State Budget Deficit Now Projected at $21 Billion


Posted on 19 November 2009

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By Marty Omoto
California Disability Community Action Network

Despite massive permanent spending cuts and some temporary tax increases made this past year, California’s budget shortfall is projected to swell to $21 billion by June 30, 2011, the end of the 2010-2011 State Budget year in a new report issued this morning by the Legislative Analyst Office – the non-partisan agency that reviews and monitors budget issues for the Legislature. 

Adding to the bad news, the report also projects continued budget shortfalls of billions of dollars for the next several years especially when federal stimulus dollars and revenues from the temporary tax increases end.  

Legislative Analyst Mac Taylor said barring any new spending cuts or revenues, the deficit for the current state budget year – which ends June 30, 2010, will be over $6.3 billion, on top of a $14.4 billion shortfall his office projects for the 2010-2011 State budget year that begins July 1, 2010 and ends June 30, 2011.  

Taylor in his report said that while an “unexpectedly” strong economic recovery could “theoretically” could reduce the size of the deficits projected,  the immense scale of the deficits is “…so vast that we know of no way that the Legislature, the Governor, and voters can avoid making additional, very difficult choices about state priorities…In the coming years, major state spending programs will have to be significantly reduced…Policymakers will also need to add revenues to the mix.”

The grim news is even worse than what Governor Arnold Schwarzenegger said to the Sacramento and Fresno Bee editorial boards last week, when he informally estimated that the size of the state deficit would grow to over $14 billion – including $7 billion for the current year budget alone.  

More Proposed Major Spending Cuts Certain With Major Impact On People With Disabilities, Mental Health Needs, Seniors

The news of the huge budget shortfall makes certain that the proposed State budget for 2010-2011 that the Governor will be submitting to the Legislature on or before January 10th, will contain new massive permanent spending cuts.  

Last week (November 9th), the Governor, said, in an interview with the Fresno Bee editorial board, that he would not agree to or propose any more tax increases, but that more spending cuts would be needed because“…we are not out of the woods yet...the key thing is, we have to go and still make cuts and still rein in the spending. It will be tougher because I think the low-hanging fruits and the medium-hanging fruits are all gone. I think that now we are going to the high-hanging fruits, and very tough decisions still have to be made."  

He said then that the problem was spending – not revenues.  

The size of the growing deficit – with on-going deficits in years ahead projected, will likely have a major impact on programs and services to children and adults with disabilities, the blind, mental health needs, persons with traumatic brain and other injuries, persons with Alzheimer’s, MS  and other disorders, low income seniors, families, organizations, facilities and workers who provide supports and services across California.  

The bad news of a growing deficit in the current budget year could push the Governor to call for another special session of the Legislature to begin early work on taking action on the crisis before January, which the Legislative Analyst report recommended.  

Noting the immense and growing size of the budget deficit, the report by the Legislative Analyst urged the Governor and Legislature to take immediate steps rather than waiting until next year because “…every month of delayed action in addressing the new budget gap means that the opportunity for various savings is lost. Solutions often need early action in order to get a full year's worth of savings” and that “taking action beginning within the next few months would also help ensure that the state can continue to meet its cash flow needs."

While not committing to any action before January, Assembly Speaker Karen Bass (Democrat – Los Angeles), in a statement issued this morning, said that solutions will mean “…crafting budget solutions that will once again require both difficult spending reductions and additional revenues.”

Bass noted that “The sliver of good news is that revenues have not continued to fall significantly below projections, so hopefully that is sign of stability.”

No other official statements reacting to the release of the Legislative Analyst’s report this morning were yet available at the time of this CDCAN Report was written, from the Governor or from Senate President Darrell Steinberg (Democrat – Sacramento), or Senate Republican Leader Dennis Hollingsworth (Republican – Murrieta) or Assembly Republican Leader Sam Blakeslee (Republican – San Luis Obispo) .  

Legislature and Governor Made Massive Cuts Earlier This Year

In February the Legislature controlled by Democrats, along with some legislative Republicans and Governor Arnold Schwarzenegger hammered out a budget deal that called for massive permanent spending cuts and temporary tax and fee increases that closed what was then a projected over $40 billion deficit.  

In late July the Legislature and Governor made even more permanent spending cuts as the deficit continued to grow by over $20 billion.  

