2008 Essay #6: The July Conference Committee Budget

This is my sixth essay for 2008 and continues my reports on the
2008-09 budget processes and continuing changes.

My first 2008 essay was an update on the 2007 "year of health reform."
The second set out some background information on actions taken by the legislature in February to re-balance the 2007-2008 budget, given shrinking revenues. The third reviewed the Governor's budget as he presented it in January of this year. The fourth presented the changes made by the Governor in his May revision of the 2008-09 budget, usually referred to as the "May Revise." The fifth left the budget area for a moment and reported on the LAO's report on the single payer bill, SB 840.

This, sixth, essay presents the budget as it stood in July at the end of the Legislative Budget Conference Committee's work. This budget was called, during the course of the summer negotiations, the "Democratic budget."

Visit my website at www.sen.ca.gov/kuehl to read my previous essays.
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Differences from the Governor?s "May Revise"

The budget presented by the Governor in May, now called his "second budget," assumed "securitization" of the state Lottery as part of the revenue solution for this budget year (08-09). This means that some Wall Street entity would pay the state the present value of theoretically increased lottery revenues, which would be repaid out of future lottery revenues for the next thirty years. The theory about paying back the Wall Street entity investing in the State lottery was that "modernizing" the lottery to give more varied prizes, as well as increased advertising and marketing, would bring in more revenue and, from that revenue, the loan would be paid back over thirty years.

There was also some thought that the schools should be taken out of the lottery once and for all and totally funded by the general fund, which would also receive the lottery proceeds. This proposal was predicted to add 5.1 billion dollars in one-time revenue to the
2008-09 budget. The Gov?s May revise also incorporated a very complicated construct to be put out for a vote of the people to validate taking this step with the lottery which, if it didn?t pass, would have somehow triggered a sales tax. No one believed this would actually happen.

In addition, the Governor?s May revision proposed a large lump sum to be borrowed from transportation funds and placed in the general fund for other purposes, with no proposal as to how it would later be repaid.

As to the subject of this essay, the budget adopted by the Budget Conference Committee last July did not assume the lottery as a budget solution, nor did it rely on borrowing from transportation money, but did assume some of the Governor?s revenue solutions, including loans from special funds, an increase in park entrance fees and some payment by home owners in state fire responsibility areas for fire services.

Revenue

Instead of the lottery proposal and a bit of fancy footwork on accrual accounting that would have pushed some expenses into the next year's budget after this one, the Conference Committee proposed tax
increases: setting the state income tax on the two highest income brackets back to where they were years ago at 10% and 11%, instead of the current 9%; rolling back the dependent credit for high income taxpayers, reinstating the top rate on the franchise (bank and
corporate) tax and maintaining the 2007 tax tables for 2008. These decisions would bring new revenue of $9.7 billion into the budget.

Expense

In the expenses categories, the Conference Committee budget put about
$2.3 billion more into K-14 education, and restored a 10% cut the Governor had proposed for categorical programs. The Conference Committee also restored about 8% of the 10% reduction we had made in Medi-Cal reimbursements, restored pharmacy rates, did not make the changes the Governor wanted to Cal-WORKS which would have kept more families from accessing the welfare-to-work benefits, and did not adopt the Governor's reductions in foster care and child welfare services. However, recognizing that the budget could only be balanced by a combination of about 2/3 cuts and 1/3 new revenues, the Conference Committee retained a great many of cuts proposed by the Governor, to senior legal services, to cost of living increases in CalWORKS, to cost of living increases in SSI and SSP, and many others.

The greatest difference between the Governor's May budget and the budget adopted by the Conference Committee early in July was in the area of corrections. A number of parole and sentencing reforms were proposed by the Conference Committee budget, including adjusting the threshold for property crimes for inflation (that is a higher amount could still lead only to a misdemeanor conviction, instead of prison), giving credit for good behavior, giving direct discharge for non-violent or non-serious crimes (defined in the penal code), and giving judges discretion to judge suitability for diversion and discretion to control parole revocations instead of automatic re-sentencing. These parole and credit reforms were indicated to save
$445 million.

What Happened Between July and August?

The Conference Committee budget and the Governor's May Revise were discussed and dissed, massaged and savaged, argued over and praised, torn apart and put back together. There was no agreement. The Republicans steadfastly refused to consider the Conference Report, as it added taxes. There was no movement.

Finally, at the beginning of August, and already a month late for the adoption of a budget, the Governor released a whole new set of ideas in another revision. This was called his August revision. In my next essay, I will set out his new proposals.