The Governor’s 2012 Budget Proposal

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The California Constitution requires the Governor to submit a budget proposal for the next fiscal year by January 10, but this year the budget was released five days early due to someone inadvertently posting the document to the Department of Finance website. So, the annual budget battle began with little fanfare in a hastily assembled press conference attended by Capitol reporters on January 5, 2012.

The Governor claims that his budget closes a $9.2 billion deficit with a roughly equal proportion of spending cuts and tax increases. In a message to the Legislature, the Governor stated:
"The budget that I am submitting today keeps the cuts made last year and adds new ones. The stark truth is that without some new taxes, damaging cuts to schools, universities, public safety and our courts will only increase.

That is why I will ask the voters to approve a temporary tax increase on the wealthy, a modest and temporary increase in the sales tax and to guarantee that the new revenues be spent only on education. I am also asking that the voters guarantee ongoing funding for local public safety programs. This ballot measure will not solve all of our fiscal problems, but it will stop further cuts to education and public safety and halt the trend of double digit tuition increases.

My budget plan also includes important reforms. It improves government efficiency and pays down debt. It reorganizes state government to make it more efficient and saves tax dollars by consolidating or eliminating functions. It restructures social service programs to better support working families. It gives substantially more flexibility and decision-making to local school districts. The plan also calls for bold investments in our future: to assure a reliable water supply, build high speed rail and reduce greenhouse gas emissions."

In his State of the State address given on January 18, 2012, the Governor stated that California is "on the mend" and he laid the groundwork for his campaign for the November ballot initiative to raise taxes. The Governor argues that his proposed temporary tax increases are necessary to stabilize California’s finances as it emerges from a recession that has seen the unemployment rate increase and government tax revenue decrease. State tax revenue has dropped by $17 billion since the recession began in late 2007.

However, the Governor has an uphill battle winning legislative approval of his budget proposal. According to the Legislative Analyst’s Office (LAO), the Governor’s estimates for capital gains by California taxpayers is $34 billion higher than the LAO's analysis from November. That translates into a $3 billion disagreement in personal income tax revenues.

The Governor’s budget assumes that the Legislature will act quickly on billions of dollars in spending cuts to begin chipping away at the projected deficit, but Legislative Democrats are either skeptical or outright opposed to enacting spending cuts before seeing April’s tax receipts to give a more accurate look at the cash available. While the Democrats follow a "wait and see" strategy, Republican legislators will likely call for an even more prudent budget, one that doesn't hinge on a major tax increase being ratified by voters this fall.

The Legislature will also grapple with the Governor’s proposal to use AB 32 cap-and-trade auction revenues to backfill the general fund. Current estimates on the revenue to be generated by the auction of allocations by the Air Resources Board range from $500 million up to $1 billion. The Governor has allocated $1 billion in his budget and will look to cut out greenhouse gas (GHG) programs currently funded by general fund monies. Those programs would then be funded by auction revenue funds thereby freeing up those general fund monies to be applied elsewhere.

So begins another edition of the annual budget game in which the Governor, legislators and lobbyists for countless political, governmental, social and economic interest groups will joust for months over cuts and spending.

Article written by Trudi Hughes, Director, Government Affairs

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