Next Year's California Budget Deficit of $10 Billion and the Most Vulnerable in Our State

The Governor said in a statement released yesterday that .“Knowing the challenges that we face, throughout the fall, my administration has been examining a variety of options to close next year's budget gap. I have not made any final decisions yet, but it's clear that the decisions that will be involved will be tough. I have a constitutional requirement to submit a balanced budget to the Legislature in January and I will fulfill that responsibility.”

He also said in his statement that since the enactment of the 2007-2008 in August after a nearly two month stand-off in the State Senate by Senate Republicans, "...we have made it abundantly clear that next year's budget will be a difficult one. Today's [release of the Legislative Analyst Office Report on the budget] developments underscore that fact and they also underscore the need to begin serious discussions on budget reform. I hope that the Legislature will join with me to make this a priority."

Advocates and some policymakers fear that health and human services programs - especially those serving children and adults with disabilities, mental health needs, seniors and low income families are especially vulnerable to major cuts and reductions.
Nothing is definite or final however until the Governor submits a proposed budget to the Legislature in January and the Legislature holds hearings in the Spring and passes a budget in the early summer.

Budget Crisis Combination of Shortfalls This Year and Next

The massive budget deficit, according to the Legislative Analyst report, is the combination of a $2 billion shortfall projected for this year's State budget passed last August by the Legislature and signed by the Governor and in addition to that number, another shortfall of over $8 billion projected for the entire budget year that begins on July 1, 2008.

The budget shortfall of $2 billion for the current budget year comes despite a budget reserve of $4.1 billion - which the Legislative Analyst Office says will be gone by June 30, 2008, because of a dramatic drop in revenues and increases in spending that outstrip what the State brings in. With revenues expected to grow by 4.6% and spending to grow by 7%, barring a major improvement in the State's economy resulting in a dramatic increase in state revenues, or "corrective action" by the Governor and Legislature resulting in new taxes or other revenues and/or massive spending reductions, the Legislative Analyst report projects that the State will face an additional $8 billion shortfall for the July 1, 2008 to June 30, 2009 state budget year when, if nothing is changed. That adds up to a gap of over $10 billion when the two numbers are combined.

The shortfall of the current budget is due to several factors, according to the Legislative Analyst report:

• Significant decrease in state revenues due to state's economy largely due to slumping real estate market and high energy and gas prices.
• Lower property taxes, driving state General Fund spending on K–14 education upwards.
• A likely delay in the sale of EdFund and a reduction in the revenues that was anticipated by the sale.
• Delayed implementation of new tribal gambling compacts.
• A court–ordered payment to the state’s teacher retirement system.

The report projects that the huge shortfall - barring any action by the Governor and Legislature, will continue into the July 1, 2009 to June 30, 2010 budget year, with a deficit estimated at $8 billion. The report suggests that after that the deficit will drop to about $3 billion in large part because the cost of paying off loans that were made to help balance the budget in previous years would have be fully paid off in 2010.

Budget Shortfall Could Grow Worse Depending on Pending Lawsuits

The budget shortfall could grow even worse depending on the outcome of several lawsuits against the State, including those involving use of transportation funds to balance this year's budget.

Transportation Funding Shift - In September, advocates for public transportation filed a law suit against the State claiming that the shift of $1.3 billion in transportation funds to other budget areas in order to balance the State budget for 2007-2008 was illegal. Of that total amount, $400 million was meant to be an on-going, permanent transfer to other budget areas, with the remaining $900 million in transportation funds shifted to other budget areas - including health and human service programs - for this budget year only.

The case, expected to be heard at the end of this month, and if the State loses, it could result in up to $1.3 billion added to the $10 billion shortfall next year.

Other Lawsuits - Other additional costs due to lawsuits and legal actions against the State relate to the prison health care system, tax laws regarding limited liability companies, unclaimed property program.

