Gov. Schwarzenegger Proposes Responsible Budget
with Creative Solutions in Face of Worse Deficit

Governor's Budget Fixes Broken System, Fully Funds Education Without Raising Taxes

May 14, 2008

Governor Arnold Schwarzenegger today submitted his revised 2008-09 state budget plan to the legislature. It is a budget that includes a combination of some necessary cuts, some new revenues and some creative solutions to address California's $17.2 billion budget problem. It fully funds education under Proposition 98, does not raise taxes and establishes a rainy day fund to address California's chronic budget problem.

"As everyone knows we are facing an extremely difficult budget year," Governor Schwarzenegger said. "With the subprime mortgage crisis, fewer capital gains and the stalled national economy, our revenues have flattened out. And because of our dysfunctional budget system, spending goes up no matter what. On top of that, we don't have a rainy-day fund to soften the blow in down years like this one."

Despite the slow economy and worsened budget deficit, the Governor has produced a budget that fully funds education under Proposition 98-increasing funding to K-14 education over the current year budget by almost $200 million-keeps state parks open, does not borrow from transportation or local governments, does not release any felons from behind bars early and does not raise taxes.

"Since January, I have traveled up and down the state to shine a spotlight on the need for budget reform and to hear about the people's ideas and concerns," Gov. Schwarzenegger said. "And I heard time and again that the people of California want us to live within our means. They don't want us to raise taxes, especially now when times are tough. And they want us to fix the budget system, so we don't have to go through this pain every time the economy cools off."

Difficult cuts are still necessary to solve the budget problem, which was approximately $14.5 billion in January and now has grown to $17.2 billion. It would stand at over $24 billion if the Governor and legislature had not made mid-year cuts in February. Because the size of the budget problem has grown, difficult cuts, like those proposed by the Governor in January are still necessary.

Californians agree that the broken budget system needs reform. The Governor's May revision will establish that long-term reform. It is focused on long-term solutions so that the state is never put in this difficult position again. Historically the state spends all the money it takes in during years of above average revenue growth, leading to unsustainable spending levels and budget deficits when revenues return to, or fall below, average levels. The Governor has proposed a reform plan that will bring stability to the budget system by establishing a rainy-day fund and by giving the Legislature authority to make mid-year cuts more swiftly.

"As the deficit grew these past few months, I knew that we could not solve this crisis by cuts alone," Gov. Schwarzenegger said. "We had to get creative and find new revenues without raising taxes."

To address the current deficit and jump-start budget reform, the Governor's revised budget proposal seeks to get more value out of an underperforming state asset-the California Lottery, which has been outperformed by the national average for years. The Governor's plan calls for the modernization of the Lottery to boost performance and returns on this asset. With this modernization, the state will be able to raise cash upfront by selling future lottery revenues with no risk to the state.

This cash, estimated at $5 billion in 2008-09 and $15 billion overall through 2011, will in turn be used to establish the rainy-day fund. Establishing a rainy-day fund is the long-term solution that will get California off the broken budget rollercoaster ride once and for all. It's this rainy-day fund that will protect all of California's priorities, so that the state is never again subjected to the feast-or-famine budget cycle that threatens funding to education, law enforcement, human services and other programs.

The Governor's proposal also acknowledges that it is fiscally responsible to put in place a last resort safety net, so he is proposing something modeled after former Governor George Deukmejian's sales tax trigger. If the Lottery proposal is not approved by voters in November, a trigger would go off that would temporarily raise the sales tax by one cent. The sales tax triggers off when the rainy day fund is full or by 2010, whichever occurs first. When the economy recovers and the rainy day fund is full, taxpayers would receive rebates until the entirety of the sales tax increase is paid back in full. This safety net would be a last resort, and the Governor intends to never have to use it.

In addition, the Governor will establish a bi-partisan commission of legislative and gubernatorial appointees to reexamine the state's tax laws. This action complements the proposal Speaker Karen Bass has discussed and also builds on the Governor's repeated calls for a more responsible, stable and predictable revenue and budgeting system.

