In fact, the budget plan conforms almost exactly to the governor’s longtime fiscal approach. He wants to fund social programs as much as possible, but not create new, permanent spending programs that cannot be curtailed when fiscal times are bad. He talks repeatedly about frugality, yet his budgets continue to ramp up state spending to record levels. He did set aside $8.5 billion for the rainy-day fund to prepare for any downturn.

Even the governor’s approach to the state’s unfunded pension liabilities is prototypical Brown. The governor speaks regularly about the size of the state debt to pay for pensions and retiree medical programs, but he typically addresses the problem with small-scale solutions that trim debt levels without antagonizing state workers and the unions that represent them.

This particular deal would borrow money from a state fund that pays a low interest rate, and pay down some of the state’s pension debt by investing it with the California Public Employees’ Retirement System, which predicts a fairly high rate of return (7 percent). Brown says this plan will save the state $11 billion over the next two decades simply because of the difference in interest rates. 

In terms of spending, the budget uses $1.2 billion in new revenues from the state’s recently passed tax increase on tobacco to help pay for growing costs to Medi-Cal, the state health program for low-income residents. But about half of those new revenues will be earmarked to health care providers and to family-planning entities like Planned Parenthood. It expands spending on the state’s K-14 educational system.

The budget also expands spending for both of the state’s university systems (the University of California and California State University), but the nearly $300 million combined in increased higher education spending comes with some conditions. The plan withholds $50 million from the University of California until the Office of the President fulfills the recommendations made earlier this year by a state auditor. It also requires California State University officials to “find space for students denied entry to their preferred campus or program,” according to the Sacramento Bee.

The budget increases spending on subsidized affordable-housing programs by $400 million. The budget also will allow more people to take advantage of the state-level Earned Income Tax Credit. Under new criteria, low-income people earning up to $22,000 a year will qualify for state EITC payments, up nearly $8,000 from previous standards. The new eligibility standards also apply to people who work for ridesharing companies or are involved in other forms of self-employment, according to various news sources. The budget doesn’t include an extension of the cap-and-trade system, although the system is likely to be extended in separate legislation.

Furthermore, the budget spends $100 million to set up a new agency to deal with the legalization of recreational marijuana sales, including the creation of a tax office along the Redwood Coast in the heart of marijuana-growing country.

The whole budget, which includes all spending (from bonds, etc.) totals $183.2 billion. But the biggest controversies are not around the amount of money the state will spend. The Legislature used the trailer-bill process – normally reserved for technical amendments to budget matters – to pass some controversial, nonbudget-related matters.

For instance, Democrats are fighting a recall measure against state Sen. Josh Newman of Fullerton. Republicans targeted him because of his vote on the recently passed gas-tax increase. One trailer bill in the budget would extend the timelines for the recall, making it more likely that the election would be put on a regularly scheduled ballot timeframe that would be more favorable to the Democratic incumbent. Another trailer bill would reduce the power of elected officials in the state Board of Equalization, a tax board. Yet another creates new dam-safety rules, following problems at the Oroville Dam spillway last winter.

Still, what Democrats described as responsible drew some rebuke from Republicans, who note that general-fund spending is nearly $40 billion higher in this budget than it was six years ago. Balanced and progressive or out of control? It depends on which side of the aisle one sits on. But everyone at least agrees that it’s basically in balance.

 Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Created to make California’s tax system work better, the Board of Equalization has found itself under a cloud of radical criticism, plunging it into a moment of extraordinary crisis. 

“At a chaotic budget hearing for an agency that collects a third of California’s taxes, two lawmakers said late Wednesday they don’t believe the Board of Equalization can be trusted to fix the accounting deficiencies and misuse of public resources that a recent audit described,” the Sacramento Bee reported. 

“I have no faith in the organization to adopt practices,” railed Assemblyman Phil Ting, D-San Francisco, who chairs the Assembly Budget Committee, according to the Bee. “You can adopt all the policies you wish. But I have zero faith that you will practice your polices because you have not demonstrated that.” His remarks, the paper added, “came at a meeting in which the Board of Equalization’s executive director refused to answer questions because he said he feared a lawsuit, Ting asked five state employees whether they leaked a copy of a critical audit to The Sacramento Bee and Ting read an anonymous email that accused the agency’s top lawyer of misleading him during the hearing.”

