California’s Revenue Shortfall Will Force Brown to Seek $1 Billion of Cuts

California Governor Jerry Brown will cut $1 billion in spending from the current budget, saying the economy won’t produce revenue he built into the plan in June, triggering automatic reductions.

Brown said he’ll eliminate a $258 million busing subsidy, take $230 million from aid to public universities, trim $200 million in programs that help the elderly and disabled, and make smaller cuts in child care, library and prison spending. Public schools will lose $79.6 million, the equivalent of a half day of classes.

“These cuts to the universities, in-home supportive services, to schools, to prosecution -- they’re not good,” Brown said at a press conference in Sacramento. “This is not how we want to run California.”

Brown and Democrats in the Legislature inserted the automatic spending cuts into the $86 billion budget they passed in June, with a provision to trigger the reductions if revenue failed to reach estimates. They said at the time that the nascent economic rebound was likely to increase tax revenue by $4 billion more than had been forecast a month earlier.

Brown took action as his finance office predicted revenue for the fiscal year that ends in June will fall $2.2 billion below budgeted levels. Most of the reductions will take effect Jan. 1, with the cuts in school funding effective Feb. 1.

Trigger Cuts

The so-called trigger cuts were developed after Democrats failed to win Republican support to keep $11 billion of temporary tax and fee increases from expiring. The automatic cuts were intended in part to ensure that the state would have enough cash on hand to repay investors who bought $5.4 billion of short-term cash-flow notes, which come due in June.

“The alternative is to borrow, obfuscate and delay,” Brown said. “I don’t want to do that.”

Such mid-year cuts are unpopular with voters, according to a Field Poll released Dec. 5. Sixty-five percent of 1,000 registered voters surveyed Nov. 15-27 said it was a bad idea to include the trigger provision in the current budget. The poll, a nonpartisan sampler of opinion in California, had a margin of error of plus or minus 4.5 percentage points.

Still, Brown said he’ll pursue a second round of automatic cuts if voters reject temporary increases in income and sales taxes in a November ballot measure he proposed. The increases would bridge a projected $10 billion budget deficit in the fiscal year that begins in July.

‘Overinflated’ Revenue

“They overinflated what the revenue would be,” said Assemblyman Jim Nielsen, a Gerber Republican who’s vice chairman of the Budget Committee. “It just shows that the gimmicks that got us into this mess remain.”

Brown, a 73-year-old Democrat, has estimated an increase of $7 billion in annual revenue from his proposal to temporarily raise taxes on those whose incomes exceed $250,000 a year and to boost the statewide sales tax to 7.75 percent from 7.25 percent. He’s said he would dedicate the gain to schools and prisons.

While Brown has been forced to take his case for higher taxes directly to voters, other governors such as New York’s Andrew Cuomo and Connecticut’s Dannel Malloy have succeeded in winning higher taxes through their state legislatures.

Brown’s trigger provision contained two tiers of cuts, depending on how much revenue the state was projected to collect. The first, tied to a $1 billion shortfall, called for reduced funding for colleges and universities, as well as services for the disabled.

School Aid

A projected miss of $2 billion or more would have forced another $1.54 billion in cuts from school aid, a week’s worth of expenses, as well as the elimination of the busing subsidy.

State Finance Director Ana Matosantos said eliminating the busing subsidy wouldn’t automatically mean school districts would do away with it. Districts will make that decision, she said.

The Legislative Analyst’s Office last month forecast a $3.7 billion revenue shortfall. The automatic reductions were linked to the more optimistic of the estimates produced by the LAO and Brown’s finance department.

The state’s initial budget forecast was “optimistic” and the subsequent shortfall anticipated by investors, according to Regina Shafer, who helps manage $5.2 billion of tax-exempt investments at USAA Investment Management Co. in San Antonio.

“From our perspective, we want to see budgets balanced whether by spending cuts or revenue increases,” she said by e- mail.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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