California taxpayers awaiting refunds could receive IOUs rather than checks this year if state lawmakers are unable to balance the budget soon.
The state is projected to run out of cash sometime in February if no agreement can be reached regarding how best to balance the budget, say finance experts.
After months of failed negotiations with legislators, Governor Schwarzenegger released his own plan to address the projected $42 billion deficit.
The governor has described his plan, which has been in the works since December, as a “four-legged stool“ designed to reduce spending, increase revenue, provide economic stimulus and make government more efficient.
Largest and most controversial of the four legs is to cut spending by $17.4 billion, which would come mainly from education, health and human services and prisons.
Such a huge hit to essential services has attracted critics, but has been deemed necessary in light of what California Department of Finance Director Mike Genest has called “the most challenging budget situation this state has ever faced.“
In a press conference to discuss the governor’s budget proposal, Genest estimated that the public school system would need to make a mid-year spending reduction of $2.1 billion, only part of which will come from an optional five-day shortening of the school year.
Higher education will be hit hard as well. According to a summary of major budget changes released by the Department of Finance, University of California and California State University funding would be increased slightly overall for the 2009-2010 fiscal year, but with one-time fund reductions of $209.9 and $217.3 million, respectively.
Much of the burden will be placed on increased student fees, which are expected to increase from $7,126 to $7,788 for UC undergraduates.
Even without the funding sought by UC regents for 2009-2010 to fund enrollment growth, cover inflated energy and operating costs and prevent increased fees, UC President Mark G. Yudof said in a written statement that the outlook is not entirely bleak for UC.
“The budget avoids dramatically deeper cuts from present levels for the university’s core academic operations,” Yudof said. “I believe these actions signify the governor’s understanding of higher education’s role in stimulating the economy.“
The governor’s plan also seeks to increase revenues by $14.3 billion, most of which would come from a three-year 1.5 percent sales tax increase.
Applied for the first time to services such as greens fees, repair services (appliance, vehicle and furniture) and veterinary services starting Feb. 1, the sales tax would also apply to tickets for amusement parks and sporting events beginning Mar. 1.
Other proposed increases in taxes and services include an oil severance, taxed at 9.9 percent per barrel of oil pumped, a $12 vehicle registration fee increase, an alcohol excise tax and a dependent tax exemption credit cut from $309 to $99.
All of these indicate even tougher financial times ahead for Californians.
“Everybody thinks that a recession is a bad time to raise taxes, but on the other hand, we have to look at our actual options,” Genest said. “We can’t spend more than we have. The reality is, the problem is so large that every single tool that we can use is going to have to be brought to bear and that does include tax increases.“
Though Republican legislators have until now refused to increase taxes and have not been present in recent budget negotiations, the sales tax increase and budget bills included in the governor’s plan will require a two-thirds vote of the Legislature.
Calling for a bipartisan effort, Schwarzenegger in a press conference last week asked Republicans and Democrats to put their politics aside and help the state avoid a financial disaster.
“In a matter of weeks California, which is the eighth largest economy in the world, will run out of cash and start issuing IOUs to the people that it does business with,” Schwarzenegger said. “Also, it will delay refunds to our hardworking taxpayers … I think they deserve better than that.”
The final part of the proposal seeks to realize additional savings by streamlining government agencies.
For example, by eliminating redundant departments in charge of recycling, IT and energy across several agencies the government could shed as many as 220 board positions worth upward of $150 million, said Victoria Bradshaw, the governor’s cabinet secretary.
Also under consideration are changes in state employee and retiree health care, which would allow the state to negotiate directly with plan providers rather than through an intermediary.
“One of the obligations of the government is to make itself efficient, to cut costs where appropriate, [and] to eliminate redundancy,” Bradshaw said. “It’s equally important now, when we’re asking both the taxpayer and the citizens to make sacrifice in light of the economy, that we also look internally again.“
Legislators and the governor have until February to find a solution to the budget gap before the state is forced to start issuing IOUs.
AARON BRUNER can be reached at firstname.lastname@example.org.