State Budget Update

Just two months after passage of the “18-month” 2008-09/2009-10 state budget, the sky is beginning to fall, just as the LAO projected. DOF April Finance bulletin details a more-than $400 million shortfall in actual revenues in March alone. Every major revenue source continues to stay down, including shortfalls of 21 percent in personal income tax, 13 percent in sales and use taxes, and 6 percent in corporate taxes.

It appears that the LAO was correct in estimating that California faces an $8 billion budget gap in the 2009-10 budget year. For education, this would mean a drop in the Proposition 98 guarantee of about $3.5 billion. If reduced that low, this is $3.5 billion below the already significantly reduced level reflected in the current 18-month budget deal.

We understand from policy makers it is possible that if the budget hole remains at “only” $8 billion, the Legislature may be able to – and may very much want to – address that gap with borrowing to avoid further mid-year cuts to education and health and human services – that’s if the May 19^th initiatives pass. It appears the state has the ability to borrow from several potential pots of monies. Accordingly, most agree that the real problem will be if the May 19 ballot measures fail.

May 19^th Election

Five initiatives on the May special election ballot have significant effects on the state budget and school finance (Propositions 1A through 1E).

The passage of Prop 1A and 1B are crucial. Prop 1A would establish in good years a rainy day fund for hard times, and would also extend for one or two more years the current budget’s one-time VLF, sales, and personal income tax hikes. Prop 1B is school specific, providing a one time infusion of $9.3 billion to schools – paid over five years beginning in 2011‑12.

Props 1A and 1B are partially linked: If Prop 1A fails, Prop 1B automatically fails, even if it is approved by the voters. But if Prop 1B fails and Prop 1A passes, Prop 1A still stands, and the dollars that would have been targeted to education under Prop 1B would instead be used to pay off state bond debt.

Of immediate impact will be the outcomes of Propositions 1C, 1D, and 1E. Together their passage would provide almost $6 billion in revenue for the 2009-10 budget. These are revenues that are already “spent” in the final budget deal, so the failure of these three propositions would blow an immediate and additional $6 billion hole in the 2009-10 budget.

Proposition 1C would provide $5 billion in one-time dollars through securitization of the state lottery. Propositions 1D and 1E are measures that propose to divert for a limited time lesser amounts ($600 million and $200 million, respectively) from dedicated funding streams for special purposes (“First 5” children’s services and local mental health programs, respectively).

Polling on the propositions continues to be dismal, with all five of the critical budget propositions failing with large margins. There are staggering differences of opinion on these propositions among statewide opinion leaders and groups. Their loudly expressed differences are causing confusion – and voter confusion almost always results in failure at the ballot box. But money also tells in elections, and big money is being collected on both sides of this campaign. While it is still too early to tell, it is clear that the education community will need to hope for the best, but plan for the worst. And the worst will most certainly mean mid-year cuts in 2009-10.

We’ll continue to keep you informed.

Thank you to Sandy Silberstein for her contribution to this report.