Warning that a recession is inevitable, Governor Edmund G. Brown Jr. dampened spending expectations even as higher revenues have poured into state coffers.
Overall, the administration’s latest revision to the proposed state spending plan envisions $6.7 billion in new General Fund revenues compared to the January budget.
Most of the additional spending will reflect priorities enshrined by the voters in the state Constitution. About $5.5 billion will be devoted to K–12 schools and community colleges. The Governor will also deposit $633 million of the recent windfall into the new rainy day reserve, and use a like amount to pay down existing budgetary debt.
“Governor Brown has wisely set aside these new revenues to repay prior state debts and build a prudent reserve for the future. Strengthening the state’s financial position is the best hedge against future economic downturns, protecting key state programs and taxpayers alike,” said Allan Zaremberg, president and CEO of the California Chamber of Commerce.
Fiscal Balance
The Governor was adamant that fiscal balance be a mainstay of his governing philosophy. He acknowledged that the budget assumes expansion of the economy, but that “as we know, economic expansions do not last.” Therefore, the budget proposes repaying a total of nearly $2 billion in budget-related debt and socks away nearly $3.5 billion in a rainy day reserve.
As usual, the top spending priority is education, with K–14 school spending pegged to grow by $9.5 billion over two years, or 16%.
The budget proposal also represents a multi-year plan to solidify higher education finances. The University of California (UC) and California State University (CSU) will maintain tuition at current levels for two years. The Governor proposes increasing state funds to CSU to a total of $158 million, and to provide temporary funding to UC from budget debt repayment funds to offset UC’s pension liability. The higher education segments will also work to ease transfers from community colleges and reduce time to successfully complete a degree.
The Governor also proposed a new refundable tax credit for the working poor—a first-ever Earned Income Tax Credit for California.
Working taxpayers with incomes less than $6,850 (with no dependents) or $13,870 (with three or more dependents) would receive a credit of 85% of the federal credit. This would benefit working households, according to the Department of Finance, $460 on average, to a maximum of $2,653. The administration estimates as many as 825,000 families may benefit from this new tax credit.
Cap-and-Trade Auction
Finally, the Governor proposes a major increase in spending from the revenues derived from the state’s cap-and-trade auction. The administration proposes including $2.2 billion for spending on a variety of clean transportation, mass transit, energy efficiency and ecosystem restoration programs.
CalChamber is in litigation with the Air Resources Board, challenging the legality of the auction (though not the cap-and-trade program itself).