Legislative Analyst Urges Legislature to Consider "Numerous Options"

The Legislature, says the Legislative Analyst report "...will need to develop a budget plan that provides almost $10 billion in solutions" and that a "...substantial portion of the current budget problem needs to be addressed through ongoing solutions" and that even "with such an approach, the state would still need to come up with billions of dollars in additional solutions of a more limited duration to get through the worst of the upcoming budget years—2008–09 and 2009–10"

The Legislative Analyst report says that there are "numerous options available" to put in place ongoing budget solutions, though "almost all of them involve making tough policy choices" for legislators and the Governor. These options, listed by the Legislative Analyst report include:

• Slowing program growth by reducing or eliminating cost–of–living adjustments (COLAs).

• Rolling back recent program expansions or reducing the level of program benefits.

• Eliminating duplicative or ineffective programs and restructuring program delivery methods.
• Shifting costs to special funds or to user fees.

• Eliminating tax credits and tax expenditure programs.

• Increasing efforts to enforce existing tax laws and ensure compliance.

• Raising tax rates.

Legislative Analyst Urges Mid-Year Action on Current Budget

The Legislative Analyst report also strongly recommends that the Governor and Legislature take action early next year to address the shortfall in the current year budget by making mid-year reductions that could include:

• Reducing Proposition 98 spending to the minimum guarantee in 2007–08 would result in about $400 million in savings that year and allow roughly the same amount of savings to be achieved in 2008–09.

• Delay or suspend COLAs, it may require action prior to July 1, 2008. For example, the 2007–08 Supplemental Security Income/State Supplementary Program COLA is due to go into effect on June 1, 2008, and the Legislature would need to act this spring if it wished to suspend it and generate $250 million in ongoing savings beginning in 2008–09. In the end, any improvement that the state can make in its 2007–08 year–end balance will make it that much easier to balance the 2008–09 budget.

• Suspend the Budget Stabilization Account (BSA) Transfer

IMPACT ON PEOPLE WITH DISABILITIES, SENIORS & OTHERS

With a shortfall of projected of over $10 billion, the health and human services budget - which contains programs and funding for nearly all the major programs impacting children and adults with disabilities, mental health needs, seniors, the blind, persons with traumatic brain and other injuries and disorders including Alzheimer's and MS, seniors and low income families and direct care and IHSS workers, is the budget area most vulnerable for significant major cuts and reductions next year.

The current year budget includes requirements on some agencies to submit plans to the Legislature for recommendations on ways to control costs. AB 203 passed as part of the budget last August, requires the Department of Developmental Services to submit such a report to the Legislature by October 1 this year making recommendations to control spending of regional center funded services and supports. The report is still being developed and has not yet been submitted to the Legislature.

Beyond possible spending reductions and other proposals that could impact hundreds of thousands of children and adults with disabilities, mental health needs, seniors and low income families and workers across California, the growing budget crisis also has or will impact the following major issues:

Health Care Reform: While the budget crisis worsens, at the same time the Governor and the Legislature are trying to come to agreement on major health care reforms that would be impacted - and have impact on the budget shortfall. How health care reform is put together and if it passes - has major impact on children and adults with disabilities, seniors and low income families and workers.

Autism Commission Report Proposals: many of the recommendations by the Blue Ribbon Legislative Commission on Autism require changes in existing state laws or new state laws and possibly significant resources in funding.

Olmstead Implementation - further progress in the State's implementation of the landmark 1999 US Supreme Court "Olmstead Decision" that requires, under the federal Americans with Disabilities Act, for the states to take measures, to avoid the "unjustified institutionalization" of persons with disabilities and seniors, could be impacted. Some advocates have been sharply critical of what they say is "extremely slow" progress in moving persons with disabilities and seniors out of institionalized settings into integrated community settings. The budget crisis could impact state funding for health services and supports needed to support people in community-based settings, and also funding for other services and supports including accessible transportation, housing, employment and education.

