This week Arnold Schwarzenegger released the Governor’s May Revision to the 2009-2010 Budget Proposal.  This year is interesting because California already has a budget on the books, but the recession and numerous tax increases caused a shortfall in the actual collected tax revenue statewide leading to a $21 billion dollar deficit.  Now the Governor, on the eve of watching his 6-proposition budget proposal fail at the polls, has proposed a budget that includes $6 billion dollars in borrowing (including $2 billion from local governments) and tax increases.

Read the Governor’s 2009-2010 Budget Proposal here.

The Governor proposed his budget assuming that Propositions 1A thru 1E would pass, providing an additional $5.8 billion in taxes, funds transfers and borrowing to help close the budget gap.  Unfortunately, it is unlikely that many of the budget proposals will pass.  Propositions 1A and 1B are polling with a majority opposing them and the financial backers of the Yes on 1C, 1D and 1E have pulled their support, dooming them to fail.  Proposition 1F is budget neutral.

The Tax Increases and Accelerations

So Arnold believes that if the voters won’t approve a tax increase (like the one in Proposition 1A), that he should propose a tax increase to the legislature and attempt to turn the same 6 Republicans that broke ranks to pass the February budget failure.  In his proposal for the May Revision, Arnold included tax increases and tax accelerations (forcing tax payments to be made earlier in the year).

From the Governor’s May Revise:

$610 million— Accelerate Estimated Payments. The May Revision proposes to accelerate payments into the 2009‑10 fiscal year by increasing the amount of the estimated payment due for individuals and corporations in June from 30 percent of liability to 40 percent.

Tax acceleration is a bad idea.  It borrows from the tax revenue that would be collected in 2010-2011 and spends it this year.  It’s kind of like getting an advance on your paycheck.  By the time 2010-2011 comes, California will have used that fiscal year’s tax revenue on this year’s overspending.

Additionally, if the 5 propositions fail May 19th, the Governor plans to change that acceleration from 40 percent to 50 percent.  From the Governor’s May Revision:

$1.7 billion— Increase Withholding. The May Revision contingency plan [if the propositions don't pass] proposes to accelerate payments into the 2009‑10 fiscal year by increasing suggested withholding amounts by 10 percent.

Taxpayers will be forced to pay 20% more of their tax burden in the first 6 month’s of next year.  This is a provision that struggling families will not be able to prepare for.

The Borrowing

The Governor’s May Revision also calls for ridiculous amounts of borrowing.  Specifically, the main revision proposal calls for at least $6 billion in borrowing through the issuance of Registered Reimbursement Warrants (commonly referred to as IOUs).

From the May Revision:

$6 billion— Issuance of Registered Reimbursement Warrants (RAWs). External cash borrowing will be needed during the 2009‑10 fiscal year to cover the shortfall of cash due to the imbalance of spending and revenue collections. The May Revision proposes to cover $6 billion of this cash borrowing need through issuance of RAWs. This amount will be treated as an offset of 2009‑10 expenditures on a budgetary basis. The total cash borrowing need, however, will be substantially more than $6 billion. Over the next few weeks, the Department of Finance will work with the State Controller and the State Treasurer to quantify the additional cash borrowing need and develop a strategy for addressing it.

Additionally, the proposal calls for $2 billion in money that would normally be allocated for the budgets of California’s 58 county governments be used for General Fund expenses if Propositions 1A thru 1E fail:

$1.982 billion—Borrowing from Local Government. The May Revision contingency plan proposes to borrow eight percent of the property tax revenues received by cities, counties, and special districts in 2008‑09 as authorized in Article XIII of Section 25.5 of the Constitution.

This will squeeze the budgets of local governments and school districts.

The Layoffs

In addition to the program consolidations listed in the May Revision, the Governor announced that he will proceed with layoffs for 5,000 of the 140,000 state employees.  While this is only a quarter of the 20,000 employees who received layoff notices earlier this year, it is a step in the right direction in reducing government size and overhead.

Analysis:  Republicans Need To Dig Their Heels In

This is a disastrous budget for anyone who values fiscally conservative budget principles.  It proposes at least $8 billion in borrowing from future years’ revenue, sending the next generation of Californians into financial ruin because of the Union-Democrat Political Machine’s reluctance to be reasonable in how we deal with a failing government.  Now more than ever is the time to tighten the belt, but the Democrats and the Governor refuse to make the tough decisions needed to properly govern and continue to spend other people’s money.