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The Budget Deal Explained

| June 28, 2011
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Audio: John Myers discusses budget on KQED Radio

Assuming Democratic legislative leaders have their ducks in a row, by Tuesday night the 2011 budget fight could be one for the record books, after confirmation yesterday that Governor Jerry Brown has closed party ranks on a budget that is missing the one thing Brown has seemed to long for all year long: a stamp of bipartisanship.

Photo: Getty/Justin Sullivan

To hear the governor tell it, of course, it’s not for his lack of trying. In fact, the great question to be answered in the weeks and months to come: did Brown’s plan — a package of extended taxes he wanted ratified by voters — die for lack of Republican clarity on side issues, Democratic refusal to deal on those side issues, or both?

For now, though, the Democratic compromise is the star of the show. And it all hinges on something much rumored in the Capitol of late — a mechanism to allow deep cuts to be avoided, if possible — as well as something not talked about or even known until today: much more rosy revenue assumptions.

Other than that, it’s largely the Democratic legislative budget quickly ratified on June 15 and then vetoed by Brown the very next day. As I wrote last week, the question was whether $4 billion – $5 billion of not-so-gimmicky solutions could be found, ones the governor would find palatable.

And they found them… they think.

“Revenues, actually, are up $4 billion so far this year,” Brown told reporters Monday afternoon as he sat squeezed between Assembly Speaker John Perez and Senate President pro Tem Darrell Steinberg.

That requires a little explanation.

It all hinges on a mechanism to allow deep cuts to be avoided, if possible: much more rosy revenue assumptions.

Brown’s January budget estimated 2010-11 revenues, absent his tax proposal, at $90.7 billion (PDF). That was actually a decrease from what was written into law (and we’ll come back to that point in a moment) when the previous guv signed the latest ever budget in October 2010. For 2011-12, the January budget pegged “baseline” (non-tax package) revenues falling to $83.5 billion.

By May, the baseline revenues for the two year period rose by a combined total of $6.6 billion. By June, everyone agreed to add another $400 million to the current year. Then, Democrats assumed yet another $400 million in the 2011-12 budget year. Still with me? All told, that’s $7.4 billion above the January estimates.

That’s where we were until today, when the governor’s own Department of Finance — backed by Dems in the Legislature — projected an additional $5.2 billion of unanticipated revenue over the two budget years for a grand windfall total since January of $11.8 billion.

Lest they be seen as too reliant on revenues that don’t come to pass (like, um, someone once was), the new unified Democratic plan contains a ‘trigger’ mechanism: if projections drop by more than $1 billion, a series of automatic cuts kick in. Cuts would range, depending on the revenue drop, from additional higher education cuts to — at worst — a $1.5 billion cut to schools that budget staffers say translates into seven fewer school days next year.

“Those are real,” Brown said Monday of the trigger cuts.

If projections drop by more than $1 billion, a series of automatic cuts kick in.

As promised, it’s worth coming back to the January revenue projections and musing on whether Brown’s projections at the time were overly conservative. If they were, then he may have correctly assumed that a downsized projection might buy him some breathing room come budget crunch time. If that was the backup plan… it worked.

The governor and legislative Democrats clearly believe that the ‘trigger’ proposal will elevate this plan out of the muck of budget gimmicks; after all, they will argue, we’re willing to bet on the possibility of even deeper cuts that the revenues materialize.

But at least one Dem doesn’t like the eleventh hour ‘budget miracle’ of revenue windfalls. “Based on [Brown's] higher revenue projections, the first majority vote budget was in fact balanced,” tweeted state Sen. Ted Lieu (D-Torrance), a reference to the budget Brown vetoed and Controller John Chiang deemed unbalanced. Lieu continued: “[The] issue is whether it was ethical for Department of Finance to withhold higher revenue projections from Legislature on 6/15.”

Photo: John Myers/KQED

The other large compromise in the new unified Democratic budget is on realignment, the governor’s year-long attempt to transfer programs to the local level (mostly counties), along with money to fund them. That’s where the bulk of his tax extensions — sales and vehicle taxes — would have gone. But without GOP support, Brown had to either cancel the reform proposal or find another way; he chose the latter. The proposal now calls for fully transferring those programs, but using existing revenues — a complicated local/state sales tax change and a portion of existing vehicle license fees — to fund it. That appears to be designed as a temporary fix, with Brown’s advisers saying the constitutional changes (and revenues) are now targeted for the November 2012 ballot.

As predicted, the governor has accepted legislative Democratic plans for forcing online retailers to collect sales taxes, a new $12 vehicle registration fee, and a firefighting fee for rural homeowners. He’s also signed off on a modification to his long effort to abolish local redevelopment agencies, one which is scored for the same amount of revenue ($1.7 billion) in this package as well as extra money ($400 million) each year afterwards.

Make no mistake: the new proposal has risks. It retains the complicated deferral of owed school funding that existed in the vetoed plan, even after legal questions have been raised. Then there’s the possibility of lawsuits on some of the fees, not to mention the Oh-It’s-On vow from redevelopment agencies to sue.

But in the larger sense, it’s a budget that acknowledges Brown had spent more than five months negotiating over his original plan with very little to show for it. I asked him today when he finally gave up on ‘Plan A.’

“I guess when I got my last text message [Sunday] night,” said Brown, though he wouldn’t identify the texter. “At the end of the day, there just was not a willingness to sign on to the [tax] extensions,” he said of Republicans.

The governor has accepted legislative Democratic plans for forcing online retailers to collect sales taxes, a new $12 vehicle registration fee, and a firefighting fee for rural homeowners.

Of course, Republicans — both those who were privately negotiating with the governor and those who were not — don’t see things that way. “We are deeply disappointed that yet again the governor and legislative Democrats have capitulated to those fighting to preserve the status quo,” read a statement from the four GOP senators who haggled with Brown. They insisted, and Brown denied, that Democratic interest groups wouldn’t go far enough on public employee pension rollbacks, budget spending caps, and the like.

Other Republicans chose to declare victory over what Brown had to leave on the table.

“The simple truth is because of Republicans’ resolve, temporary tax increases will expire this Friday and the average California family will save nearly $1,000 per year,” said Assembly GOP Leader Connie Conway in a written statement.

Barring a revolt in the Democratic ranks, the 2011 budget saga will end before the new fiscal year — only the second time in a decade that’s happened. And once it’s over, then the question becomes: where will Jerry Brown’s energies turn? Will he continue to negotiate with Republicans on the taxes his realignment plan will ultimately need? Will he ever release the bill language he says his team drafted for Republicans on pensions, spending caps, and environmental regulations… or are those offers now null and void?

And perhaps most importantly, has the once-and-again governor learned things to avoid when it comes to his next big bipartisan negotiation… or… has he concluded that there just aren’t deals out there, not even for a governor who seems to sense his legacy is tied to whether California can be fixed?

John Myers is KQED’s Sacramento Bureau Chief. Follow him on Twitter or at Capital Notes.

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Category: State Budget

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About the Author ()

John Myers is Sacramento Bureau Chief for KQED Public Radio and "The California Report," heard daily on 23 public radio stations across the Golden State. Reach John Myers at jmyers@kqed.org.

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