Capitol Republicans are putting together a plan to ease the state's deepening cash crunch that cuts state services while tapping into voter-approved money intended for the mentally ill and early childhood development. Democrats, meanwhile, are crafting a series of proposals that would require simple-majority votes in each house and raise an estimated $5 billion for state coffers, according to some estimates.
The battle of taxes vs. cuts, and the fallout from Thursday's war of words, continued Friday in the Capitol amid increasingly rancorous budget negotiations. The state faces an immediate $15.2 billion hole in the current fiscal year, and upwards of $40 billion in red ink through the middle of 2010 as the economic crisis chokes off income tax revenue, corporate payments and property taxes.
According to Capitol sources, the Republican proposal is scheduled to be unveiled as early as Monday.
Among other things, it would divert money from the $1 billion-plus per year generated by Proposition 63, which voters approved in order to provide money for mental health program. The program also has a large reserve in upwards of $2 billion that may be tapped under the Republican plan. Ironically, perhaps, the program was authored by Democrat Darrell Steinberg of Sacramento, now the leader of the Senate and a key negotiator on the state budget.
The GOP plan also would divert money from Proposition 10, the tobacco tax that voters approved a decade ago.
Both changes would require approval from voters, and Republicans are expected to call for a special election as early as March 2009.
Republicans began putting their plan together following stormy budget meetings in the Capitol this week in which the leaders of the parties in both houses attacked each other and the governor — who returned the comments in kind.
The meetings were the latest indication of the paralysis that has gripped the Capitol over how to deal with the state's grim fiscal picture. The governor, a Republican, and Democrats have both blamed Republicans for clinging to ideology in the face of an unprecedented crisis, while Republicans believe new taxes would hurt the economy even more.
The relations between the legislative leaders have gotten so bad that Democrats are now privately scrambling to put together another short-term plan that would not need Republican approval. Steinberg has reportedly identified billions in revenues that could be increased without any Republican support.
Among them is the reversal of part of the so-called "triple flip" that was used to bring the state's 2003-04 budget into alignment.
Under that plan, the local sales tax was reduced by about $1.4 billion. The state sales tax was increased by the same amount, and was used to provide a dedicated revenue stream to pay off bonds used to balance the 2003-04 budget. The state general fund then repaid locals for the loss in local sales tax revenues, a cost of about $1.4 billion to the state.
But this year, there's a new wrinkle on the triple flip: Republican and Democratic budget staffers agree that if the state simply stops paying back the locals for their lost sales tax revenues, the local sales taxes would automatically go back up to cover that shortfall. The end result would be a savings to the state general fund of anywhere from $1.1 to 1.5 billion.
In addition to undoing the triple flip, Democrats are looking toward other solutions that could give the state a quick influx of cash. They are also expected to revisit billions in cuts that were in the Democrats' November lame-duck budget package.
State Controller John Chiang says the state will run out of cash by February unless lawmakers address the state's budget shortages. Also imperiled will be public projects seeking money from bond sales, because lenders will be skittish buying bonds if the state's fiscal house is not in order.
To date, majority Democrats and minority Republicans have been unable to agree on a budget-balancing strategy. The budget requires a two-thirds vote – 27 in the Senate and 54 in the Assembly. Democrats control both houses but do not have enough votes for a two-thirds majority and must seek Republican support.
Democrats have agreed to new taxes, cuts and borrowing to balance the books, but Republicans have rejected any new taxes