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Posted by: Kim_Hamilton on 01/01/2009 12:53 AM
Updated by: Kim_Hamilton on 01/01/2009 12:54 AM
Expires: 01/01/2014 12:00 AM
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California Finance Director Releases Governor's 2009-2010 Budget
California Finance Director Mike Genest released Governor Schwarzenegger's 2009-2010 budget.....DIRECTOR GENEST: Okay. What you see behind me is a lot of very tired people. The Governor has gone to extraordinary lengths this year to get his budget out early. Just to remind you of the history, we put out an August compromise when we recognized that it was necessary. As we saw the economy beginning to deteriorate the Governor called a special session. We put out early revenue updates in September and then more formally in October. He called a special session in November; it had no effect. We called another special session in December; those negotiations are ongoing.....
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The reason for all this frenetic energy and all the late nights put in by all these good folks behind me, is that we are facing a major crisis, probably the most challenging budget situation the state has ever faced. And the Governor believes in acting immediately. We should not wait, in his opinion, for a deadline. Our deadline constitutionally is January 10. But you all know we put our $41.8 billion problem explanation out a couple weeks ago; normally we would not have done that until the January 10 budget came out. But the Governor, as I said, wants to act immediately. When he knew there was a problem he wanted the legislature to understand what the problem was.
If we could have, we would have put out our proposed solutions to that problem back then. But it took a lot of work and until—we were thinking we were going to be ready yesterday; it took us another day longer. This whole process has been truncated. It’s been real tough on the staff of the Department of Finance behind me but it’s been necessary, in the Governor’s view, because the legislature needs to act immediately.
You have in front of you several documents; the biggest one is called the Governor’s Budget. I should clarify. The Constitution says what the budget is and it’s required to be proposed to the legislature by January 10. This is not exactly that, only to the extent that the official budget would have budget bills and the whole big massive document with all the details for each department. That will be issued on January 9th, which has always been our plan. But this is very close to final, if not the final version of a couple of the pieces of information that are in there, especially the introduction, which gives you an overview.
And if you turn to Page 1 of the introduction, we go through a discussion of the origin of this budget gap. The number that we put out a couple weeks ago was 41.8. Now that we’ve fine-tuned all the numbers and polished it up it’s gone down to 41.6, virtually the same, just minor detail changes.
So that is a massive shortfall and it’s the kind of shortfall that cannot be addressed by waiting until July 1 to enact a budget. We have to act immediately, not just on the Governor’s December 1st proposals.
But if you go to Page 5 of the introduction, you’ll see—I should say December 19th proposals—you’ll see sort of the evolution of our proposals. On the 19th we proposed $22.3 billion worth of solutions—that is what they are worth now as we’ve now scored them—on a two-year basis. We’ve had to add, now that we’ve appreciated the full size of the problem, we’ve had to add another 4.6 of solutions that need to be addressed right away, that need to be adopted in the special session.
We think it is appropriate and acceptable to wait for the July 1 Constitutional deadline—actually it’s June 15th but July 1 is the new fiscal year. We can wait until then to adopt some of these solutions, 14.8 but obviously the bulk of the solutions to get you to 41—this one says 41.7, it used to say 41.6.
STAFF:
41.6 is the problem we are solving—
DIRECTOR GENEST:
So we over-solved the problem.
STAFF:
By $2 billion.
DIRECTOR GENEST: Our problem definition included just a sort of target reserve of 2 billion. When we got all said and done we actually had a reserve slightly larger than that.
So you can see that most of this has to be done right away. And the important thing there is that if it’s not done right away the value of these things erodes dramatically, which means that we would have to do even deeper cuts next year. So acting early is the key to making this really difficult budget situation more manageable. The longer we wait the harder and harder it gets to do these solutions.
We can talk about the specific solutions as we go through questions. I don’t want to spend too much time on that. I want to take you through some of these other documents first.
The first one I want to talk about is the one that’s called ‘Protecting Funding for the Classroom in a Challenging Fiscal Environment’. A lot of you know that Proposition 98 depends heavily on state revenues. Proposition 98 sets a total funding guarantee for schools; it’s called the Minimum Guarantee. It consists of a total amount and that is made up by whatever amount of local property tax is available and the general fund makes up the difference.
So when general fund revenues drop dramatically, as they have, the Proposition 98 Guarantee also drops dramatically. In a budget situation as difficult as this one, it’s not possible and it wouldn’t be prudent to overfund the Minimum Guarantee. The budget funds the Minimum Guarantee this year and next year. That’s point number one. We’re funding the Minimum Guarantee. We don’t have to suspend Proposition 98. We have a legal option to do that but just the drop in the Guarantee is so dramatic that we could not even contemplate going even lower. It’s a pretty substantial reduction in the Guarantee that’s driven by the revenue reduction.
