2008 Essay #10:The Late-Night, Sept. 15th, Threatened-to-be-Vetoed Budget

This is my tenth essay for 2008. In this essay, I set out the main provisions of the budget bills and revenue bills that were passed in the late hours of Monday, September 15 and the early hours of Tuesday, September 16. Following passage of these budgets, along with a number of "trailer" bills, which amend statutes, as required, to give effect to the budget, the Governor announced he would veto the budget bills and all associated bills. There is currently an attempt to avoid such a veto, and new proposals to be voted on. In a breathless attempt to keep you all up to date, this essay presents the budget that passed Sept. 15.

My next essay will set out the changes made on Friday, September 19 and the final budget solution.

Visit my website at www.sen.ca.gov/kuehl to read my previous essays. For those of you who received this essay by forwarding, it is written by California State Senator Sheila Kuehl. If you wish to subscribe to receive these essays on a continuing basis, (no charge), please send an e-mail to Sheila.Kuehl@sen.ca.gov, titled "subscribe." If you receive it directly and wish you didn't...send an e-mail to the same address, but title it "unsubscribe."

Failure of Previous Budgets to Pass

The Governor had not been able to convince any Republicans to vote for any of the budgets except their own. Consequently, none of the budgets previously presented had garnered the requisite 2/3 vote in either house, not the Conference Report, not the Governor's August Revision, not the Republican budget, and not the Democratic amends to the Governor's budget.

Over the weekend of September 13 and 14, the four legislative leaders met and agreed on a new set of bills with an entirely new take on revenue sources and a compromise on spending and budget reform measures, mostly related to the Rainy Day Fund.

General Description of Budget Bills

There were four main bills presented on the evening of Monday September 15, which, together, constituted the budget and changes to the ways in which revenues would be realized to balance the budget.

The first budget bill presented was the Conference Committee report (for a description, see my essay #6 for 2008, on my website).

The second budget bill, an addendum to the Conference Report, included additional funds for various programs, including the Office of Emergency Services, state forensic laboratories, further development of the Hydrogen Highway, some park projects and some enhancements to transit expenditures.

There were also provisions to restore MediCal payments to healthcare providers pursuant to a court order, but delay them until March of 2009, to reduce funding in the Department of Developmental Services and increase family cost participation for certain expenses in the Regional Centers.

In addition, in the second budget bill, funding for K-14 education was reduced by $858 million dollars, eliminating funding for categorical program cost-of-living adjustments. However, the total of $58.1 billion to Prop 98 was $1.3 billion greater than had been presented in the Governor's May Revision. It also provided K-12 education with $350 million in property tax revenues by adjusting the (rather complicated) formula for passing monies through to the schools. There were also modest increases to the Student Aid Commission, a restoration of monies to the Public Utilities Commission to implement the Institute for Climate Solutions, and a restoration of monies for booking fees and small and rural sheriff funding.

The two Main Revenue Bills

First of all, what was not in the bills: taxes and borrowing. The Republicans continued to say "What Is It About No Taxes You Are Failing To Understand?" The Democrats continued to say, "What Is It About No Borrowing You Are Failing To Understand?"

As a compromise, revenues were to come largely from accelerated withholding, both for personal and for corporate taxpayers. Other temporary revenue enhancers included a tax amnesty program to collect overdue taxes, collecting money earlier from people with fluctuating incomes, and a change in the law that allows net operating losses to offset gains so that, for two years, the ability to take these losses would be suspended.

However, after those two years, companies could take carryback losses from all those years, and could spread them out against gains made in any of their subsidiaries and affiliated corporations, probably blowing another big hole in the budget in three years.

The Details

AB 1452 was a revenue bill that required a 2/3 vote, and got it. It deleted earlier provisions that would have increased the sales tax, pursuant to the Governor's proposed budget. It added the net operating loss "carry-back" provisions described above, but limited it to 50% of losses in 2011, 75% in 2012 and 100% thereafter. Still, it was a great expansion of the use of these losses to offset revenue in that it allowed the losses to be used by affiliated corporations against their income. It accelerated payments of fees by Limited Liability Companies to June 15 of the current taxable year, instead of April 15 of the next year, as is now the case with local business license taxes and personal income taxes, with a 10% penalty for late or underpayment. It limited the amount of business incentive tax credits that could be used to reduce tax liability.

The second revenue bill, AB 36, required only a majority vote because it simply increased the amount of withholding collected by the Franchise Tax Board, but did not increase taxes in any way. Specifically, after 2009, the bill would require the wage withholding tables to produce a sum equal to 10% more than is now specified for withholding. It also increased the withholding rates to 6.6% for supplemental wages and 10.23% for stock options and bonus payments.

The argument for this bill related to the chronic underpayment of taxes now being withheld. Critics indicated that this change would be tantamount to "borrowing" from the taxpayers who didn't actually owe such an increased amount and who would simply get it back when they filed their taxes. Others countered that taxpayers have the option to reduce their withholding by filing amended forms. This bill became the center of a continuing controversy later in the week.

In addition, AB 36 eliminated the "safe harbor" provision for taxpayers with incomes over one million dollars by requiring them to pay their full estimated tax liability in quarterly payments, instead of the smaller increments now allowed. This bill received no Republican votes and got a bare majority in the Senate. I believe the same was true in the Assembly, which voted on the bill later in the morning of September 16.

And....The Lottery

Three lottery bills also passed the Legislature on September 15.

The first was the so-called "modernization" bill. It authorizes the lottery to increase and decrease prize payouts so as to maximize profits, without allowing any new games or technology. It reallocates the revenues so that, in the 09-10 fiscal year, at least 50% of the total annual revenues must be returned to the public as prizes instead of capping the prizes at 50%. It also eliminated the current provision requiring that 34% of the total annual revenues must be allocated for the benefit of public education. Instead, it authorizes the Director of the Dept. of Finance to designate a portion of net lottery revenues for transfer to the Lottery Assets Fund for securitization and sale to the bond market, pending approval by a vote of the people. To make up for losses to education, the bill appropriated, for 2009-10, and for each subsequent year, a general fund appropriation to education equal to amounts appropriated for K-12 and high education from the lottery in 08-09, adjusted annually for cost-of-living and student growth adjustments. It also enables future "modernization" to be accomplished with a 2/3 vote of the Legislature, and not a vote of the people.

The second lottery bill authorized securitization of lottery revenues by selling the future revenues of the lottery. Requires a vote of the people.

The third lottery bill was a Constitutional amendment to permit securitization and recast the purpose of the lottery, as set out in the two bills, above.

September 15 budget: Sock It Away For A Rainy Day?

This bill, Senate Constitutional Amendment (SCA) 13, increased the size of the Budget Stabilization Fund (BSF) from 5% to 12.5 percent (see my essay #8, on my website).

It restricts the ability of the Governor to suspend the transfer from the General Fund to the BSF to years in which available resources are less than prior year's expenditures and adds unanticipated revenue growth between the January budget and the May Revision to first meet Prop 98 constitutional requirements and the rest to the BSF.

It would also allow a loan from the BSF to the general fund to address cash flow deficits.

The budget nobody loved

Within hours, the Governor indicated he would veto this budget and all the trailer bills (which I will set out in later essays, depending on what happens). He was most concerned that the Legislature had not accepted his demands concerning the Budget Stabilization Fund. Everyone started to have second thoughts about the withholding increases, and, consequently, about virtually everything else.

The Legislature is going into session late in the afternoon on Sept. 19th to amend again to satisfy the Governor and to make further changes to the revenue sections, eliminating the withholding provisions and, instead, simply increasing penalties.

In my next essay, I will set out what is, hopefully, the final budget.