The Legislative Analyst’s report says that “failed budget solutions” are primarily responsible for the budget deficit for the current 2009-2010 State budget due to the
State’s “inability to implement several major solutions” as the Legislature and Governor hoped for in July including:

  • Inability of several programs—in particular, the prison system and Medi–Cal—to collectively achieve billions of dollars of spending reductions assumed in the 2009–10 budget.
  • Inability of the state to sell the State Compensation Insurance Fund (SCIF), a quasi–public workers’ compensation insurer, for the budgeted amount of $1 billion in 2009–10.
  • The state’s loss of a recent federal court case dealing with use of $800 million in transportation funding for the 2009-2010 State budget year.
  • A nearly $1 billion increase in the Proposition 98 funding guarantee for K–14 education for the 2009–2010 State budget year (meaning the State will need to pay that increase required by Proposition 98 to the schools).
  • The ongoing impact of most of these problems says the Legislative Analyst report, further expands the $7.4 billion operating shortfall that policymakers already expected in the 2010–2011 budget year.


Court Cases Could Increase Budget Problems Says Legislative Analyst

While the Legislative Analyst report warns that additional court cases “threaten to increase identified budget problems even higher” the report assumes that the State will eventually win in “active, budget–related court cases” including for those “active” cases at the trial or appellate court level.

The state currently faces an array of active cases, including cases challenging several billion dollars of spending reductions. These cases include ones related to the budgeted shift of local redevelopment funds, state employee furloughs, and various health and social services reductions including In-Home Supportive Services and Medi-Cal provider rate reductions, Adult Day Health Care and others.

The state also is appealing to the US Supreme Court, a three federal judge panel’s order to reduce the prison population.  

The Legislative Analyst’s forecast also does not include spending which was vetoed by the Governor using his line item veto power in July but is currently being challenged in state court.

The Legislative Analyst Office’s projections of the deficit size however could be hundreds of millions of dollars larger than what it eventually might end up being because it is based on an assumption that the State will eventually win all the pending lawsuits that have blocked several major cuts from being implemented – an assumption that several legal and advocacy groups do not share.  

Spending on the Increase In Several Areas In the Budget

The current year 2009-2010 State budget faces a  $6.3 billion shortfall – on top of the over $14 billion deficit for 2010-2011, because the Legislative Analyst report said that spending is “drifting well above the levels assumed in the July budget package” .

The Legislative Analyst report forecasts that State General Fund spending will be $4.9 billion higher than budgeted in the revised 2009-2010 State Budget, caused largely in these areas due to increased spending for  prisons, a nearly $1 billion increase required in the Proposition 98 minimum school funding guarantee in the 2009–2010 State budget year, a nearly $900 million of higher than budgeted spending for the Medi–Cal Program, over $800 million in higher spending in State general funds, due to a federal court decision which blocked the state’s ability to use “spillover” gasoline sales tax and Public Transportation Account funds to reduce General Fund spending.

The Legislative Analyst report said that the State’s tax revenues are coming in only slightly less - about $451 million less than budgeted for the 2009–2010 State budget year, which given the other bad news in the report, is considered, as Assembly Speaker Bass said, a “sliver of good news” that could point mean the state’s economy is beginning to recover.  

The Legislative Analyst report – and other budget analysts however warn that any economic recovery by the State will likely come too short and too late to help resolve the $21 billion shortfall. 

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Marty Omoto is Executive Director of the California Disability Community Action Network, 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 local public policy issues

The California constitution is supposed to require a balanced budget. The legislature and the governor (a number of governors, actually) have cheated on that for years. They did it with general obligation bonds.

There is normally nothing nefarious about a state selling bonds to build a bridge or school or any other capital construction. You get the advantage of a new bridge promptly and then pay for it through tolls or taxes over time. But what our legislature (and current and past governor's) have done was something else.

They sold General Obligation bonds to be paid off by future tax revenues for no purpose other than to address (then) current-year deficits. They could avoid either raising taxes or cutting spending by borrowing against the future - a future when the economy would be better and tax revenues higher. They got their lump sum - at the price of having annual interest payments to the bondholders.

Except now many of those bonds are coming due, and there is NO money available to pay off the principal. The only option is to sell still more bonds to cover the principal owed to those who bought these investments years ago - to roll over this debt - somewhat akin to putting all your old credit card charges on your new credit card - but not quite.

This time we don't get any 'teaser' rate. Our bond ratings today are considerably below where they were when we originally sold those older bonds. Worse yet, we are competing in a marker where the federal government will soon be flooding the market with bonds to pay off their own current and past deficits. No state has lower bond ratings than we do - nobody pays more for their borrowed money.

What this means is that our cost of borrowing has gone up considerably - and is about to skyrocket even more. $21 Billion in the red next year? If only. It's going to be a lot worse than that I'm afraid.