Warning of Recession, Governor Proposes Prudent Budget

Loren Kaye
President of the California Foundation for Commerce and Education

Emphasizing his commitment to fiscal prudence, Governor Brown this week proposed a $171 billion balanced state budget with no new general taxes and an $8 billion rainy day reserve.

Even though General Fund spending is projected to rise by more than $9 billion over the past two years, actual spending is held in check. Thanks to the Proposition 2 budget reform, the Governor proposes boosting the state’s rainy day reserve and paying down another $1.5 billion in budget debt.

The Governor faces mounting pressure from legislative Democrats and interest groups to increase programmatic spending while revenue growth is strong. For the most part, he rejected those calls, reminding Californians of the inevitability of an economic downturn:

“It must never be forgotten,” said Brown, “that 69.5 percent of our General Fund revenues come from the volatile personal income tax which, as history shows us, drops precipitously in time of recession—an event not too far off given the historic pattern of the 10 recessions that have occurred since 1945. During a moderate recession, revenue losses to the General Fund will easily total $55 billion over three years.”

Nonetheless, the budget proposal highlights administration priorities for increased spending.

Public schools and community colleges would receive $2.4 billion in additional revenues, maintaining their steady recovery since the depths of the recession. Responding to calls for more attention to early childhood education, the Governor proposed consolidating $1.6 billion in disparate programs into a block grant, promoting local flexibility and focusing on disadvantaged students and improved local accountability.

The Governor also highlighted the $900 million in competitive matching grants for career technical education, many of which should address areas of high youth unemployment and high dropout rates.

Much of the credit for the recovery in education finance is attributable to a recovering economy, as well as the passage of Proposition 30, an income tax increase on high-earning Californians and a small sales tax increase, promoted by the Governor in 2012. The tax is scheduled to expire in 2018 but is now the subject of several proposed ballot measures to extend it for another dozen years. The Governor indicated his skepticism of this new tax proposal, suggesting that the exemption of the new tax from the Proposition 2 rainy day reserve was a “fatal flaw.”

The Governor’s budget also addresses another issue that could be on the November ballot, proposals to increase the minimum wage to $15 by the end of the decade. The budget notes the major increased costs just to state government—topping $4 billion annually when the wage increases are fully implemented. Effects of these wage increases on businesses would be exacerbated during a recession, according to the budget statement.

The Governor’s budget also addresses two pieces of unfinished business from 2015.

A change in federal policy has undermined the ability to obtain matching federal funds for a tax assessed on managed care organizations that serve Medi-Cal beneficiaries. A proposal to update the tax failed last year since it would have sharply increased taxes on health plans that do not serve Medi-Cal.

Since then, the administration has worked with health plans and other advocates to devise an acceptable replacement tax that would qualify for $1 billion in federal reimbursements. The challenge is finding a way to avoid a reduction in federal Medi-Cal matching funds without adding costs to health plans that would have increased premiums to responsible California employers.

The Governor’s budget restated his demand for increased funding to address California’s annual $6 billion funding gap for annual highway system maintenance and repair.

Last year the Governor proposed a 10-year, $36 billion finance plan to partially address this shortfall. The new budget re-ups this proposal, and adds another $800 million in additional loan repayments to support a variety of transportation projects.

The budget continues spending proceeds from the Air Resources Board’s cap-and-trade program, which uses revenues from auctions of greenhouse gas emission allowances to support separate carbon reduction, environmental protection and community development efforts. The budget proposes spending more than $3 billion on these projects.

Use of auctions to distribute greenhouse gas allowances has been challenged by CalChamber and others, arguing before the 3rd District appellate court that the ARB’s auction was not authorized by a legislative statute and also is an illegal tax under Proposition 13.

The budget will now be the subject of legislative hearings and horsetrading, and must be approved by the Legislature byJune 15.

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