And in light of that the Governor has asked us to minimize the impacts on education to the maximum extent that we could and this document here—it’s two-sided—it goes over the things we’ve done to minimize it. And there’s a chart here and I’m going to ask Jeannie Oropeza and Ana to walk you through this to get the sense of exactly what sort of lengths have we gone to, to protect Proposition 98, because we’ve actually done quite a bit in this budget to protect the funding for the classroom, even recognizing that with all of the things we’ve done we’re still going to have to cut funding for the classroom, even this year, by a couple of billions dollars. But that’s a lot less than the Minimum Guarantee goes down.
So, do you want to take them through some of these charts?
JEANNIE OROPEZA:
So the first thing you want to focus on is on the 08-09 fiscal year and so what we did in order to minimize the actual reductions to education, in order to protect them, we propose to shift the funding from the PTA—if you recall, we were depositing that into the general fund and then reimbursing schools for about $600 million. So instead, we provide direct appropriation to schools from the PTA and we eliminate the Prop 98 appropriation that was counted towards the Guarantee in the 08-09 year. So from the schools’ perspective, they won’t see a change; they’ll still be getting the same amount of money, it’ll just be coming from a different source. But what that does is it allows us to bring the Guarantee down in the current year.
The other thing that we’re doing is similar to what the legislature proposed, using the prior year’s settle-up. We owe about $1.1 billion for prior years, for 02-03 and 03-04, to meet the obligations for those fiscal years. We’re going to take $1.1 billion worth of current year expenditures and we redesignate those dollars as expenditures for those other fiscal years. And what that does as well is brings the guarantee down by another $1.1 billion.
DIRECTOR GENEST:
Actually, it doesn’t bring the Guarantee down, it brings the appropriation (Inaudible)
JEANNIE OROPEZA:
The appropriation to the Guarantee.
DIRECTOR GENEST:
It’s the drop in revenue that brings the Guarantee down.
JEANNIE OROPEZA:
Right.
DIRECTOR GENEST:
The issue is that the amount we appropriate in the budget act was more or less the Minimum Guarantee as we calculated it back then, based on the revenues we had back then. But now the Minimum Guarantee has dropped because the revenues have dropped. So the issue is, do we leave the appropriation up high, above the Guarantee, or do we bring it down? And what Jeannie is describing is the various ways we can bring it down without taking any money away from the schools.
JEANNIE OROPEZA:
Right. And the final solution that we have is we propose to defer the payment, $2.8 billion, for monies that schools would then normally receive in January and February and instead we’re going to make that payment in July. The schools will continue to expend monies to cover those expenditures and they’ll get the money in July. And we have a similar feature in our current budget; we have about $1.1 billion that we currently defer the June payment into July. Yes?
QUESTION:
I’m really not asking a question quite on this topic. Is this a control that was previously deferred from like last summer? And also, is this the categorical money, then?
JEANNIE OROPEZA:
This is on top of the deferral that currently exists, on top of the $1.1 billion. And we did two things. We did a cash deferral, which I think is what you’re referring to. We deferred the July payment into September 1st. That was just for cash purposes, to meet our cash needs. What this does is allow us to actually bring the spending level down to the Guarantee level. So schools will still get to spend the money. They get their money in July instead of February, which is different than what we did this summer. This summer was simply cash. They still got in the same fiscal year, so the appropriation still counted in that year. This is a little different. We move it to the next fiscal year and so it actually brings the expenditures down to the appropriation level for Prop 98.
QUESTION:
Is this categorical money, or is it—
DIRECTOR GENEST:
Let’s go to questions at the end. We’ll go back to—just finish this overview of the whole thing here and then we’ll do questions. Also, I should let you know, we will be available for more detailed briefings, because obviously we know there’s a lot of stuff here, it’s going to take you a while to assess it. And so if somebody wants to focus in tightly on the education piece, or whatever, we’ll set that up for the afternoon.
I think the best way to close the overview here is to look at Page 10—I’m sorry, Page 8 and Page 9, because those of you who follow the budget, we usually put out something called the ‘General Fund Budget Summary’ and it just shows you for the two years, this year and next year, what the prior year balance carried forward was, if any, or the prior year negative carried forward, in this case. And then it goes through the revenues and transfers and it comes down to the budget gap.
So the first table—what we usually do is just one of those tables. This year we’re doing three of them, to sort of take you through the evolution of the budget, since so many things have changed.
The first table, SUM-01, is the workload budget. In other words, if we change no policies whatsoever in the state, what would the situation be? And as it shows, we would have a $41.6 billion budget gap. That’s assuming we have to do enough to build a slight reserve, because we do. The Constitution requires us to build in a reserve, a prudent reserve.
