California Family Minute

November 21, 2011

Creative Accounting Still Can’t Find $4 Billion

by Rebecca Burgoyne, 
CFC Research Analyst

Last summer, instead of balancing the state budget as constitutionally required, the Legislature’s majority Democrats indulged in some creative financing – optimistically pulling an additional $4 billion in income out of the proverbial hat. They based their rosy assumptions on the hope that the economy would improve – a hope destroyed by last week’s fiscal forecast from the nonpartisan Legislative Analyst’s Office (LAO). 

Normally an advisory report, this year’s forecast took on additional significance as the first real indication of whether or not some automatic budget cuts will be made in January. Last week’s news from the California Legislative Analyst was dismal. State revenue is running $3.7 billion behind predictions and the projected deficit could reach $12.8 billion by July 1. 

As part of the 2011-12 budget, legislators – and the governor – built in fiscal “triggers” that would be pulled should the projected pot of money not materialize. The triggers would be automatic, and based on the more optimistic of two fiscal reports – the one last week by the LAO or one due next month from the state Director of Finance.

Built-in triggers to reduce the 2011-2012 budget

A month from now, based on revenue projections from the Legislative Analyst and the state Department of Finance, the Director of Finance is required to impose a two-tiered system of cuts that will be made early next year. Should income fall between $1 billion and $2 billion below projections, trigger cuts to higher education, public safety, and social services will be made. Should income be more than $2 billion short, K-12 education and community colleges will be slashed. 

Moreover, in concocting their creative budget, the Legislature hamstrung local school districts. A budget trailer bill (AB 114) prohibits districts from laying off teachers or cutting programs midyear should budget cuts materialize. The California School Boards Association objected to AB 114, saying it “intrude[s] on the ability of school boards to manage their own resources.” Many school districts will be forced to shorten the current school year or renegotiate current teacher contracts to include additional furlough days.

Will the triggers be pulled? 

Legislators who created the optimistic income and trigger scheme are loathe to make any of the cuts. Should income projections remain low, rumblings from the Capitol indicate they may examine other solutions – even abandoning the triggers in favor of additional rosy income assumptions or accounting gimmicks. Last week, Sen. Ellen Corbett (D-San Leandro) told the San Jose Mercury News, “I am deeply troubled by this forecast and the prospect of making another round of deep cuts to public schools and higher education. The Legislature and governor should explore all of our available options and do everything we can to prevent midyear cuts."