Capitol Alert

Jerry Brown’s budget plan predicts slowdown in California revenue

Gov. Jerry Brown, urging lawmakers to restrain spending amid a downward turn in revenue, said Friday that California cannot afford to significantly expand state programs and services.

The Democratic governor, touching off weeks of budget negotiations at the Capitol, said the state will face future deficits if a ballot measure to extend temporary income tax increases fails in November.

Brown declined to endorse the measure, however, saying “we’ll manage” if it falls short.

“I’m leaving that to the people of California,” said Brown, who championed higher taxes in 2012 but said repeatedly that they should remain temporary.

Brown’s remarks – and the release of his revised, $169.3 billion state spending plan – came days after the state’s most lucrative month for revenue fell short of his office’s expectations.

The revised budget assumes nearly $2 billion less in revenue than initially forecast through June 2017, with Brown warning lawmakers to prepare “for a time of necessity.”

“Like everything else, things don’t last forever,” Brown told reporters at the Capitol. “The surging tide of revenue is beginning to turn.”

While Brown cheered legislative Democrats by endorsing a plan to build housing for homeless people with mental illnesses – effectively shifting $2 billion from mental health programs – the broader budget proposal appeared to leave intact a years-old conflict between Brown, a relatively moderate Democrat, and more liberal elements of his party.

Democratic lawmakers are pushing for increased spending on child care, education and monthly grant funding for families that have another child while on welfare. Currently, those families are barred from receiving additional money under a law passed in 1994.

“This is a budget that continues recession-era cuts,” said Anthony Wright, executive director of Health Access California. “While it’s appropriate for the governor to focus on preparing for the next recession, that needs to be balanced with undoing the damage from the last recession.”

Sen. Mark Leno, D-San Francisco, said in a prepared statement that “given the unacceptably high number of Californians living in poverty, we must make targeted re-investments in education, health and social service programs that help lift up the most vulnerable residents of our state.”

The revised estimate follows a slowdown in sales tax revenue and April income tax returns that came in more than $1.2 billion lower than January estimates. In addition, it bases lower revenue estimates on more complete information about volatile capital gains income. Capital gains came in $15 billion below forecasts for 2014.

Nevertheless, the plan assumes continued economic expansion through at least June 2017. And the coming fiscal year would include $400 million more in general fund revenue than lawmakers and Brown predicted when they approved the current budget last June.

 

Brown proposed no new spending cuts to make up for the revenue decline. Instead, the drop in revenue means the state won’t have to transfer as much money into its rainy-day reserve.

In his revised budget, the reserve would grow from its current $3.5 billion to about $6.7 billion, less than the $8 billion he envisioned in January.

The plan maintains a $2 billion supplemental contribution to the reserve Brown proposed in January, an idea that the Legislature’s nonpartisan fiscal analyst has cautioned against because it would take away legislative discretion on how to use the money.

“Is it going to be a hard sell? Yeah,” Brown said of the reserves. “I’m going to be pretty resolute on this budget. I want people to know that. We do need reserves.”

In another major one-time expense, Friday’s revision leaves intact a $1.5 billion Sacramento state office construction plan. And it continues to take no opinion on what should happen with the Capitol annex, home to the governor’s office as well as those of most lawmakers.

In endorsing a housing effort put forward earlier this year by Senate Democrats, Brown called housing for mentally ill people a “serious problem” and said “we have the money” to address it.

The measure would be funded by Proposition 63, the existing 1 percent income tax on Californians earning $1 million or more per year to pay for mental health services. Senate Democrats have said it could fund construction of at least 10,000 housing units statewide.

The move will require Republican support to achieve a two-thirds vote in the Legislature, and it could draw opposition from some mental health advocates who have raised concerns about the approach.

In addition, the plan allocates another $45 million to provide full Medi-Cal coverage to 185,000 undocumented children, up from an estimated 170,000 children in the January proposal.

Legislative budget hearings will begin Monday on the latest proposal. Lawmakers face a June 15 deadline to pass a spending plan.

In recent years, the Democratic-controlled Legislature has approved its preferred approach by the deadline, with more spending than Brown would accept. They have followed up with subsequent legislation after agreeing to less spending as part of a final deal with the governor.

“In any scenario, there are no halcyon days ahead,” Brown said.

Republicans, largely sidelined in recent budget negotiations, have traditionally viewed Brown’s budget proposals more favorably than those from Democratic lawmakers.

But Assemblyman Jay Obernolte, R-Big Bear Lake, said Friday that “sometimes his actions don’t match his words.”

Obernolte objected specifically to Brown’s recent approval of a plan to gradually raise the minimum wage to $15 in California. The first phase of the increase, to $10.50 on Jan. 1, would cost the state an estimated $39.4 million through June 2017.

Friday’s plan continues a $3.6 billion transportation package, with $2 billion of that coming from a proposed new $65 vehicle registration tax. That package has gone nowhere in the Legislature.

Coming to fruition, though, was another major January budget goal of the governor’s: Lawmakers’ approval of legislation expanding a state tax on health plans.

Lawmakers passed the three-year measure in late February. Starting July 1, it raises more than $1 billion for Medi-Cal and services for people with developmental disabilities, while giving health plans breaks on other taxes. The tax would pull in matching federal dollars.

Federal officials have yet to sign off on the state’s approach after almost two months of review.

Jim Miller: 916-326-5521, @jimmiller2 Jeremy B. White of The Bee Capitol Bureau contributed to this report

Budget highlights

Key changes Gov. Jerry Brown made in his spending proposal for the fiscal year that begins July 1:

  • Assumes shift of $2 billion in Proposition 63 money for mental health to fund low-income and homeless housing
  • Reduces by $1.6 billion the amount transferred into the state’s rainy day fund because of lagging revenue
  • Spends $39.4 million to pay for raising the hourly minimum wage to $10.50 Jan. 1
  • Sets aside an extra $500 million to pay for state employee pay raises
  • Increases by $45.4 million (to $188.2 million) the amount set aside to fund Medi-Cal for undocumented children
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