Then in December, the Governor put out some solutions for the problem that we had identified as of that date. And those solutions, it turns out now, would drive our budget gap number down to 19.2. Well, that’s not enough; we’ve got to drive it down to zero.
So you go to the next page and you see SUM-03 and it shows you that now, with all of the solutions proposed in the budget, there is no budget gap, there’s actually a reserve that’s slightly larger than the $2 billion that we targeted—it’s really about 2.2—and all the numbers will have changed. So if you want to get a summary sense of this you can go in and look at these various numbers and see how they’ve evolved.
As far as what the specific solutions are and the details of them, they are explained in the subsequent chapter and I think with that—there’s probably only one more thing to talk about on a summary level and that’s the RAW.
This is a difficult proposal to make. As we explain in here, you would never propose to, in essence, roll forward part of this year’s deficit into the year after next if you had any alternative. The budget attempted to solve all the problems either by cutting spending or raising taxes. And there were some other things, like borrowing from special funds, minor adjustments like that. There was the lottery proposal you’re all familiar with and that’s built in.
But even after all of that, we couldn’t quite close the gap, especially in the current year. It’s just so monumental that—I think as you go through our solutions you’ll see these are really difficult choices. These are substantial tax increases, these are major program reductions and even with all of that we couldn’t quite get there.
So we’re proposing to sell a RAW about next July or so. And under the rules of the Constitution, when you sell a RAW you can pay it—a RAW is a Revenue Anticipation Warrant and when you sell a Revenue Anticipation Warrant you’re allowed to pay it back in the fiscal year following the year in which you sold it. So the way we’re doing this, it lets us take some of this year’s deficit—not all of it, because most of it we’ve solved but some of it—and in essence move it, not into next year where it would have to be solved for a Constitutionally balanced budget but into the subsequent year.
Now, we go over in some detail, or at least we go over the specifics of the things that would have to happen for us to sell a RAW on Page 5. And it’s not an easy thing to do. Number one, right now, today, we couldn’t do it under any circumstances; according to the Treasurer and the Controller there’s just no market right now. So we have to wait for the financial market to reright itself, which it is potentially doing and get back a little bit closer to normal. That’s one step. That’s not under our control.
But we wouldn’t ever be able to sell a RAW if we didn’t have a balanced budget. And I don’t mean a plan proposed by the Governor, I mean enacted by the legislature, wired in, all of the Legislative changes necessary to make the numbers work, adopted and signed by the Governor. If we had that, that would put us in the business, maybe, of selling a RAW.
But even then we would have to have a plausible explanation of how we propose to pay that back in the subsequent year. Now, we don’t necessarily have to have that in a great deal of detail right now but I think before we finish this budget, if we’re going to count on this RAW we’re going to have to have a plan for paying it back.
And then, in addition to all of that, under current law if we fail to pay it back in the subsequent year, then the people who hold the RAW have a right to come to the Treasury every single day and take out the money. They get first call on what they call the ‘daily sweep’ of the cash.
So we think if all those conditions are met we can sell a RAW. We don’t want anyone to jump to the conclusion that right now we can solve the whole problem by selling a RAW.
Number one, there will be some practical limit to the size that you could sell under any circumstances. We don’t exactly know what it is; 5 billion, we think, is within the range, 5 billionish.
And number two, those conditions have to be met before you can even think about selling a RAW. So this is not a way to avoid acting immediately on the budget problem. It’s just that if we act immediately and if we act not only on this year’s problem but on next year’s problem and get that all resolved, then we’re on the path to do the rest of it, a little bit of it, with this RAW proposal.
So with that, I’ll throw it open to questions in general.
QUESTION/ANSWER:
QUESTION: (Inaudible) what’s new in this proposal from the December 1st proposal?
DIRECTOR GENEST: Well, we do that only—do we have a table that does that neatly? I don’t think we have a—well, we have something but it’s really—
QUESTION: Could you just over for us what the major different points are in this proposal? Because just looking over it, it seems like the big-ticket items are very similar.
DIRECTOR GENEST: The biggest two things are some changes in the tax proposal and the changes in education. We’ve described education, our proposal for education and that’s probably the biggest dollar change. The tax proposal change was the dependent care credit.
ANA MATOSANTOS: It’s the LAO dependent credit option that basically aligns the dependent credit to the personal exemption credit.
DIRECTOR GENEST: But we can give you a list of the details.
QUESTION: I started by New Year’s drinking early, in November. Can you translate that into English? Because my brain can’t do it. (Laughter)
DIRECTOR GENEST: The dependent care credit, when you file your taxes if you have a dependent, an elderly parent or a child—I’m sorry, the word care is incorrect. So you file your taxes, the state taxes, you get to take a credit for dependents. And some years ago that credit was raised up above the credit you would take for yourself and, as the LAO suggested, maybe it would make sense to just bring it back down so that credit is the same as you would take for yourself and that’s what this does.