Governor Schwarzenegger has consistently worked to achieve greater fiscal stability for the state without stealing from local governments and infrastructure funding. His actions include proposing the California Recovery Plan (2003); negotiating and championing the Economic Recovery Bond Act and the California Balanced Budget Act (2004); negotiating and championing the Protection of Local Government Revenues Act (2004); proposing the California Live Within Our Means Act (2005); and making it more difficult for the state to tap into transportation funds through the 2006 Strategic Growth Plan Transportation Funding Protection Initiative.

For more information on the Governor's May Revise, go to http://gov.ca.gov/may-revise. Excerpts of the Governor's prepared remarks are below.

EDUCATION

The Governor's May Revise proposes $1.8 billion in additional General Fund dollars for K-12 education and community colleges to fully fund the minimum Proposition 98 Guarantee in 2008-09.

Highlights include:

PUBLIC SAFETY

While California's structural budget deficit persists due to slower rates of economic growth, softening state revenues and spending increases, the May Revise makes important adjustments to better reflect improvements and downward trends in California's state prisons. These trends include a decrease in inmate population projections and fewer parolees reoffending, resulting in significant budgetary savings of approximately $300 million.

Highlights include:

EMERGENCY PREPARDNESS

California's communities constantly face a potentially devastating range of emergencies and natural disasters, including flooding, extreme temperatures, wildfires, mudslides, drought, and earthquakes. The Emergency Response Initiative will ensure California is prepared by providing first responders with new equipment and technology, improving overall emergency preparedness and response and proactively helping to save lives and property. The Governor's proposal will benefit all Californians - north, south, coastal, inland, rural, or urban.

Highlights include:

While all Californians will benefit from this initiative, the updated proposal recognizes that there are varying levels of risk depending on where Californians live. Thus, the surcharge on all residential and commercial property insurance statewide will be designated by zip code and set at two levels based on differing risk:

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the following are short pdf files:
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A RESPONSIBLE BUDGET IN THE FACE OF A WORSE DEFICIT
FIXES OUR BROKEN BUDGET SYSTEM, FULLY FUNDS
EDUCATION – WITHOUT RAISING TAXES

FIXING CALIFORNIA’S BROKEN BUDGET SYSTEM
GOVERNOR’S STRUCTURAL REFORMS WILL MAKE BUDGET
MORE DEPENDABLE, PREDICTABLE AND STABLE

A RESPONSIBLE, TEMPORARY, TAX-NEUTRAL SAFETY NET
MODELED ON FORMER REPUBLICAN GOVERNOR’S MECHANISM,
AN ADDED FAILSAFE THAT SHOULD NEVER HAVE TO BE USED

STRENGTHENING DISASTER PREPAREDNESS AND RESPONSE
GOVERNOR’S EMERGENCY RESPONSE INITIATIVE PROTECTS
PEOPLE, PROPERTY STATEWIDE

PREVENTING THE EARLY RELEASE OF STATE INMATES
WITH PAROLE REFORMS WORKING AND OUR INMATE
POPULATION DECREASING, THE GOVERNOR’S MAY REVISE
ELIMINATES EARLY RELEASE PROPOSAL

PROVIDING A LONG-TERM BUDGET SOLUTION BY MODERNIZING THE LOTTERY
GOVERNOR’S PROPOSAL WILL BRING BILLIONS IN NEW REVENUE TO
CLOSE BUDGET GAP, JUMP-START NEEDED STRUCTURAL BUDGET FIX

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EXCERPTS OF GOV. SCHWARZENEGGER'S PREPARED REMARKS AT MAY REVISION PRESS CONFERENCE

"Today I am presenting the Legislature with my revised budget proposal for fiscal year 2008-09."

"As everyone knows, we are facing an extremely tough budget year."

"With the subprime mortgage crisis and the stalled national economy, our revenues have flattened out. And because of our dysfunctional budget system, spending goes up no matter what.

"On top of that, we don't have a Rainy Day Fund to soften the blow in down years like this one. So, when I proposed my 2008-09 budget in January, we were facing a $14.5 billion deficit. Had we not done anything about it, with the economy continuing to decline, the deficit would now be $24.3 billion.

"I declared a fiscal emergency and the Legislature did a great job making cuts in a special session. But the problem we face today is still $17.2 billion, so our crisis is real and it is very serious.

