Sen Tom McClintock’s 40 point proposal to resolve the budget stalemate

Budget Letter: The Next Step
Published on July 24, 2007
July 24, 2007

Hon. Richard Ackerman
Senate Republican Leader
State Capitol
Sacramento, California

Dear Dick:

You have asked under what circumstances I could support SB 77, the budget act for FY 2007-08. In my judgment, the largest general fund budget the state can safely sustain under current conditions is slightly over $100 billion, or $8.3 billion more than was spent just two years ago and $21.7 billion more than was spent at the outset of this administration. Here are my thoughts on the scope of the problem and on what immediate steps can be taken to address it.


Although the architects of the budget maintain that it is “only” out of balance by $699 million, this claim relies on several accounting gimmicks, some of which I outlined in my speech to the Senate on July 20th.

First, the budget is virtually certain to produce an actual dollar shortfall of $2.006 billion because of the following factors:

$699 million – Shortfall at outset
$330 million – Failure to account for prison guard contract offer: The administration has already placed $330 million on the bargaining table in contract discussions with the CCPOA, and the actual costs are likely to rise well beyond this level. The budget simply takes no account of this expense.
$190 million – Overstatement of property taxes: The Legislative Analyst’s Office has already warned that the property tax assumptions of the budget are unrealistic and overstated.
$184 million – Overstatement of tribal gaming revenues: The LAO has already warned that the tribal gaming revenue assumptions in the budget are unrealistic and overstated.
$603 million – Failure to account for May/June revenue shortfall: Even though the state’s revenues fell $603 million short of budgeted projections in May and June, the budget assumes they were received anyway.

Second, the budget employs several devices amounting to $1.167 billion that also clearly fall into the definition of deficit finance, by either pushing expenditures due in the current year to the next fiscal year, or accelerating revenues due in the next fiscal year into the current one. Although they will not affect the state’s cash flow, they certainly add to the state’s deficit:

$300 million – Postponement of payment to local governments for mandate relief: Although the state is obligated to pay for these mandates, the budget pushes them into the next fiscal year to avoid paying them this year.
$357 million – Acceleration of tobacco securitization funds: The budget accelerates tobacco securitization funds that were scheduled to pay 2008-09 CTA settlement costs into the 2007-08 fiscal year to pay for general fund spending.
$250 million – Diversion of Williams School Facility Repair funds: The budget also raids the Williams School Facility Repair fund for general fund expenditures, creating an obligation to repay the “loan” in subsequent years.
$260 million – EPSDT prior year deficiency deferral: The budget defers $173.4 million of a $260.2 million prior years’ (2003-06) deficiency to 2008-10 and scores the 2007-08 $87 million appropriation as a prior-year expenditure.

I would therefore classify the actual deficit in the current budget at $3.173 billion. This assumes there is no deterioration in the state’s economy, despite alarming job figures announced on Friday. We need to bear in mind that this budget is predicated on the assumption that state revenues will grow at a robust rate of 5.8 percent this year – compared to the 2.4 percent growth we experienced this past year. Thus, these are “best case” numbers.

Unfortunately, it doesn’t end here. There are also several highly questionable and shaky assumptions amounting to $2.865 billion in the budget that will require a substantial reserve in order to protect the state from insolvency in the budget year. Specifically:

$709 million – Escheated property: The budget is predicated on receiving $709 million in escheated property – despite the fact that the state’s unclaimed properties program is currently blocked by a federal court order. Further, the revenues projected in the budget from the escheatment of property make it obvious that the state does not believe that its proposed reforms will significantly reduce property seizures or significantly increase the return of seized property, and thus it is unlikely the injunction will be lifted any time in the foreseeable future.
$200 million – “Limited Liability” court case: The state has lost this case in the lower courts and is ignoring the strong likelihood it will lose at the appellate level. Its liability is conservatively estimated at $200 million.
$176 million – Unallocated reductions: The budget once again assumes the governor will make $176 million in unallocated reductions, despite his failure to make most of the unallocated reductions as directed in past budgets.
$300 million – Medi-Cal FPACT waiver: The state’s Medi-Cal FPACT program is currently operating by virtue of a federal waiver, and I am told there is significant reason to believe that waiver will not be renewed. If that occurs, the state will have to support the program entirely with state-only funds, increasing state obligations accordingly.
$980 million – Ed Fund sale: The budget is predicated on the sale of the state’s Ed Fund, which guarantees federal student loans. Not only does this action require federal approval that has not yet been granted, it assumes $980 million in revenue although the fund has never been appraised, and sources tell me the actual valuation is likely to be one fifth of that amount.
$500 million – CalSTRS court order: The state is currently under court order to pay $500 million of the $558 adverse judgment arising from its failure to fund CalSTRS. The state is appealing the ruling, but is ignoring the very strong likelihood that it will have to discharge this obligation during the budget year.