QUESTION: (Inaudible)
DIRECTOR GENEST: 1.4, she said?
QUESTION: For the budget year?
QUESTION: 1.4 what?
DIRECTOR GENEST: Billion.
QUESTION: For the budget year?
DIRECTOR GENEST: We don’t have any of that in the current year, do we?
ANA MATOSANTOS: It’s not current year. It’s the 2009 calendar year change. But because of how withholdings and all the pieces work, most of the dollars in 09-10, you get some of the money that would normally have been owed in (Inaudible)
QUESTION: Now, you said that’s a two-year (Inaudible)
ANA MATOSANTOS: The 1.4 is the 09-10 value. But because of the difference between calendar year and fiscal year, there’s just some differences in how it’s—
QUESTION: You’re proposing that as a permanent change or temporary?
ANA MATOSANTOS: Permanent change.
QUESTION: What’s the (Inaudible)
ANA MATOSANTOS: What you get with one dependent now under (Inaudible)
STAFF: Each dependent would have got $309 and instead it would
be the amount for a personal credit.
QUESTION: Which is what?
STAFF: One third of that.
ANA MATOSANTOS: If you go to Page 61 of your document, on Page 61 it tells you the history about when it was increased and what the specific change is going to be.
QUESTION: Are there any other new taxes in this proposal?
ANA MATOSANTOS: Basically this is it. The Emergency Response Initiative from last year is refashioned. It included a part of the package but that’s not a general fund benefit, that’s an Emergency Response Imitative to provide additional dollars to be able to expand our firefighting.
QUESTION: As long as we’re on revenue, let me ask you—you have in here the addition of some (Inaudible) Board of Equalization and force a new (Inaudible) law since the manufacturers would (Inaudible)
DIRECTOR GENEST: Right.
QUESTION: —(Inaudible) they have basically gotten a tax exemption?
DIRECTOR GENEST: We obviously didn’t have time to figure that out. That’s relatively new stuff, so that’s not incorporated into our numbers. We’ll have to make some adjustment later.
QUESTION: (Inaudible) most recent tax, like the expansion of taxes, the—
DIRECTOR GENEST: Right. I don’t think we pulled back any of our December proposals. They’re all the same. The score a little differently because we’ve got more updated numbers and we’ve just added to them. And just because I said the two biggest are education and the dependent credit—there’s a whole slew of other ones and it’s kind of hard to summarize them neatly. We can reproduce this document for those who want to go through the list of what’s changed.
QUESTION: Could we have it on clean paper?
DIRECTOR GENEST: I don’t think that’s allowed, no.
QUESTION: Can you quantify, in the education changes, in terms of numbers?
DIRECTOR GENEST: We’d have to go back to the chart and I’m going to have to defer to either Ana or Jeannie on this one.
ANA MATOSANTOS: In the special session we were proposing an actual cut of 2.5 billion. The actual cut amount is being reduced, as the chart illustrates, from the 2.5 to basically 2.1. So that’s a change. The other changes are the ones that Jeannie walked you through that address how schools get to keep the same level of funding but we’re adjusting the guarantee, which in turn has an impact on 09-10. So the biggest change from a cut standpoint is that the 2.5 became 2.1 and then we have the changes that Jeannie walked you through that illustrate how the Guarantee is changing, which impacts what happens to the Prop 98 Guarantee but allows schools to be able to keep the same level of programmatic funds.
QUESTION: So what’s the total dollar figure of what the schools were going to get in December 1st and what they’re going to get now?
ANA MATOSANTOS: Basically, schools were going to get, in December 1st, the current Guarantee is 58.1. Schools were going to get a $2.5 billion cut. Now schools are programmatically going to get $56.1 in 08-09. Next year they’re going to programmatically get $56.3 billion.
QUESTION: Versus 59?
ANA MATOSANTOS: Versus 59, which is roughly what the Guarantee would have been rescored based on the new revenues.
QUESTION: Ana, unless you get too deep into the weeds here, the changes that you’re talking about in the current year, in 08-09, 6.6 billion for schools, that’s what you have here. Can you just kind of outline how you get there now that the schools are open and have been open for months, teachers have been contracted—where do they get those savings?
ANA MATOSANTOS: As Jeannie walked you through, from a programmatic standpoint in terms of what schools have and the amount of money that they’re going to be able to spend, in the special session we were proposing to do a current year reduction of 2.5. We’re now going to do a current year reduction of 2.1. So schools are going to have to make a reduction mid-year of 2.1 billion. We’re continuing to provide all the flexibility measures that we were proposing before.