"Now, the other thing you will recall about my January budget proposal is that I included 10 percent across-the-board cuts to balance the books. But as the deficit grew, I knew we could not solve this crisis by cuts alone. I said we had to get creative and find new revenues, without raising taxes and I will explain in a moment exactly how we did that. In the meantime, I also traveled up and down the state to shine a spotlight on the need for budget reform and to hear about the people's ideas and concerns. Because the cold, hard truth is we cannot continue to run our state like this, where there is no connection between revenues and expenditures."

"And there was no mistaking what I heard time and time again. It was loud and clear. The people of California want us to live within our means, just as they must in their businesses and families.

"They don't want us to spend more than we take in. They don't want us to raise taxes, especially now, when times are tough. And they want us to fix the budget system, so we don't have to go through this pain every time the economy cools off.

"My May Revision reflects some of those concerns. For starters, I am very happy to say that the budget I am releasing today fully funds Proposition 98, at $56.8 billion, which allows us to raise per pupil spending for the 5th year in a row. This budget also keeps our state parks open. And it does not release inmates early.

"And once again, also for the 5th year in a row, it holds the line on taxes. By calling for a constitutionally required Rainy Day Fund, it also fixes the systemic problems that are so damaging to our state and our people."

"Now, the critical element to making this budget work, now and into the future, is budget reform. As you all know, over time our revenues grow at a very healthy rate. Over the last decade, for instance, revenues have increased an average of 5 % per year. But in one of those years, revenues shot up 23 percent. Then they went flat. Another year, they grew 14 percent. Then flat again this year. No other big state has such volatile up-and-down revenues. But this roller-coaster revenue problem has a simple solution: If we save money during the above-average years, we will have enough money for the below-average years.

"The Rainy Day Fund I first called for in January would stop Sacramento from spending all the money that comes in when revenues spike. And when our revenues fall below a rolling 10-year-average we would use the Rainy Day Funds to smooth out revenues, so we would not have to make severe cuts in programs. If this reform had been enacted in 1998, we would not be facing such a massive budget problem today.

"Future governors and Legislatures may still face tough choices, but with a Rainy Day Fund, they should never be this extreme. And Sacramento would not have been able to use one-time spikes in revenues to pump up so many permanent programs.

"But what about this year? We don't even have a mandatory Rainy Day Fund yet, let alone money in it to avoid deep cuts. This is where the California Lottery comes in. We chose the Lottery because it has been an under-performing asset. So we will modernize the Lottery and go to voters in November, asking them to approve both a constitutional amendment establishing the Rainy Day Fund and plans to securitize future Lottery revenues.

"We believe that would generate $15 billion over three years, all of which would flow into the new Rainy Day Fund. And from there, the money would be drawn down into the General Fund to stabilize revenues for the 2008-09 budget. Of course, we would do this in a way so education would still get its current level of Lottery proceeds. That allows us to be in the black fully fund Proposition 98 and make other modifications from our January proposal.

"We are confident that our plan will work. But to be extra prudent, I am also proposing a one-time fail-safe mechanism. An insurance policy we hope to never use. If revenues fall short, or if this doesn't get approved by voters in November, a one-time trigger would temporarily increase the state sales tax by one percent.

"We don't think that will happen, because securitization of the Lottery should guarantee ample revenues to fully finance the Rainy Day Fund. And we have confidence that our economy will rebound and we will grow our way out of our problem. But in the unlikely event that the trigger is pulled, the tax would be temporary. This is very similar to something former Governor George Deukmejian used in 1983, when he also faced an economic slowdown. And the good thing about this is that after the tax increase ends the money automatically gets rebated to taxpayers.

"There are other developments in this budget that allow us to make changes from January. In Corrections, the 10 percent cuts that would have been achieved by releasing some non-violent and low-risk inmates early are not needed. Our parole reform and a declining inmate population allow us to reach almost the same savings without releasing anyone early."

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Alexander Kim

Deputy Director
Office of Governor Arnold Schwarzenegger

300 South Spring Street, Suite 16701
Los Angeles, CA 90013
Tel. 213-897-0322
Fax. 213-897-0319