Official sanction

The heated controversy came to a head this month in the wake of a devastating state administrative report showing bad accounting of nearly $50 million in funds. “Citing a review that found widespread mismanagement at the state Board of Equalization, State Controller Betty T. Yee […] called for stripping the panel of responsibilities for tax administration and audit and compliance functions so it can focus on handling taxpayer appeals,” the Los Angeles Times explained. “Yee’s proposal came in response to an evaluation by the state Department of Finance that found board officials were improperly redirecting resources and employees to pet projects in their districts.”

According to the investigation, conducted by the department’s Office of State Audits and Evaluations, “concluded the elected tax board members are violating the California Budget Act, which requires that they get approval from the Department of Finance and notify lawmakers before they move revenue-generating staff such as auditors to other duties,” Bloomberg BNA reported. “The tax board also doesn’t keep track of staff hours or calculate the amount of lost revenue resulting from employees being redirected.”

“The violations skew the required information the board must provide to lawmakers under the Budget Act each year about costs and lost revenue collections due to those reassignments, the auditor said. Without accurate information about staffing, the Legislature can’t assess the effectiveness of the SBOE’s existing compliance efforts or be sure the tax agency’s cost-benefit ratios are accurate, the audit said.”

A tightening circle

The Board has weathered sharp criticism before, especially in recent years. But this time, few if any outside the Board itself have offered much of a defense. “In the 1990s, Gov. Pete Wilson, facing budget deficits, sought to merge the board with the Franchise Tax Board,” as the Fresno Bee editorial board noted. “Gov. Arnold Schwarzenegger took office in 2003 promising to blow up the boxes, and took aim at the tax boards. And yet the Board of Equalization survives because many legislators, thinking about the next election, hesitate to abolish an office that pays $142,577 a year.” 

For the Board, today’s trouble began in earnest two years ago, when heightened scrutiny from Sacramento began to close in. “Although the board was dinged in November 2015 when an audit by Yee’s office found that it mistakenly sent $47.8 million in sales tax revenue to the state’s general fund, the Finance Department’s newest audit revealed that the board has done little since then to stanch the bleeding,” Courthouse News observed. “The board is still struggling with its accounting, having revised its proposed allocation adjustment 11 times to correct for errors and omissions,” the site added. 

The saga of Gov. Jerry Brown’s budgetary labors has taken an unexpected twist, potentially triggering an all-but-forgotten provision designed to funnel money back to taxpayers. 

In 1979, taxpayer advocate Paul Gann spearheaded a ballot measure designed to place a curb on Sacramento spending by requiring rebates at a certain level of state spending. “Subsequent voter-approved changes to the limit have made it a fiscal afterthought for the past quarter-century,” as the Sacramento Bee noted. “Yet a recent report by the nonpartisan Legislative Analyst’s Office contained breaking news in the complex world of government budgets: Brown’s January proposed budget wrongly excludes $22 billion from total spending subject to the limit, and after accounting for the money, state government is as close as it’s been in decades to exceeding the threshold.

“The report creates the prospect of upended spending priorities or even the first taxpayer rebates in 30 years. And if lawmakers stick with the governor’s methodology, the state would be ‘highly vulnerable’ to a lawsuit, in the analyst’s view.”

Entangled budgets

Among the bills that were vetoed at that time were two that would have repealed sales taxes on diapers and tampons. Both measures passed unanimously, but the governor wanted to assure that new spending-related measures didn’t lead to deficits. So the authors of those two measures are back again this year – but this time they are addressing the revenue issue.

The Common Cents Tax Reform Act, Assembly Bill 479, would “exempt diapers, tampons, pads and other basic necessities from California’s sales tax,” according to a statement last week from its authors. The February version of the bill would have exempted sales taxes from the sale, storage and use of various physician-prescribed medicines, but was amended to target diapers and feminine products.

To deal with the governor’s concerns, its co-authors (Assembly members Cristina Garcia, D-Bell Gardens, and Lorena Gonzalez Fletcher, D-San Diego) want to raise taxes to offset the tax cut. The bill would increase the excise tax by $1.20 per gallon on hard liquor that is 100 proof and and by $2.40 a gallon for liquors that are more than 100 proof.

They estimate the tax increase will add about 1.5 cents per gallon to the typical hard-liquor serving and say that it’s a modest increase, but the tax rate would be boosted by more than 36 percent – raising it from $3.30 a gallon to $4.50 a gallon. The state’s excise taxes, however, would remain the same on the sales of beer and wine.