The next set of changes really are more ones of the color of the money that they’re receiving this year. So, for example, schools are not going to get any less money in terms of the 1.7 that Jeannie walked you through that has to do with home to school transportation and with settle-ups. It’s no net change in how much schools get in 08-09. What it is, is a change in what that money is for. And that, in turn, has an impact on the Prop 98 Guarantee for next year. So programmatically the schools were previously looking at a $2.5 billion current year cut and now they’re looking at a 2.1 current year cut.
QUESTION: That includes the deferral, the 2.8?
ANA MATOSANTOS: The 2.8 is a change in timing of when the dollars are being received. So programmatically the 56.1 that I referenced, about the amount of money that schools have to spend, that 56.1 includes the 2.8, because just like today, they can spend the 1.1 that was previously deferred. This just adds to that deferral. So it’s a timing of receipt of the dollars. Programmatically, it’s available to them.
QUESTION: In terms of the new revenues, there’s a higher fee for DMV for car registration. Is that correct?
DIRECTOR GENEST: That was in December. That was already proposed but yes.
QUESTION: Twelve dollars?
STAFF: Twelve dollars.
QUESTION: But you haven’t included all the nifty tax schemes from the Democrats. Are we to interpret that you oppose them, or merely that whatever happens in Big Five stays in Big Five and they’ll work it out later?
DIRECTOR GENEST: Well, any governor’s budget reflects his priorities and this is what he thinks makes the most sense. There are four other parties at the table, though, when we get down to the actual negotiations.
QUESTION: So we should not read this as, you know, screw this, we don’t like this, we don’t endorse this?
DIRECTOR GENEST: You can read it as this is what the Governor thinks is the best way to handle the most challenging budget situation this state has ever faced.
QUESTION: Didn’t you say that—we were conversing before the meeting—that if in fact they reach an agreement in the next couple of weeks and do something, then you will revise this budget in January?
DIRECTOR GENEST: Right. Well, whether it’s in January or in February, it will depend.
QUESTION: Soon thereafter, at any rate?
DIRECTOR GENEST: The special session ends at approximately February 1st, so if they acted on the last day we would probably take a few weeks to absorb what they did and see how it changes our numbers, come back with a new set of proposals to reconcile to that. Of course, the easy way for this to happen is for them to do exactly what we propose immediately. And that’s what we recommend.
QUESTION: You must have been drinking earlier today.
QUESTION: I have another question here. I’m just curious—when you look at what the Governor proposed in the special session, all the solutions are over 18 months but get us what, about 21, $22 billion? Is that right?
DIRECTOR GENEST: Scoring them now, I think and I’m not looking at the numbers.
QUESTION: Right. So I’m doing some math here and 41.2 minus 21.2, that’s another $20 billion. I’m only seeing additional revenue of $1.4 billion. And some tweaking of Prop 98 solves it in terms of $20 billion? Can you help me understand that a little bit? How do we get from the 21, 22 to 42?
DIRECTOR GENEST: Well, the way to see that is again back on the progression on Page 8 and 9. If you want to just go to the workload budget, the SUM-02, it shows that with all the solutions that we proposed already but as they are now scored—and that assumes enactment by February 1st—we would still have a problem of 19.2, as it shows there. So we have 19.2 more to do.
QUESTION: Right.
DIRECTOR GENEST: And then you look over here at what happened when we did it. We did 19.2 plus a little extra because we came out with a slightly higher reserve than we had originally targeted.
QUESTION: I think the question is, where did you get the extra $20 billion?
QUESTION: Yeah, how do you get the extra $20 billion?
DIRECTOR GENEST: Well, as I said, there are two major changes, the way that we addressed education and the dependent care credit. But there are many other changes that add up to that 20 that you’d just have to go through.
QUESTION: But you’ve only noted the dependent care as 1.4 billion.
DIRECTOR GENEST: Okay, let’s go to Page 5 then. Maybe that’s a better table to explain it. It’s still at the high level; it doesn’t give you the finite detail but you can see there that the December 19 proposals—I already went over this—22.3 is their value and this is all to get you to the 41.6. And then we added 4.6 in the special session. You can see we added some more spending cuts and some more—and these are two-year numbers, so it’s not just this year but it’s also next year—we added a little bit of revenues and some more borrowing in the special session. And then for July 1 implementation, the key additions, the biggest things—there are some more spending cuts and I think one of the takeaways from this table is if you look at these categories, the largest category by far is expenditure reductions. So cuts are the biggest contribution to solving the problem, which is appropriate. And then you can see there’s the lottery proposal, that’s now built in and a little bit more borrowing—well, that’s already been built in—and then the RAW of 4.63.