NEXT STEPS

The Legislature is currently in special session on health care and also on water - though neither house is meeting on a regular basis on either issue. [Note: the Assembly Health Committee is meeting today to consider proposals regarding health care reform, and the full Assembly could meet after Thanksgiving, followed by the State Senate in early December to possibly approve a health care reform package and send it to the Governor.]. The regular session of the Legislature is scheduled to reconvene on January 7th (this is the regular session where the budget for 2008-2009 and bills from the 2007 session, with exceptions, are carried forward for further action)

BUDGET FOR JULY 1, 2008 - JUNE 30, 2009

The State Constitution requires the governor to submit a proposed balanced budget to the Legislature on January 10th. Governors give hints of what that budget proposal will contain in their annual "State of the State" address to the Legislature a week or a few days before that.

The Governor - on November 5th, ordered all state agencies to present to him plans for reductions in state spending of 10% - most of which would likely require changes in state law that need approval by the Legislature to be considered for inclusion in the budget that the Governor will submit on January 10th. It doesn't mean those proposals will be included in the budget proposal he submits on January 10th - but it is a clear signal that he intends to look at spending reductions as one of the major ways to address the $10 billion budget gap.
The Legislative budget committees and subcommittees in both houses usually schedule hearings to review major parts of the Governor's proposed budget as early as late February through May.

Governor releases in early May changes or revisions to the proposed budget he had submitted on January 10th. These changes or revisions - referred to as the "May Revise" or the "May Revision" often contain new major proposals that previously were not announced.

The Legislative budget subcommittees in both houses will usually hold a final round of hearings to review new proposals contained in the revised version of the proposed budget

After that the budget proposal heads to the floors of both houses, then for review and action by a special joint committee - called a budget conference committee, composed of 3 members each from the Assembly and State Senate to resolve differences between the actions taken by both houses.

Budget proposal then heads for final action on both floors of the Legislature - though in reality outstanding issues are left to the Democratic and Republican legislative leaders and Governor to resolve.

MID-YEAR CUTS AND REDUCTIONS

In previous major budget crisis - including 2002 and 2003, then Governor Davis in the fall of 2002 and in the fall of 2003, the new incoming Governor Schwarzenegger proposed mid-year cuts and reductions, meaning proposals that would cut spending and make other changes in the current year's budget. Both called special sessions of the Legislature to approve such cuts - though in both cases, the Legislature refused to enact any of the proposed mid-year major cuts meant for the current budget year. However the Legislature in 2003 and 2004 did agree to modify versions of cuts for the new budget year that begins on July 1.

As of now, the Governor has not proposed such mid-year reductions - which would require approval by the Legislature. However, all that could change in the coming months, especially if the State's economic picture gets worse and the Governor declares a "fiscal emergency", triggering provisions of Proposition 58, the Balanced Budget Initiative passed by voters in March 2004. [See below]

PROPOSITION 58 IMPACT

Unlike in 2002 and 2003, Proposition 58, passed by voters in March 2004 by 71-29%, gives the Governor special (though limited) authority to declare a "fiscal emergency" should he or she determines that the state is facing substantial revenue shortfalls or spending increases (resulting in going over budget) that would force the Legislature to act. In theory, the Governor could make such a declaration now.

After declaring a "fiscal emergency" the Governor would then be required to propose legislation to address the problem, and call the Legislature into special session to consider his proposals and address the problem. If the Legislature fails to pass and send to the Governor legislation to address the budget problem within 45 days, the Legislature would be prohibited from acting on any other bills or adjourning until such legislation is passed.

It is not certain what happens if the Legislature passes legislation that the Governor does not believe addresses the budget problem or what actually defines, and adjourns the special session and moves forward on regular session bills. Almost every year in the past decade the Legislature has failed to meet the constitutional deadline of passing a State budget by June 15th each year, or pass a budget by the beginning of the State budget year without any penalty against them.

The California Disability Community Action Network, is a non-partisan link to thousands of Californians with developmental and other disabilities, people with traumatic brain injuries, the Blind, the Deaf, their families, community organizations and providers, direct care, homecare and other workers, and other advocates to provide information on state (and eventually federal), local public policy issues.