Also, I consider this a “best case” analysis, considering, as just one example, the LAO’s warning that the administration has under-budgeted to meet its current obligation to pay health benefits to retired employees and continues to ignore the analyst’s warning that it needs to set aside $6 billion annually to fully fund this obligation. Under these circumstances, I believe that at the very minimum, the state must begin the fiscal year with a 3 percent budget reserve.

Although the budget’s architects boast a $3.4 billion budget reserve, it needs to be remembered that a year ago, that reserve was roughly $10.5 billion. What remains today is unlikely to be sufficient to fund the contingencies discussed above.

In short, in order to produce a genuine balanced budget with a minimum prudent reserve, additional spending reductions of at least $2.893 billion would have to be made, bringing general fund spending to $100.067 billion – or $8.352 billion MORE than we spent as recently as FY 2005-06.


I am open to discuss any combination of savings to reduce the budget to this level, and there are more than enough immediate steps that can be taken to do so, even without the long-range operational reforms that offer far more in savings while in many cases improving the level of services available to Californians. Remember that a generation ago, with taxes far lower than they are today and with population growing much faster than it is today, we were offering a vastly higher level of services and quality of life.

As a starting point, I would suggest $2.895 billion in immediate reductions as follows:

1. Adopt the governor’s plan to conform welfare eligibility to federal law. ($324 million): Federal law sets a five year limit on the time a person may remain on welfare and req
uires work activities as a condition of receiving welfare. Most states conform to these requirements and have seen a dramatic reduction in their welfare rolls as a result. California law allows welfare recipients to remain on the welfare rolls indefinitely, or to ignore federal work activity requirements, with only a slight reduction in benefits – paid entirely by state taxpayers. The above savings DO NOT include the added cost savings of reducing the state’s welfare rolls and avoiding federal sanctions for failure to do so. (5180)
2. Repeal in-state tuition subsidies for illegal aliens. ($75 million): Under current law, California taxpayers provide non-residents of the state of California – including foreign nationals illegally in the United States – the same in-state tuition subsidy as legal California residents – as long as they have spent three years in and graduated from a California high school. In 2005, the LAO estimated the total cost of the AB 540 waivers at the UC, CSU and Community College system at $120 million annually. According to the L.A.O., the University of California estimates that up to 13 percent of their waivers are for foreign nationals illegally in the United States and the Community Colleges estimate that up to 90 percent of their waivers are affected. Assuming a 13 percent rate at CSU as well, that brings the total cost to California taxpayers of providing the in-state tuition subsidies to foreign nationals illegally in the United States to as much as $75 million per year. (6110, 6610 and 6870)
3. Eliminate vacant staff positions. ($200 million): The Senate Republican Fiscal Office has identified approximately 6,000 vacant staff positions in non-health and non-corrections agencies that could be eliminated. Many agencies maintain these vacant positions – while continuing to receive funding for them – and use the unspent monies as a giant slush fund. (Various items)
4. Extend San Diego County’s “Project 100 Percent” statewide. ($80 million): Within 10 days of the application being accepted, a public assistance investigator for San Diego County makes an appointment and actually visits the applicant in their home. This home visit allows the investigator to confirm with their own eyes whether the applicant actually lives there, has the children they claim and is otherwise eligible. Over the ten years this program has been in existence, they have found that one in five applicants misrepresents information on their welfare applications. Based upon the FIRST MONTH’S welfare benefit, they estimate the program saved a half million dollars last year in San Diego County. Since the average stay on welfare is 25 months, the actual savings of this program are more likely in the $12 1/2 million range. Annualized and extrapolated across the rest of the state, that’s over $80 million per year. (5180)
5. Rescind the governor’s proposal to increase salaries for prison guards, de-couple salaries from CHP, and institute a 12-month wage freeze. ($330 million): California prison guards make more than guards in any other state in the nation. According to the San Francisco Chronicle, more than 5,000 guards made over $100,000 last year in wages and overtime. This is in addition to a benefits package that includes retirement as early as age 50 with 90 percent of their highest year’s earnings. Offering an additional wage increase totaling $330 million is unjustifiable in good budget times; in the state’s current fiscal condition, it is unconscionable. (5225)