QUESTION: Can you explain then, at least the first two lines there under ‘Expenditure Reductions’, we’re looking at additional special session proposals and proposed to be enacted by July 1, that’s a total of about $7.5 billion. Second line, ‘Revenues’, nearly 2 billion. Can you kind of go over what things you mean to cut?
DIRECTOR GENEST: Well, we talked about the two biggest things and there’s a whole mess of littler things that are all itemized on this next—maybe we should Xerox this for those people who want the detail.
ANA MATOSANTOS: Some of the other significant items, in terms of the additional proposals—I think part of it is, we’re making a distinction between additional current-year solutions versus additional proposals to address the 09-10 problem. So some of the things that are big-ticket items for the 09-10 side of the equation—
For example, as part of our problem definition, we built the cost associated with the Higher Ed Compact. Well, we’re proposing to not fund those additional costs.
We have a proposal that is basically the LAO option regarding the First Five Commission where we’d be eliminating the state First Five Commission and we are shifting half of the local funds and we’re using those dollars to pay for children’s’ programs. That’s worth roughly $275 million.
We’re proposing a short-term change to the maintenance of effort requirement for Prop 63. That allows us to use some Prop 63 dollars to pay for base mental health costs. That’s worth another $225 million.
We’re proposing additional suspensions of COLAs for SSI as well as for Cal-Works for the budget year. That gives us, I think, roughly another 150 or so.
QUESTION: I thought that you were already suspending those COLAs?
STAFF: Our focus was on 08-09 in the special session. The legislative proposals already included the suspension of some of the budget-year COLAs. Our focus for the special session proposals was on things that were 08-09, so this is basically the budget-year COLAs that would be suspended. They’re already reflected in the legislative packages.
So there are some additional reductions. There is a realignment of the Conservation Corps; that’s $17 million.
There’s—any other significant big-ticket items that I’m missing? There’s the beginning of—there’s additional employee comp savings that you’ve already heard about. We have an additional furlough day and we have an additional—we have $150 million that’s associated with the other piece of paper that you got that speaks to our next step of consolidation, efficiency streamlining to make government more efficient and realize additional savings. We’re looking at $150 million there and that’s a placeholder associated with layoffs. The total employee comp savings, when you look at our special session plus the additional proposals, is now over $1.5 billion.
We’re looking at the Pension Commission. We’re looking at phasing in implementation of the recommendations made by the Pension Commission, including making sure that we are offering a lower-cost health insurance plan for state employees. That in the budget year gets us some budgetary savings of a little bit over 100 million.
So that’s some of the additional changes and additional proposals that help us fill the gap and we can get you a chart.
QUESTION: You mentioned the changes in employee health care. I noticed, in looking through there, there’s a reference to not using PERS—
DIRECTOR GENEST: Right.
QUESTION: —to provide state employee health care but going outside of PERS?
DIRECTOR GENEST: If you recall, we had the Post-Employment Benefit Commission last year and they made a variety of recommendations. Their key recommendation was to begin funding the accrued, unfunded accrued actuarial liability for our retiree health care. And so we had tried to do that in this year’s budget but what we found was that the best way to fund it was to make some changes in the way we do health care and to essentially reduce the cost of health care this year for active employees, which will ultimately reduce the cost for retired employees. But it takes a while to get that started, so we only got a half-year of value out of that savings and that wasn’t enough to start doing the unfunded actuarial liability for what we call OPEB, Other Post-Employment Benefits.
So what we did was, we went ahead and implemented the changes, or proposed to implement the changes in the way we do employee health care and retiree health care will then follow. And then we took the first half-year and just used it as a general fund savings. But we’re proposing in the next year, in 2010-11, to have that savings and hopefully some other savings associated with bargaining, that will help us to start paying for that unfunded liability.
QUESTION: Right now PERS contracts for all the health care for state employees and retirees?
DIRECTOR GENEST: I think that’s almost—is it all—yes, okay.
QUESTION: Yeah. So you would what, put out a contract for a private insurer to provide that health care? How would it work?
JEANNIE OROPEZA: What we would do is make a change to the statute that would allow the state to begin negotiating directly with plan providers for health care for the state.
QUESTION: Doesn’t PERS do that now?
JEANNIE OROPEZA: PERS does that for the state now. But we would use DPA, for example, to negotiate directly with the health plan for a lower cost health plan.
QUESTION: And so the administration would run employee health care and retiree health care, I presume?
JEANNIE OROPEZA: Correct.
QUESTION: Rather than PERS? In other words, they would eliminate, they would get out of the picture entirely?