“Common sense is that liquor is a choice and a luxury and human biology is not,” said Garcia, who authored the tampon-tax bill last year. “There is no happy hour for menstruation. Our tax code needs to reflect the fact that it’s not OK to tax women for being born women.” Gonzalez Fletcher, who had authored the diaper-tax measure, depicted the matter as one of “babies over booze.” Because the bill requires a tax increase, it will need two-thirds supermajority support in the Legislature.

But opponents of the legislation caution against using the tax code to favor some goods over others. “Taxing drinks to reduce the taxes on other consumer goods is folly – not least because retailers will mark up diapers and feminine care products to their current price,” said Kevin Kosar, a senior fellow of the R Street Institute in Washington, D.C., and author of the 2016 book, “Moonshine: A Global History.”

“Drink taxes should only cover the social costs they produce – not expenses attributable to normal bodily functions like defecation and menstruation,” he added. “What’s next – taxing drinks to pay for toilet paper and fingernail clippers?”

This is likely to become a partisan issue. Some California Republicans supported previous efforts to reduce taxes on diapers and tampons, figuring any tax reduction is a good thing. Likewise, many Republicans generally took issue with the governor’s statement equating tax cuts as spending. If a cut is the same thing as a spending hike, then it implies the government – rather than individuals – is the steward of all income. But they appreciate Brown’s insistence the budget remain balanced, which means any diversion of revenue has to be made up somewhere else.

California Democrats are jumping on a national “gender equity” campaign designed to reduce the prices of feminine products and other necessities. For instance, the Washington Post reported that New York’s Democratic Gov. Andrew Cuomo last year signed a law exempting sales tax from tampons and Washington, D.C.’s Democratic mayor signed a law that also removes the tax from diapers. Cuomo blasted the tax as regressive – meaning it hurts the poor the most – and called it a “matter of social and economic justice.”

Assembly Bill 479 isn’t the only recent effort to rearrange the tax code to favor in a targeted manner. “The Teacher Recruitment and Retention Act of 2017,” introduced by Democratic state Sens. Henry Stern, D-Agoura Hills, and Cathleen Galgiani, D-Stockton, would exempt public-school teachers from paying state income tax on their teacher salaries if they stay in the field for at least five years. The goal is to address a shortage of classroom teachers.

The diaper/tampon exemption would be revenue-neutral because of the corresponding booze-tax increase, but the teacher exemption is estimated to cost more than $617 million a year. Although the state’s highly progressive tax code already is filled with special privileges for some and higher tax rates for others, critics worry that this new spate of tax exemptions could spark a frenzy of similar bills, and the slow expansion of state tax exemptions from one favored group to another.

When Gov. Brown vetoed seven tax bills last year, he noted that their cumulative effect would be to reduce revenues by around $300 million. He cautioned about cutting such revenues “when the state’s budget remains precariously balanced.”

Although there’s disagreement on the likelihood of new deficits, there’s little question that California’s budget remains as precarious as ever. That gives the teacher exemption a huge obstacle – but it’s unclear what the governor might do if AB479 passes now that supporters of the tampon and diaper exemptions identified a tax hike to make up for lost revenue.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Some Californians have long complained of their state’s status as a so-called “donor state” — one that sends more money to Washington than it receives. But as political tensions with the White House have heated up, and some federal funding put in play, at least rhetorically, analysts have crunched the numbers, shedding fresh light on the relationship between Sacramento and the nation’s capital. 

Hard to untangle

California’s Legislative Analyst’s Office, an independent body, “has pored over the data to calculate a number that is the monetary essence of California’s relationship with the United States,” the Los Angeles Times noted. “And what a number it is: The federal government spends some $367.8 billion a year on California. That’s an average of about $9,500 for every woman, man and child in the state.”

“In truth, the money isn’t spread out evenly. About 56 cents of every federal dollar spent in California, according to the analysis, goes to health or retirement benefits — Social Security, Medicare and money for low-income residents’ health care through the Medi-Cal program. Defense contracts are the next biggest slice of the pie, followed by paychecks to military and civilian government employees. From there, federal spending gets sprinkled among a number of programs run by the state government.”

