceleration of the full 67.5 percent VLF rate reduction (with no offsets for other tax reductions).

Governor's Vetoes

Before signing the budget, the Governor used his line-item veto authority to eliminate about $1.1 billion in 2000-01 budget spending, of which about $1 billion was from the General Fund. The General Fund vetoes included:

• $210 million from health and social services programs, including legislative augmentations for mental health programs and various provider rate increases.
• $176 million from higher education, including community college apportionments and funding for the Student Aid Commission.
• $173 million from K-12 education, including funds for child care and a school safety block grant.
• $151 million from youth and adult corrections, including $121 million for juvenile justice programs.
• The Governor also reduced or deleted various legislative augmentations in resources, environmental protection, and arts programs.

Major Features of the Final Budget

The 2000-01 budget's main priorities are in three major areas: education, tax reduction, and transportation. Specifically:

• Education. The budget includes major funding increases for both K-12 and higher education. For K-12 education, it provides $6,694 in per pupil funding, an 11 percent increase from the 1999-00 Budget Act amount. The budget includes a $1.8 billion increase in general purpose funding (deficit reduction), a block grant for teacher recruitment and retention, and augmentations for education technology and beginning teacher salaries. In higher education, the budget includes substantial funding increases for the University of California, California State University, and California Community Colleges, as well as expanded financial aid.
• Tax Reduction. The budget includes $1.5 billion for tax reduction (excluding the $1.165 billion appropriation for 2001-02 VLF rebates). The major provision is an acceleration of the VLF rate reduction to 67.5 percent from January 2003 to January 2001. Other provisions include a teachers' tax credit, a child care tax credit, an increase in senior citizens' property tax assistance, and a variety of targeted tax reductions.
• Transportation. The budget includes a General Fund commitment of $2 billion for transportation, financed by a one-time direct General Fund appropriation of $1.5 billion and a diversion of $500 million of sales taxes from the General Fund to a transportation special fund to support traffic congestion relief efforts. In the five subsequent years, all General Fund sales taxes on gasoline and diesel fuel (about $1 billion per year) will be diverted for this purpose.

Other Programs. The budget also provides $570 million for various housing-related programs, with an emphasis on multifamily housing. In the health and social services area, the budget provides provider rate increases for physicians, hospitals, and other health care providers. It includes funding increases for a variety of mental health services. With regard to local governments, the budget sets aside $200 million in one-time funds for local government financial reform.

State Appropriations Limit

Background. Article XIII B of the State Constitution places limits on the appropriation of taxes for the state and each of its local entities. Certain appropriations, such as capital outlay and subventions to local governments, are specifically exempted from the state's limit. As modified by Proposition 111 in 1990, Article XIII B requires that any revenues in excess of the limit that are received over a two-year period be split evenly between taxpayer rebates and increased school spending.

State's Position Relative to Its Limit. As a result of several years of strong revenue growth, the state moved near its appropriations limit for the first time in nearly a decade in 1999-00. The actual position of the state relative to the limit will be determined in fall 2000, when the state Controller closes the books on 1999-00.

Based on the budget as enacted in June, the state will be several billion dollars below the limit in 2000-01. As a result, there will be no excess revenues accumulated over the two-year (1999-00 and 2000-01) period. One of the key factors holding down appropriations subject to the limit in 2000-01 is the large amount of spending in the budget for capital outlay, school subventions, and tax reduction--all of which are exempt from the spending limit.

Budget Trailer Bills

In addition to the 2000-01 Budget Act, the budget package includes a number of related measures enacted to implement and carry out the budget's provisions. Figure 6 lists these budget trailer bills.

Figure 6
2000-01 Budget-Related Legislation
-- Chaptered --
Bill Number	Chapter Number	Author	Subject
AB 480	114	Ducheny	Child care tax credit.
AB 511	107	Alquist	Rural investment credit, net operating loss carryover, long-term care credit, graduate student expenses, vehicle license fee, research and development credit.
AB 858	106	Kuehl	Vehicle license fee reduction.
AB 1509	74	Machado	New tax-deferred retirement benefit for State Teachers' Retirement System members.
AB 2864	80	Torlakson	Jobs-Housing Balance and Interregional Partnership Program.
AB 2865	81	Alquist	California Housing Finance Agency Downpayment Assistance Program.
AB 2866	127	Migden	General government omnibus bill.
AB 2867	82	Lowenthal	Building code enforcement.
AB 2870	83	Cedillo	Downtown Rebound.
AB 2872	144	Shelley	Environmental protection omnibus bill.
AB 2875	99	Cedillo	Community health clinics.
AB 2876	108	Aroner	Social services omnibus bill.
AB 2877	93	Thomson	Health omnibus bill.
AB 2878	94	Wayne	Breast cancer treatment.
AB 2879	75	Jackson	Credentialed teacher tax credit.
AB 2880	76	Calderon	School finance: deficit reduction.
AB 2881	77	Wright	Teacher professional development institutes.
AB 2882	78	Reyes	Educational technology.
AB 2883	79	Villaraigosa	University of California Institutes.
AB 2884	196	Kuehl	Judges' salaries.
AB 2885	100	Cardenas	Juvenile justice/Citizens' Option for Public Safety (COPS).
AB 2928	91	Torlakson/Florez	Transportation omnibus bill.
SB 406	92	Ortiz	Transportation--follow up to omnibus bill.
SB 1643	69	O'Connell/McPherson	Beginning teacher salaries.
SB 1647	113	O'Connell	Land conservation credit.
SB 1656	84	Alarcon	CalHome and Housing Trust Fund.
SB 1664	60	Karnette/Leslie	Senior citizens' property tax assistance.
SB 1666	70	Alarcon/Johannessen	Teacher recruitment and retention incentives.
SB 1667	71	Alpert	Education omnibus bill.
SB 1679	87	Sher	Resources omnibus bill.
SB 1683	72	Escutia	Supplemental remedial instruction.
SB 1689	73	Escutia/Monteith	Advanced placement courses.

-- Enrolled --
Bill Number	Author	Subject
AB 1913	Cardenas	Juvenile justice/COPS.
SB 1644	Ortiz/Poochigian	Cal Grants.
SB 1688	Polanco/Rainey	Merit scholarships and algebra academies.
-- Pending --
Bill Number	Author	Subject
AB 1255	Wright	California Work Opportunity and Responsibility to Kids--drug offenders.

Return to California Spending Plan 2000-01 Table of Contents

Return to LAO Home Page