6. Repeal appropriation for Cesar Chavez Day. ($5 million): Chavez Day celebrations should be funded with private donations – like any other holiday. (0650)
7. Eliminate funding for the methamphetamine anti-use ad campaign. ($10 million): There is no evidence suggesting that this advertising campaign will be effective in reducing methamphetamine use. (4200)
8. Abolish Physical Education Teacher Incentive Program. ($40 million): It is not clear why a $40 million incentive program is necessary to attract gym teachers. (6110)
9. Adopt LAO recommendation to match veterans who could transfer from Medi-Cal into the VA health system. ($250 million): The LAO writes in its Analysis of the 2007-08 Budget: “Our analysis of population survey data indicates that approximately 144,000 veterans who are entitled to comprehensive medical care and health services through the federal Veterans Administration (VA) heath care system are enrolled in the state’s Medicaid Program (known as Medi-Cal in California). We believe it makes fiscal sense for the state to examine the possibility of encouraging veterans to seek medical care from the VA instead of from Medi-Cal…We estimate that the cost of such benefits totals approximately $500 million ($250 million General Fund).” (4260)
10. Eliminate general fund support for UC Labor Institute. ($6 million): This is precisely the sort of special interest program that should be funded with private grants and donations and not public funds. (6440)
11. Maintain all education categorical programs at their current levels. ($837.054 million): Despite the third consecutive year of declining enrollment, categorical programs continue to escalate. With fewer children in the public schools, maintaining categorical funding at its present level still produces a per pupil increase in actual support. (6110)
12. Eliminate general fund support of UC outreach activities. ($26.3 million): This still leaves $57 million out of UC unrestricted funds for outreach activities, in addition to the work of every high school counselor in the state, who is supposed to be doing precisely that. (6440)
13. Delete the three-year pilot program to increase legal representation in civil proceedings. ($5 million): The LAO recommended this item be deleted from the budget “because the benefits of the new program are not clear, relative to other potentially less expensive approaches and it would move the state in the direction of a major new funding commitment it could not easily afford.” (0250)
14. Eliminate general fund support for the Science Center. ($14.808 million): This is the only museum in the state that is subsidized for 64 percent of its costs. This is exactly the sort of function that should be funded by private donations, patrons and visitors. (1100)
15. Transfer $100 million from PTA to reimburse general fund for STA debt service. ($100 million): Given the unexpected windfall to the PTA as a result of sky-rocketing gas prices, it is not unreasonable to transfer an additional $100 million for general fund debt service costs.(2660)
16. Require full county participation for transitional housing plus program. ($29.950 million): Once the share of cost requirement was eliminated last year, program costs have exploded from $1 million to $20 million in one year. This should be a county-option program. (5180)
17. Reinstate Transitional In-Patient Care. ($19 million): The TIC program shifts the care for patients with short-term medical or rehabilitative need from costly hospital-based general acute care to a transitional care unit within a skilled nursing facility. (4260)
18. Reduce COLA for UC and CSU administration at 3.4% rather than 4%. ($33.8 million): This is a LAO recommendation based on the fact that the governor’s proposed 4 percent COLA is well in excess of the inflation rate. (6440 and 6610)
19. Adjust UC and CSU growth rates to reflect actual figures. ($24.9 million): The governor proposed funding UC and CSU growth at rates considerably higher than actual numbers would justify. This is an LAO recommendation. (6440 and 6610)
20. Raise qualifying GPA for CalGrant B program from 2.0 to 3.0. ($29.7 million): The CalGrant program is supposed to assist students to afford college educations in which they will be able to succeed. A minimum threshold to determine the likelihood of success is a “B” average. (7980)
21. Eliminate general fund support of OPR. ($5.436 million): OPR is a pet office of the governor that duplicates policy analysis that is prov
ided by Executive Branch departments. In practice, the office does little to assist local governments and could easily be downsized or eliminated. (0650)
22. Delay implementation of biomonitoring program for one year. ($3.7 million): This is a new program and could easily be deferred for one year. (4265)
23. Eliminate California veterans cash benefit program. ($5.422 million): This is a state-only program that pays out cash benefits to certain veterans who would qualify for SSI/SSP in California but have returned to the Philippines. California should not be paying cash benefits to individuals who are no longer California residents. (5180)
