Governor Arnold Schwarzenegger’s use of a budget trigger that triggers $4.6 billion in drastic spending cuts and the delay of $2 billion in corporate tax cuts if $6.9 billion in additional federal funding fails to materialize has allowed the Governor to distance himself from both the need for severe spending cuts and/or the need for additional tax revenues to close the $20 billion plus budget gap projected for 2010-11.
Recent reports by Senator Barbara Boxer’s office and the California Budget Project have called the Governor’s projections for what California is owed from the federal government into serious question by indicating that California is actually a net beneficiary of federal assistance—receiving about $1.50 for every dollar state taxpayers send to Washington, DC.
Thus far, the Governor has preferred to hide behind the budget trigger rather than address the true severity of the state’s fiscal situation. As federal and state officials have pointed out, the federal government is not the cause of California’s budget problems and cannot be counted on to solve our budget problem.
“While the odds seem favorable for some federal relief sought by the administration, we believe that the likelihood of Washington agreeing to all of the Governor’s requests is almost non-existent,” states a recent report by the Legislative Analyst.
The focus on obtaining additional federal money is simply a distraction from the real issue at hand—the perpetual difficulty, becoming a near impossibility of obtaining the 2/3 vote necessary to balance the state’s budget in the Legislature.
The Governor’s proposed cuts are so severe—the elimination of the CalWORKS welfare program, healthy families program, and In-Home Support Services (IHSS) program, and an additional 5% reduction to state employee salaries, among others—that the Governor chose to distance himself from them by proposing a budget trigger that will allow him to blame the federal government for being forced to support these cuts.
The Governor also used the budget trigger to avoid having to propose the delay of $2 billion in corporate tax breaks that a handful of state Republican lawmakers demanded as a condition of supporting last year’s budget deal. Republicans have not strayed from their hard line anti-tax rhetoric and will inevitably rally against the suspension of tax breaks that they themselves requested less than one-year ago, regardless of how wasteful and ill-advised the tax breaks are given the state’s current situation.
Governor’s Budget Trigger Based on Deeply Flawed and Dated Data
The justification for the Governor including the budget trigger in his January budget proposal is that California is owed billions of additional dollars from the federal government and the state needs to “reform” the state-federal relationship in order for the state to balance its budget.
“California is getting 78 cents back for every dollar it sends to Washington,” the Governor’s Office states. The Governor’s figures come from a study by the Tax Foundation that uses 2005 data and a flawed methodology, according to Senator Boxer’s office and the California Budget Project.
According to a memo released by Senator Boxer’s Office, when the state’s recession began in 2008, Congress took action to bring additional economic assistance to the state which resulted in California receiving $1.02 for each dollar the state paid in federal taxes. When the new Administration took office in 2009, Congress and the President immediately passed an economic recovery bill that provided direct and indirect aid to the states which included an estimated $85 billion to California over two years—which represents a little more than the state spends in one year.
“Due to the combined impact of increased assistance to the state and the decline in tax receipts from California because of the economic slowdown, we estimate that in fiscal year 2009 Californians will receive at least $1.45 in federal expenditures for each dollar they pay in federal taxes,” states the memo released by Sen. Boxer’s office. The memo bases its estimates on data obtained from the Census Bureau and the Internal Revenue Service, among others, and was reviewed by external reviewers at the Public Policy Institute of California (PPIC) and the Center on Budget and Policy Priorities (CBPP). To view the memo, click here.
The California Budget Project has also completed an analysis that “suggests that California actually receives $1.50 back for each dollar in taxes paid, a figure slightly higher than the Senator’s,” states a report by the CBP.
The Boxer memo and California Budget Project also note that the methodology the Tax Foundation Study used in its study is flawed because it only uses one year of data and overestimates the state’s deficit by including the federal deficit.