The question of what Californians put in, however, has grown complicated over time. “Part of the difficulty stems from the tangled web of money that flows between individuals, the state and the federal government,” as the New York Times observed. “Perhaps the most cited figure comes from the Tax Foundation, a conservative group that found Californians got back about 78 cents in services per federal tax dollar paid in 2005. Other tallies have been higher: between 91 cents and $1.06 on the dollar, according to the Times. 

Limited authority

Although the widening political gulf between the White House and leading California Democrats spurred the interest in recalculating what taxpayers receive, experts have cautioned that even a battle of wills with Washington won’t likely result in a freeze on federal cash. “Key court decisions restrain the federal government’s ability to put coercive strings on funding,” the Sacramento Bee recalled. “Some Republican as well as all Democratic lawmakers would object on behalf of their California constituents. And with upward of $67 billion in federal grants being funneled to the state annually, picking and choosing would quickly get complicated.”

“The Supreme Court, for one, has at times been skeptical about the federal government attaching conditions to funding. In a much-discussed 2012 decision on the Affordable Care Act, Chief Justice John Roberts Jr. wrote that the law had gone too far when it effectively threatened states with losing federal Medicaid funding if they didn’t expand their Medicaid programs to low-income adults.”

Sizing up cutbacks

At the same time, however, the prospect of additional federal grants in at least one controversial area have come under attack from within the state itself. “In a letter to Transportation Secretary Elaine Chao, California’s 14 Republican members of Congress asked that the administration block $650 million in federal grants the state wants to use to electrify a portion of commuter rail that runs between San Francisco and San Jose,” The Hill reported. “Republicans said the money, which would come on top of more than $3.5 billion in federal funding already granted for construction costs, would be wasted.” 

“The Obama administration provided billions in grant funding through the 2009 stimulus package and an omnibus appropriations measure in 2010,” the site noted. “California voters approved a nearly $10 billion bond to fund the project in 2008. But since the high-speed rail system was first proposed, costs have ballooned, from about $33 billion to more than $60 billion.”

Republicans have also eyed another place to pare back politicized funds. “Rep. Duncan Hunter, R-Alpine, won’t request federal funds in the coming fiscal year for states, cities and universities that have a policy to not comply with enforcement of federal immigration laws,” according to a statement cited by the Los Angeles Times.

A handful of California cities, like Los Angeles and San Francisco, have so-called “sanctuary” policies, which prompted the federal action. And in a statement of defiance, Senate President Pro Tempore Kevin de Leon said he would fast track his bill to make California a sanctuary state. 

“(T)he Senate will expedite the process to pass my bill, SB54, to prevent state and local tax dollars and law enforcement resources from being used to help ICE destroy families and damage our economy,” the Los Angeles Democrat said. 

But even as Democratic leaders strongly push to protect the sanctuary policies, the public is split. A Hoover Institution poll from earlier this month showed that 40 percent of voters support sanctuary policies, while 41 oppose (19 percent didn’t seem to care either way). 

De Leon called the move “unconstitutional” and said the state would fight Trump in Congress and in court.  

The money is not insignificant. For example, Los Angeles is slated to receive $523 million this year in federal funding, while the state will receive around $95 billion. 

California’s attorney general, Xavier Becerra, said in a statement that the executive orders don’t change, and cannot contradict, existing law.

“Executive orders can be challenged for violating constitutional and legal standards in their enforcement,” Becerra said.

While a legal battle could take years (perhaps beyond a Trump presidency), the stage may be set for funding fights in Congress. 

De Leon’s bill will be heard next week in committee. 

The bad news: Providing certain health care services just became way more expensive for the counties. 

The Brown administration is ending a program that coordinated care for seniors and low-income families because it was no longer cost effective. As a result, the state will save $626 million this year, forcing counties to pick up the check. 

The Coordinated Care Initiative allows Californians who are eligible for both Medi-Cal and Medicare to “receive medical, behavioral health, long‑term services and supports, and home and community‑based services coordinated through a single health plan,” according to the budget document released Tuesday. 

But the law allows the Department of Finance to end CCI if it is deemed no longer cost effective. Federal regulations requiring in-home caregivers to receive overtime after 40 hours per week drove the cost of the program up with the minimum wage hike.

Last year, state analysts estimated the plan to gradually increase the minimum wage to $15 per hour would cost the state $4 billion by 2021. Cutting the CCI program will lower the state’s burden to $2.6 billion, according to a Department of Finance official. 