24. Eliminate the Naturalization Services Program. ($5 million): This program is intended to increase the number of individuals naturalizing. It is a worthy goal, but the responsibility of the individual – not the state. (4700)
25. Rescind the augmentation to the Coastal Wetland Account for maintenance and management. ($5 million): This program has traditionally been funded by interest earned on the fund balance, and that funding mechanism should be continued. (3600)
26. Eliminate general fund support for litigation on climate change both in the Air Resources Board Budget ($1 million) and the Attorney General’s Budget. ($2 million): Litigation on climate change will make no appreciable different on climate change, but have a chilling effect on economic activity. (0820 and 3900)
27. Reverse the 2006-07 marginal cost augmentation for UC and CSU. ($23 million): This was a discretionary augmentation removed and then re-inserted into the budget in 2006. There is no policy justification for this expenditure – and is not even part of the governor’s compact. (6400 and 6610)
28. Rescind Medi-Cal continuous eligibility for children expansion by reinstating quarterly status reporting. ($26.5 million): This option would only dis-enroll children WHO ARE NO LONGER ELIGIBLE to receive Medi-Cal benefits. (4260)
29. Fund CSU pre-collegiate level coursework at the Community College Rate. ($10 million): This is a recommendation that the LAO has made in the past – pre-collegiate coursework should not be paid at collegiate prices. (6610)
30. Eliminate AVID funding. ($9.035 million): School districts can continue this program if they believe it is a high priority with their own discretionary funds. (6110)
31. Require Medi-Cal co-payments. ($34 million): Co-payment amounts would be used to offset Medi-Cal costs and reduce over-utilization. Providers would collect up to $3 from the beneficiary for specific services. No person would be denied care if they could not afford the co-payment. (4260)
32. Rescind the general fund augmentation made by the legislature for Student Aid Commission operations. ($15.4 million): Administrative overhead has traditionally been paid from the student loan operating fund. (7980)
33. Postpone establishment of the Chief Information Officer for one year. ($7.874 million): This is a brand-new office within the executive branch that can be easily postponed without affecting any ongoing programs. (0502)
34. Eliminate augmentation for Access to Justice program. ($2.5 million): Whatever the justification for this program, additional augmentations in a tight budget year are not justifiable. (0250)
35. Eliminate general fund support for African-American Museum capital outlay expansion. ($2.325 million): Capital outlay should be financed by revenue bonds redeemed by private donations and patrons. (1100)
36. Eliminate general fund support for emergency housing and assistance program. ($4 million): Proposition 1C provides for $50 million for homeless shelters supported by EHA. (2240)
37. Freeze CCC funding at last year’s level. ($2.002 million): CCC has undergone considerable expansion in the last several years. It is a worthy program, but has far outstripped the growth of the general government. (3340)
38. Eliminate state-only cash assistance program for immigrants. ($128.3 million): A condition for legal entry and residence into the United States is a pledge that the immigrant will be gainfully employed and will not draw upon government support. This state-only program flies in the face of that pledge, which is why the federal government refuses to fund it. (5180)
39. Reduce County Single Allocation Funding. ($90 million): This is entirely a discretionary augmentation included in the 2006 budget act and continued in 2007-08. (5180)
40. Reduce CalWorks earned income disregard. ($70 million): This proposal will allow CalWorks families to keep $200 and 40 percent of remaining earned income. The state’s earned income disregard policy will still be one of the most generous in the nation. (5180)

I believe there are many other immediate steps the legislature can and should take to further reduce its expenditures, especially considering the economic uncertainties that lie directly ahead, and I will be adding and refining this list as the budget discussions proceed. But whatever combination of solutions is developed, general fund spending cannot safely be pushed above $100 billion.

As I outlined in my speech to the Senate last Friday, the most significant savings are NOT in direct reductions, but in changing the way funds are being spent. I laid out three general approaches that are the most obvious: returning to market-rate wages and benefits for public employees, decentralizing service delivery systems and contracting out services.

These reforms cannot be achieved in a period of just a few days, or even months, as most require detailed reorganizations, contract re-negotiations and constitutional changes. That is why the resolution of the current budget impasse does not end the state’s fiscal difficulties, and why it is vital that immediately following adoption of the budget, the legislature proceed to work on adopting the reforms now that will produce serious savings in the future without compromising core services.


Tom McClintock

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