Summary of the $6.9 Billion the Governor Says the Federal Government Owes California
The Governor says “the federal government must readjust California’s federal reimbursement rates to ensure our state is treated fairly and not subsidizing other states’ programs.” The Governor provides the following examples:
►”Flawed” federal reimbursement formulas ($1.8 billion): “California is currently disadvantaged compared to other states under the current Federal Medical Assistance Program (FMAP) formula for Medi-Cal Spending. California’s relatively high-income wage earners distort the per-capita income methodology, masking the large number of low-income individuals in California. This flawed formula results in California receiving the lowest possible rate of 50 percent. California must receive a more equitable FMAP rate (57 percent) equal to the 10 largest states and reflective of the national average.
►Extension of federal stimulus funding ($2.1 billion): The American Reinvestment and Recovery Act (ARRA) of 2009 provided $87 billion in additional federal Medicaid funding for the states, including California, but this funding ends on December 31, 2010. The Governor calls for the extension of this funding assistance as well as additional assistance for other state programs that have received ARRA funds such as CalWORKs, Child Welfare Services, Foster Care, Special Education and Child Support Services.
►Unfair Federal Mandates to be Paid by Federal Government ($3 billion): The Governor lists four “unfair” federal mandates for which he wants federal funding:
–Services paid for by Medi-Cal instead of Medicare and changes to the required level of state funding for prescription drug costs ($1 billion)
–California needs direct reimbursements from the federal government for special education spending to account for the service levels required by federal law ($1 billion or more)
–California needs full federal reimbursement for the State Criminal Alien Assistance program for housing illegal immigrants in the state’s jails ($879.7 million)
–California needs to receive money to update the federal funding formula for foster care ($86.9 million)
Overview of Governor’s “Budget Trigger”
“The budget identifies spending reductions and extension of revenue increases (listed below) that will go into effect in the event that the federal government fails to provide the $6.9 billion of additional funding proposed in the budget,” according to the Governor’s budget proposal.
Here is a partial list of the trigger’s $4.6 billion in spending reductions:
►Eliminate the California Work Opportunity and Responsibility to Kids (CalWORKs) Program ($1.044 billion)
►Reduce Medi-Cal eligibility to the minimum allowed under current federal law and eliminate most remaining optional benefits ($532 million)
►Eliminate the state’s In-Home Supporter Services Program ($495 million)
►Eliminate the Healthy Families Program ($126 million)
►Eliminate funding for enrollment growth at the University of California and the California State University ($111.9 million)
►Fund existing mental health services with Proposition 63 funds ($847 million, needs voter approval)
Summary of trigger’s suspension of $2.4 billion in tax breaks:
►Extend suspension of a business’s ability to reduce taxable income by applying net operating losses (NOLs) from prior years to reduce current income ($1.2 billion)
►Extend reduction in the credit for each dependent under the personal income tax from $319 to $102 ($504 million)
►Delay the use of business credits by unitary groups of corporations and instead retain current law which requires subsidiaries to have their own tax liability to use research and development and other credits ($315 million)
►Delay the change to the single sales factor allocation method for apportioning multi-state corporate income and instead retain the current double weighted sales, property, and payroll formula ($300 million)
►Lower to 30 percent the first year phase-in of the ability of corporations to carry back losses two years to offset prior tax profits ($20 million)
Legislature Considers Mid-Year Solutions Prior to Late February Deadline
The Governor has also called the Legislature into an emergency special session to consider making $6.6 billion in reductions in the current budget year to help close the state’s $19.9 billion budget deficit projected for the current budget year and the 2010-11 budget.
“Given the re-emergence of a current year shortfall and the necessary time for budget solutions to achieve their full value, it is imperative that many of the solutions proposed in the budget be adopted immediately,” states the Governor’s budget.
State law gives the Legislature 45-days from when the emergency session was called, January 8, to come up with a proposal for making at least $6.6 billion in mid-year reductions. The Legislature’s first step is to hold committee hearings to review the Governor’s proposed spending reductions for the current budget year.
“The budget proposes solutions for action in the Special Session that will close $8.9 billion of the budget gap,” states the Governor’s budget. The total amount of expenditure reductions proposed by the Governor for the current 2009-10 budget year is unclear because the Governor’s budget proposes $3 billion in cuts for 2009-10 and then additional cuts proposed under the trigger which would presumably go into effect once the federal funds are not realized.