The California State Budget in Context: A Series of Essays by Sheila Kuehl

Over the years, the people of California have passed a number of bonds to build up infrastructure: K-12 facilities, higher ed buildings, prisons, resource acquisitions, water improvements. Since most of these bonds are paid off over a thirty-year period, each budget includes a goodly chunk for interest on the various infrastructure bonds, called “debt service”. In the 06-07 budget, that interest amounts to around 4 billion dollars.

For the first time, the people also approved a bond not related to infrastructure, at the behest of Governor Schwarzenegger, to pay down debt (by creating more). This budget borrowing bond also requires the payment of interest every year. In 06-07, the interest will be almost 5 billion dollars. So, a total of 9 billion dollars in this new budget goes for interest on past bonds. This fall, we will be asked to vote on a new set of bonds, which I strongly support, because, in the absence of any will to raise any taxes, these bonds are the one and only way California can finance critical infrastructure repairs.

Debt Reduction in the 2006-7 budget saves future $$

Both sides of the aisle, both houses of the Legislature and the Governor agreed this year to pay down some of the budget borrowing (non-infrastructure) debt to the tune of $2.8 billion dollars. This saves no money in 06-07, but does save interest in future years (generally called the “out” years in budget-talk). About one-half is for pre-payment of money the state borrowed from the gasoline tax revenues for things not related to transportation and which has to be paid back. The remainder is for local governments, schools and special funds, all of which got hit for loans to balance past budgets.

The basic ins and outs

The revenue picture is a bit rosier than usual this year, mostly because of spikes in business earnings, corporate profits and capital gains, primarily in the housing area. All of these categories are among the most volatile, that is, not to be counted on from year to year. Consequently, we attempted to spend these monies on one-time expenses, as you will see in the next essays on specific spending areas, rather than building in increases that would have to be supported every year, even though that represented a hardship on social services and healthcare, which is driven by caseloads.

05-06

We began the last budget year (05-06) with a prior-year balance of $9.5 billion, mostly because of past budgetary borrowing and better than expected revenues. The revenues and expenditures were, of course, identical, at $92.7 billion, so at the end of the year we had the same 9.5 billion. We paid off about a half billion in encumbrances and started this year with 9 billion in the reserve fund.

06-07

The new budget assumes revenues at $94.4 billion and expenditures of 101.3 billion, which will leave the reserves at 2 billion at the end of the year. However, as we saw last year, when a deficit was projected, often spending lessens during the year to match revenues. Still, the Legislative Analyst’s Office is projecting continuing “structural” deficits of about 4-5 billion in each of the “out” years.

What Does It All Mean?

More money this year in the budget, a bit less belt-tightening for the poor, for education, for parks, for health and welfare. But it is not a generous budget, simply a prudent one. And the Governor has not really done anything to fix the structural deficit, which could involve a modest tax increase. He’s just ridden the wave of corporate profits, business income and capital gains realization to a slighter higher level and hopes everyone will think he’s done something.

Next: K-12 education.