Highlights and Analysis of the 2011-12 Budget

Wednesday, July 6, 2011

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Executive Summary

This “majority-vote” budget was enacted on a partisan vote.  Republicans did not support a budget they had no hand in crafting. This budget reflects the legislative Democrats’ priorities and fails to include any Republican reforms to make government more efficient and effective, improve the economy and create jobs. At present, the Administration expects a structural budget gap of less than $5 billion to emerge next year, but in all likelihood it will be significantly larger given the various “budgetary threats” (see Key Points page 5).

In January, the Governor’s Budget identified a General Fund budget deficit of $25.4 billion.  That deficit grew to $26.6 billion when the Governor cancelled the $1.2 billion sale of state buildings approved by former Governor Schwarzenegger.  In March the Legislature enacted a package of bills that provided about $13.4 billion of “solutions,” including about $7 billion in spending reductions and $6.4 billion of fund shifts, loans, transfers, and increased revenues (but no new taxes).

Next, the Governor’s May Revision updated the General Fund budget deficit to $9.6 billion ($4.8 billion carry-in deficit from 2010-11 and $4.8 billion operating shortfall in 2011-12).  According to the Administration, the new deficit accounted for the $11 billion of solutions already adopted by the legislature and another $2.4 billion awaiting the Governor’s signature.  It also reflected $6.6 billion of higher-than-anticipated revenues and $3 billion of higher spending (including a backfill for $1 billion of Proposition 10 funding currently subject to litigation).

Now, the final 2011-12 Budget Act reflects an additional $5.2 billion of unanticipated revenues from state taxpayers without any new general tax increases. General Fund spending is about $1.4 billion higher than it was in the Governor’s January Budget proposal ($86 billion as opposed to $84.6 billion) and the revised 2010-11 General Fund spending level is nearly $5 billion higher than the 2010-11 Budget Act ($91.5 billion as opposed to $86.5 billion).  In the event the revenue assumptions in this budget fail to materialize, there are a series of “trigger cuts” that are supposed to take effect to fill any budgetary gaps (see Trigger Cuts on Page 42), which means the 2011-12 spending level could be reduced further.

The Administration has indicated that the solutions in this budget reflect $15 billion of Expenditure Reductions, $2.9 billion of Other Solutions, $992 million of Revenues, and $8.3 billion of “Natural Solutions and Miscellaneous Changes”.  The total solution package is $27.2 billion and provides for a $543 million reserve.  However, a closer analysis of the solutions adopted suggests that the Governor mischaracterized $7.6 billion of fund shifts, deferrals, and revenue increases as expenditure reductions.  From a Republican perspective, real programmatic spending reductions are only about $7.4 billion and the Other Solutions are about $10.0 billion, including such solutions as the fund shift from RDAs ($1.7 billion), the fund shift from Proposition 63 ($861 million), fund shifts and borrowing associated with the Governor’s realignment plan ($2.6 billion), and the use of transportation weight fees to fund debt service ($1.1 billion).

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