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Schools vs. health care in stimulus trigger

Uncertainty over the flow of federal stimulus money into California is fueling a confrontation between education and health-care interests over a device at the heart of the state budget that could affect some $3 billion in spending, perhaps more.

The dispute is based on the amount of money that the state’s General Fund – the treasury of personal and corporate income taxes – will receive from the economic recovery package that President Obama signed last month.  

If it comes in at $10 billion or more, a series of taxes and cuts that the governor and Legislature approved as part of this year’s budget will be blocked. If it comes in less, the changes will go forward as planned. The rational behind the scheme is that if the state gets more money from the federal government, it wouldn’t need to put into effect some of the painful cuts or taxes it approved to balance the state’s budget.

But two problems have arisen. They are rooted in politics as much as finances.

The first is that state’s budget has slipped out of balance by at least $8 billion, and probably more, because the state’s weakening economy is crippling incoming tax revenue. That means the state has at least $8 billion less than it thought it had when the budget was approved just weeks ago to resolve an unprecedented $41 billion shortage.

The second is that the potential for next taxes and cuts stemming from the impact of the federal stimulus money sparked a dispute between two Democratic constituencies, schools and labor.

The decision on just how much money will come in will be decided by state Treasurer Bill Lockyer, a Democrat, and state Finance Director Mike Genest, a Republican, who held a public hearing on the issue this week. Their finding is required by April 1.

During the hearing, hundreds of members of the Service Employees International Union demonstrated outside the Capitol and others testified at the hearing, urging Lockyer and Genest to set the stimulus level at $10 billion to forestall some $1 billion in cuts. The SEIU said their members, including minimum-wage, in-home health care workers would be devastated by the cuts. The package also includes about $1.8 billion in new taxes.  

Beth Capell, who advocates for the expansion of health care to the poor, told Lockyer and Genest that flawed methodology at the state and federal level has skewed the numbers, leaving doubt as to the true impact of the stimulus funds.  She also complained that the Legislature’s financial adviser relied on numbers generated by the governor’s office, and that there was a lack of clarity from federal fiscal analysts, as well.

“We simply ask that these be reconciled,” Capell said.

There has been no final decision, but both Lockyer and Genest appeared skeptical that the General Fund would reach $10 billion. The likely target is more in the neighborhood of $8.2 billion, which reflects the estimates of the administration and consultants.

Kurt Sjoberg, the former state auditor and now a private consultant hired by the treasurer to study the issue, suggested that the state could reach the $10 billion benchmark by invoking recession-driven authority to cut school funding by $3.6 billion, and then use stimulus money to make up the difference – new money that would be counted as part of the infusion of stimulus cash.
That move would boost the impact on the General Fund to nearly $12 billion, thus blocking the cuts opposed by SEIU, but forcing deep cuts to schools, which are opposed to the reductions.

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