Cutting the program will shift the labor costs onto the counties, which is estimated to cost more than $4.4 billion over the next six years, according to the California State Association of Counties. 

 “This would be devastating to counties all over the state,” CSAC President and Alameda County Supervisor Keith Carson said in a statement. “We undoubtedly would have to make cuts in other vital social services to cover these costs.”

The budget showed a $2 billion deficit — modest by historical standards, but worthy of the lawmakers’ attention — caused by an increase in government programs over the last few years and lagging revenues.

Brown said he didn’t want to “repeat mistakes of the past,” recalling the days of the state’s budget crisis. The proposed budget showed approximately $8 billion in the Rainy Day Fund by the end of 2017-18, which is 63 percent of the constitutional target, which Brown said was bigger than it seemed as he called for greater savings now. 

Independent analysts, as well as Brown’s budget experts, have cautioned against the state’s over-dependence on the wealthiest residents to fund the government. Brown lauded the state’s “progressive” tax system, where people with the most pay the most. But he said it also requires prudence.

“It doesn’t make sense to pretend we have money when we really don’t,” Brown said. 

Trump 

Recently, many prominent Democrats staked out positions as Trump antagonists, in interviews and even with the Legislature’s hiring of former U.S. Attorney General Eric Holder. Brown took a more measured approach by saying money wasn’t moved around to certain areas in anticipation of Trump, but left the door open for the May budget revision.

Brown seemed confident that the Affordable Care Act, which has expanded coverage to millions of Californians, wouldn’t go anywhere, noting that any repeal-and-replace proposal would have to get Democratic support in the Senate and that cutting health care for millions of people would be political suicide for Trump. 

Transportation and housing 

In response to the ongoing infrastructure funding woes, Brown proposed a “road improvement charge” of $65 per vehicle. In other car-related news, the gas tax will increase 2.1 cents per gallon automatically. 

As for housing, one of the other major unresolved issues facing the state, Brown proposed to re-appropriate an unused $400 million in funding for housing that was set aside in the last budget.

The budget does send $3.2 billion to local municipalities for affordable housing projects, but Brown said more needed to be done to spur housing development by cutting red tape, cutting delays and cutting “whatever expenses we can do without.”

“We have to bring down the cost structure of housing, not just subsidize,” Brown said.  

The report, released by the non-partisan Legislative Analyst’s Office on Wednesday, identified three areas of concern. First, LAO writes the administration’s strategy “lacks basic information necessary to determine its merits, including its costs, benefits, and potential alternative approaches.” 

Second, the LAO noted the administration’s insistence on using a particular funding process that allows “the administration to establish and fund projects without legislative approval” greatly reduces legislative oversight. 

The LAO also called the construction and renovation plan “ambitious,” adding it was already behind schedule and that it is likely to become increasingly more expensive.

The LAO recommended the Legislature call for a “robust analysis” of the administration’s strategy, to closely monitor the $1.3 billion expenditure for 2016-17 and to push for further appropriations to be made through the budget process. 

“We believe these recommendations would help ensure that the state has the information it needs to move forward with the best available strategy for addressing its buildings in the Sacramento area and that any funds provided are spent with adequate legislative oversight and accountability,” wrote Helen Kerstein, an LAO analyst. 

The administration’s plan provided “badly needed” funding for the modernization effort, to maximize energy and water efficiency, to strengthen security and to make the buildings ADA compliant, said an administration spokesman. 

“We look forward to working closely with our colleagues at the LAO and within legislative leadership to make this effort a success and ensure the highest possible degree of transparency and accountability in how these projects are executed,” Brian Ferguson, a deputy director at the Department of General Services, told CalWatchdog on Thursday. 

The LAO warned that the stock market fluctuations and other “volatile and unpredictable” economic factors make it difficult to project the state’s finances too far out. Regardless, the LAO estimates that the state would be fine through 2020-21. 

The projections would change with any new obligations, both at the state and federal levels.

Gov. Jerry Brown has been quick to veto new spending or tax cuts that aren’t paid for, like the ill-fated effort to remove sales tax on tampons and other feminine hygiene products, but the impending negotiations on transportation issues may call for new spending. The LAO also pointed to the possibility that a new president and Republican-controlled Congress may change federal policies that affect that state’s budget.

“Any such state or federal policy changes could have a significant impact on the state’s ‘bottom line,'” wrote the LAO.