TO: ACSA leadership and interested parties

FR: Adonai Mack, Legislative Advocate

RE: Budget Vote Fails Senate Floor

With three days before the end of the legislative session, the Senate finally took a budget up for a vote. On Thursday night, the rumors circulated that the Senate had an agreement on the budget and planned to pass a budget on Friday morning. It appeared that the rumor was half right. The Senate voted for a budget, but without any Republican votes (and one Democrat not voting) the budget failed passage.

The Democrats proposed a budget Friday that resembled the Governor's "August Revise". The proposal included the following elements:

Education

* Fully funding Proposition 98 at $57.8 billion with no cuts to categorical programs or across the board cuts.
* Defers $150 million of "settle up" payments
* Temporarily shifts $228 million in local redevelopment funds to schools
* No cost-of-living adjustment

Revenues

* Temporary one-cent sales tax increase that lasts for 3 years
* Suspends the Net Operating Losses (NOL) for 2 years
* Tax amnesty program for Personal Income Tax and Corporate Income Tax

Budget Reform

* Increase the cap on the Budget Stabilization Act (BSA) or "rainy day fund" from 5% to 12.5%
* Requires 3% of General Fund (GF) to be placed into the BSA per year until the cap is reached. In years where the cap is reached, the Legislature can reduce the required transfer from 3% to 1.5%
* In years where there is a deficit, the Legislature can transfer funds from the BSA to the GF with a 2/3 vote. However, transferred funds may only be used for one-time purposes.
* The Governor is provided with stronger, unilateral authority to make mid-year cuts when there is a budget deficit. The Governor can reduced state operations by 7% and suspend all statutory COLAs for 120 days.
* Securitizes the California State Lottery and compensates education by putting the revenues that education would receive from the lottery into the base of Proposition 98.

After a spirited debate over the design of the state budget and whether the budget negotiations were genuine, a disgusted Senate Pro Tem Perata challenged the Republican Caucus to come up with a responsible budget that did not include taxes or borrowing. It took all of 24 hours for the Senate Republican Caucus to develop the framework for a budget proposal. The Caucus' proposal includes massive cuts to health and human services, budget reform, an economic stimulus package, no taxes or borrowing, but maintains level funding for education. The Senate Republican proposal includes the
following elements:

Education

* Funds Proposition 98 at $57.9 billion
* Securitize lottery

Eliminate Tax Increases in Governor's August Revise

* Remove sales tax increase
* Remove Fire Tax
* Remove tax increase to home owners and renters

Budget Reform

* Spending Cap
* Strengthen Rainy Day Fund
* Mid-year cut authority
* Capture full "April Surprise"
* Require 2/3rd vote to withdraw from rainy day fund
* Prevent Legislature from adjourning until budget is passed

Economic Stimulus

* "High tech" fix on overtime
* Federal conformity on high wage overtime exemption
* Runaway Production Tax Credit program
* Public-Private Partnerships
* Worker schedule flexibility
* Expand healthcare options for workers
* Provide regulatory relief

Where does that leave us?

It is likely that the Senate Republicans will have their proposal fully finished for a Senate floor discussion by this Friday or this weekend. The Republican Caucus met Senator Perata's challenge by developing a budget that did not include taxes or borrowing. However, the proposal, while sparing education, makes huge cuts to the health and human services side of the budget. In addition, the Republican proposal contains a spending cap and mid-year cut authority for the Governor which has the potential to permanently reduce education funding at existing levels for the foreseeable future.The Assembly has been unusually quiet for several weeks and may be waiting the fallout of the Senate budget negotiations before moving forward with a finalized proposal. However, it appears that with both the Democrats and Republicans are digging their heels in, and it could be several weeks before the budget is finalized.

The budget stalemate may have a serious impact on the allocation of education funding. ACSA is analyzing the school apportionment process and working with the California County Superintendents Educational Services Association and the California Association of School Business Officials to develop a joint advisory detailing the implications of a late budget.

Additional updates will follow. For additional information or assistance, please contact ACSA Governmental Relations at 916-444-3216.