DIRECTOR GENEST: If you think about it, it makes a lot of sense on a policy basis, because it’s the Department of Personnel Administration that negotiates for employee compensation. And right now it’s bifurcated. They deal with employee compensation. But what about the rest of employee compensation, which is the health care? So why not combine them all at once? It may be that the employees would rather have a little more in their pocket and a little less in health care, or a little more in health care and a little less in their pocket. Those kinds of things should be on the table. Plus, we also think that DPA can do a better job of coming in lower on the cost.
QUESTION: And you think that PERS and the union representatives that control PERS are going to roll over and let you have that?
DIRECTOR GENEST: I don’t think it’s up to them. It’s up to the legislature.
QUESTION: When do you now think the state runs out of money?
DIRECTOR GENEST: We haven’t updated our cash flow. Cash projections are really sensitive to specific fluctuations and the particular set of proposals here is slightly different than the particular set of proposals when we last had a formal cash flow. But it’s going to be essentially something like February or March. Certainly we’re not getting past March. We might not make it past February without having to do either deferrals or IOUs or what have you, even if our proposal is adopted immediately. Of course, if our proposal is adopted immediately we get a lot closer to snuff. We haven’t got the final projections on that yet, though.
QUESTION: And the sales tax numbers under this proposal are what?
DIRECTOR GENEST: What do you mean, the sales tax numbers?
QUESTION: Aren’t there changes in the sales tax that the Governor has proposed?
DIRECTOR GENEST: No.
QUESTION: Wasn’t it the 1.5?
DIRECTOR GENEST: 1.5 plus some services.
QUESTION: That’s still in there?
DIRECTOR GENEST: Did I miss something?
ANA MATOSANTOS: Everything that was in special session (Inaudible)
DIRECTOR GENEST: Yeah, that’s a good rule of thumb. Everything that we put in the special session is part of this. We’re just adding to it.
QUESTION: How do you respond to Republicans who say that recession is the worst time to raise taxes and this will just prolong the recession and may even depress revenues?
DIRECTOR GENEST: Well, I think everybody thinks that recession is a bad time to raise taxes. But on the other hand, we have to look at our actual options. We have a responsibility to run the government and it has to come in and balance. We can’t spend more than we have. And we think that we have done—as I said, the largest category of solutions that we have proposed is spending reductions.
And the Governor thinks that’s appropriate. He thinks that we have to solve this problem with every tool at our disposal. And that’s not just a personal assessment that he’s made. The reality is, the problem is so large that every single tool that we can use is going to have to be brought to bear and that does include tax increases.
And it is extremely unfortunate that that means increasing taxes during a recession. We shouldn’t overstate the impact of that, however. The amount of tax increases that the Governor is proposing is relatively small in the overall context of the economy. It’s still not something that you do with relish but it’s something you do out of necessity.
However, I should say that recognizing that is why the Governor has insisted that we have to adopt some measures to improve the economy while we take these really difficult cuts and these really difficult tax increases into consideration. That’s why he’s insisting on economic stimulus proposals associated with the budget.
QUESTION: A question about the RAW. The Controller has been pretty explicit about the fact that the state can’t do that kind of borrowing.
DIRECTOR GENEST: And we agree.
QUESTION: Is there a Plan B if that money is not going to be available, or a backup plan?
DIRECTOR GENEST: No, there isn’t. But let me say, we agree with the Controller. In fact, I think we’ve been more explicit and more definitive than the Controller because, if you recall the Floor session that we all did, he said that we would pursue it but the chances wouldn’t be good. What we said is it is impossible, it cannot happen under current circumstances.
Now, in this document we explain the things that must happen to make it possible. Those are very difficult things. First, you have to have a balanced budget. Not just proposed, not just under consideration but enacted. That’s pretty hard to do. We’ve got to do it.
QUESTION: You rely on the borrowing to be in balance, so how do you have a balanced budget before you even go to the market?
DIRECTOR GENEST: We think if we have this entire budget package adopted and we’re still going to have to come up with an explanation of how we think we can pay for this in the out year. But if we have those two things, assuming the markets get a little bit cleared up from where they have been, we think that would put us in the game to sell a RAW. But to think we could do it today, it’s not a possibility to do it today. We need to meet these conditions first.
QUESTION: What’s the timeframe for that?
DIRECTOR GENEST: For what?
QUESTION: For doing the borrowing.
DIRECTOR GENEST: We would expect to do it in July. That means an on-time budget that cuts and has other solutions of $41.6 or $41.7 billion has to be adopted on time this year. And if there was ever a time that we need an on-time budget, this is it. In fact, an on-time budget isn’t good enough. We need one to be adopted by February 1st—part of it. A good part of these solutions have to be adopted by February 1st.
QUESTION: Mike, which of these need to be put to the voters?
DIRECTOR GENEST: The Proposition 63 change and the First Five change.
