Governor Says Reducing Spending is Way to Solve the Problem

Citing a projected current-year budget shortfall of $3.3 billion, Governor Arnold Schwarzenegger announced today that he will issue proclamations declaring a fiscal emergency and calling a special session of the Legislature to address it on Thursday, January 10, 2008.

The proclamations will be issued concurrently with the release of the Governor's proposed 2008-09 state budget. Emergency legislation is also being drafted over the holidays to address the current year shortfall and will be introduced immediately upon opening of the special session.

"While California's economy remains fundamentally sound and continues to grow, a combination of factors has dramatically changed our budget outlook this fall," Governor Schwarzenegger said. "I have briefed each of the legislative leaders on our projected budget shortfall and I believe that when the Legislature reconvenes in January immediate action is necessary. I will continue my discussions with the leaders in the coming weeks, so that we can narrow as many differences as possible and move quickly in the special session to bring this year's budget back into balance. In addition, I have also met with dozens of officials in the last three weeks including law enforcement and education leaders, as well as advocates for patients and persons with disabilities, to talk about our budget situation."

Since taking office, Governor Schwarzenegger has actively pursued policies to achieve greater fiscal stability for the state without stealing from local governments and infrastructure funding. He successfully negotiated and campaigned for passage of Propositions 57, 58 and 1A, protecting local funding and transportation dollars for local projects in 2004 and he campaigned unsuccessfully for a spending cap in 2005.

"I firmly believe that the way to solve our chronic budget problem is with fiscal restraint. We will figure out how to get spending in line with revenue," said Governor Schwarzenegger. "We must take action as soon as the Legislature returns to close the current-year shortfall and balance the budget for the coming fiscal year. But it is also essential for us to make long-term fundamental budget reform an absolute priority. Our current situation makes it clear the state's budget system is flawed. However our fiscal adversity actually creates an opportunity - if we rise to the challenge - to implement lasting reform. I believe that we must and I am ready to work with the Legislature to achieve it. In the meantime, Californians should enjoy the holiday season with the confidence that our economy is fundamentally strong."

Among the factors contributing to the current-year shortfall:

A revised - and lower - current-year revenue forecast, driven in part by the continuing slump in the housing sector and the ongoing effects of the subprime mortgage collapse.
Increased firefighting costs related to this fall's wildfires in Southern California.
Legal challenges that have delayed implementation of Indian gaming compacts.
Lower estimated local property tax revenues, which affect the state's share of K-14 school funding.
An appellate court decision in a lawsuit over teachers' retirement funding.
Under the provisions of Proposition 58, approved by Californians in March 2004, the Governor has the authority to declare a fiscal emergency if he determines that the state faces substantial revenue shortfalls or expenditure increases. The Governor is then required to call a special session of the Legislature and to propose legislation to address the fiscal emergency. If the Legislature fails to approve and send legislation to the Governor to address the fiscal emergency within 45 days, it would be prohibited from acting on any other bills or adjourning in joint recess until such legislation is passed.

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Governor Schwarzenegger and California's Budget
Tying Our Own Hands
Since taking office Governor Schwarzenegger's leadership has successfully spearheaded efforts to take
past budget-balancing ploys off the table. Prior to his administration, the State of California was criticized
by local governments for regularly using local tax dollars in difficult budget years to help cover Sacramento
shortfalls (estimates put this number at $40 billion between 1992-2004.). The Governor proposed a new set
of solutions and has actively pursued policies to achieve greater fiscal stability for the state.
· Governor Schwarzenegger proposed the California Recovery Plan. The Governor's proposal
included a Constitutional amendment to limit budget spending; it also proposed issuing economic
recovery bonds and reforming workers compensation.
o While the Legislature failed to adopt the Governor's initial spending limit proposal, the
Governor fully supported the final negotiated product.
· Governor Schwarzenegger negotiated and championed Proposition 58. The Governor
championed the California Balanced Budget Act (Proposition 58) which:
o Requires that the State of California enact a balanced budget each year.
o Allows the Governor to declare a fiscal state of emergency and make mid-year budget
adjustments, in the event that the state faces significant revenue shortfalls or spending
deficiencies.
o Establishes a rainy day reserve.
o Prohibits most future borrowing to cover budget deficits (general obligation bonds, revenue
bonds, and certain other forms of long-term borrowing).
· Governor Schwarzenegger negotiated and championed Proposition 1A. The Governor worked
with the legislature to place the Protection of Local Government Revenues Act (Proposition 1A) on
the November 2004 ballot and campaigned on its behalf. Passed by voters, this Constitutional
amendment prevents the State of California from taking funding from local coffers. As a result, the
State of California cannot:
o Reduce or reallocate local sales taxes.
o Shift property taxes to schools (ERAF) or reallocate them among local government agencies.
o Reduce the Vehicle Licensing Fee rate below.65 percent of value unless the state provides
replacement revenue.
o Mandate costs on locals by shifting partial or full responsibility for costs of shared programs.
· Governor Schwarzenegger pushed for a state spending limit. In 2005 the Governor championed
Proposition 76, the California Live Within Our Means Act, which included a spending limit for the state
budget-showing his commitment to solving our budget's structural problems and the state's
spending habits even in prosperous economic times.
· Governor Schwarzenegger raised the bar on Proposition 42. As a result, the state lost its ability
to borrow from these transportation funds on an open-ended basis.
o Proposition 1A-the voter-approved 2006 ballot proposition to protect transportation funding
that was part of the Governor's Strategic Growth Plan-made it more difficult for the state to
tap Proposition 42 transportation funds.
o The proposition amended the State Constitution to provide that transfers of sales taxes on
gasoline under Proposition 42 can only be suspended on the condition that the suspended
amount is repaid within three years. The bond also provided that an equal share of any
outstanding debt related to past suspensions of Proposition 42 (done in 03-04 and in 04-05) is
repaid every year. That ongoing repayment amount is $82.7 million.