QUESTION: That’s it?
DIRECTOR GENEST: Oh, that’s right, the lottery.
QUESTION: Oh, the lottery, yeah.
DIRECTOR GENEST: We’ve long since put that on a future ballot.
QUESTION: Are you going to still do an event next week? What will we see next week that’s different from this? Or is this the budget?
DIRECTOR GENEST: Well, what will happen next week—I don’t know if there will be an event. If there is, we’ll go. I don’t know. (Laughter) Or maybe we won’t, I’m not sure. But in any event, what will happen is we will meet—the Governor will meet his Constitutional obligation to submit a budget. This isn’t a budget. This is a description of what the budget will be. You’ve seen the budget, it’s that big and for it to work, for it to meet his Constitutional requirements, there have to be budget bills. We are finalizing getting those budget bills ready to be printed by the State Printer and all of that will be ready on the 9th that’s not ready now.
As far as what kind of availability or more explanation, I don’t know. I don’t’ know if it’s necessary, We’ll keep explaining this to you.
QUESTION: Even in the early stages there’s a sense that maybe this isn’t what you really want in a budget so much as dropping a Doomsday scenario on the legislature to get them to act. Is this firing for effect, or is this the real thing?
DIRECTOR GENEST: It wasn’t us that dropped the Doomsday scenario on the legislature, it was the economy and to some extent the fact that we have never completely gotten rid of our long-term structural deficit-type problems, as some of you know very well.
But it wasn’t us that dropped the Doomsday bomb on them, it was reality and it is reality and it’s not a matter of political showmanship. I think the LAO’s numbers are the same as ours, more or less. When they come in February they’ll be a little better or a little worse than ours, I’m sure but more or less at this level of disaster.
QUESTION: What are the differences between what you’re proposing versus what the Republicans have put out?
ANA MATOSANTOS: The Republicans proposed to basically look at taking existing reserves for Prop 63 as well as looking at the revenues going forward to be used to pay for program costs. What we’re basically looking at is we’re not impacting the reserves and we’re going forward for a temporary period using a portion of the revenues to pay for base costs. So we’re basically—they did a sweep of the full amount, both reserves and money going forward and we’re just taking a portion of it.
DIRECTOR GENEST: I want to do something a little different here. We’ll keep doing questions but we have Victoria Bradshaw, who is our Cabinet Secretary, the Governor’s Cabinet Secretary. And all of you remember—well, not all of you but most of you remember the California Performance Review a few years ago. And unbeknownst to some of you, a lot of that Performance Review, those proposals, have already been implemented. There’s a lot more to do. And I think Vicki is going to talk to you about that. You do have that document here, as she’s coming up. The document ‘California Performance Review.”
QUESTION: Mike, while she’s doing that, could we make you available for electronic interviews now, broadcast?
DIRECTOR GENEST: Yeah, we’ll do that either here or out there, at your convenience.
STAFF: We should just do a scrum outside. Vicki is only going to take a couple of minutes and then you should—
DIRECTOR GENEST: And then we’ll do—we’ll put together little submeetings and stuff and go over in a little bit more detail about some of the (Inaudible)
SECRETARY BRADSHAW: The Governor has felt very strongly that one of the obligations of government is to make itself efficient, to cut costs where appropriate, to eliminate redundancy and particularly to make itself more efficient. And along those lines, growing off of this, CPR, which was in the first two years of the administration, he feels it’s equally as important now, when we’re asking both the taxpayer and the citizens to make sacrifice in light of the economy, that we also look internally again.
We have identified, as you see, a listing of those that are primarily either redundant functions. For example, there are energy functions within three different agencies. We’re going to look at streamlining that. We are looking at consolidating certain IT functions and procurement, much like the private sector has done and like state government has done in most other procurement. We are looking at certain recycling and prevention functions that deal with spills that now reside in three different agencies and multiple divisions within those. These alone will eliminate, will affect 20 some boards and commissions and will eliminate 220 board positions and additional staff.
So I guess we want to assure people that we are continuing to look at our own selves, that government itself is trying to reform and to become efficient, to eliminate redundancy and that he is building into part of his proposals as well.
QUESTION: How much money would that save?
BRADSHAW: It saves actually quite a bit over multiple years, particularly in the IT area.
QUESTION: You don’t have that (Inaudible)
BRADSHAW: Well, no. We will have that. We know what it is in the post-secondary education, student aid and the California Conservation Corps, we know that it can be upwards of several hundred millions as well as billions going out.
QUESTION: That’s general fund, or—
BRADSHAW: Multiple funding sources.
QUESTION: That’s not built into—
BRADSHAW: It’s not built—this is not built into the budget other than the 150 million placeholder.
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