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THE NOONER for May 3, 2013

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On the road again...speaking of that, the Capitol Connection podcast is up for those of you who need to load up your iPod for the drive to the annual AT&T fundraiser for Democrats in Pebble Beach.

At least I will be delivering good news to our community college trustees this weekend. After all, the state likely ended March roughly $4.8 billion above budget projections, with $4.5 billion of that attributable to personal income tax. Of course, all of this gravy came in during the month of January, and the champagne corks flying in Sacramento this month were to celebrate the state meeting budget projections.

The LAT's Chris Megerian takes a look. Another interesting article today is Peter Burrows's article about why Apple just borrowed $17 billion for its stock buyback rather than use its $100 billion in cash. The answer: most of that cash is overseas and would incur a 35% tax rate, costing $9.2 billion, rather than the rock bottom interest rate under which the company was able to access cash.

Anyway, I'll let those of you who want a lighthearted Friday Nooner, take a break from partisanship and feel free to jump to the headlines while I dive into the budget and Proposition 98 outlook as we approach the May revision of the governor's proposed budget (due May 14). Budget geeks, continue with me after the jump. 

 

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**CLASSIFIEDS**

  • Capitol Weekly and UC Center present a conference on Online Gaming - May 7, 2013 in Sacramento. Register here.
  • California League of Bond Oversight Committees: Second Annual CaLBOC Statewide Conference - May 10, 2013 in Sacramento - Keynote speakers Bill Lockyer and Assemblymember Joan Buchanan - More info and registration
  • Join Mayor Christopher Cabaldon, Councilman Steve Hansen, Supervisor Phil Serna, the Rev. Faith Whitmore and Dr. Claire Pomeroy as they are honored as recipients of Four Freedoms Awards at the Sacramento Stonewall Democrats' 9th Annual Gala, Wednesday, May 15 at the Red Lion Hotel Woodlake Conference Center, Sacramento. Purchase tickets @ www.sacstonewall.org/events/4freedoms2013.

 

MO MONEY, MO PROBLEMS

This is somewhat of a rehash of my writing last Thursday in talking about the governor's proposed Local Control Funding Formula, but the month is now over, and we can go a bit deeper. Sorry if it's too technical for a Friday.

The revenue story of April was therefore evidence that the $4.9 billion in extra personal income taxes (PIT) in January wasn't an acceleration of what normally would come in during April. However, it's still very likely that a significant portion of the above projection PIT in January were payments based on one-time or accelerated income.

Taxpayers, particularly high-income earners and those with more control over their earnings, took action to realize income in December rather than 2013 because of the uncertainty surrounding federal tax rates. In the end, capital gains were raised from 15-20% for high income earners (over $400k for individuals) and PIT rates were increased from 35% to 39.6% for individuals with income over $450,000. Proposition 30 was retroactive, so the increased rates on those with incomes greater than $500,000 applied to both the 2012 and 2013 tax years.

Thus, the biggest challenge for budget forecasters will be identifying what share of the extra January PIT revenues were one-time occurrences, and there's no simple way to do it. In fact, much of that money that was withdrawn from the investment economy to pay the lower 2012 rates is probably working capital again, and with the robust stock market, willl likely have additional taxable events in 2013-14. High income earners hate taxes, but also hate to have money sitting on the sidelines.

Now, what is the budget impact of this revenue analysis? Well, depending on the characterization of the revenue, the state's requirement for spending on K-12 and community colleges could be radically different--and possibly even lower in 2013-14 than proposed by the governor!

The Legislative Analyst's Office recently provided these scenarios to the California Association of School Business Officers. This was before the April revenues were seen, but it's still largely applicable.

These scenarios are significant, whether or not you are on the Proposition 98 side of the house.

 

Governor's Proposed Proposition 98 Budget:

  • 2012-13: $53,541 (+$6.5b from 2011-12)
  • 2013-14: $56,200 (+$2.7b from 2012-13)

 Scenario 1: Significant January spike in revenue is one-time

  • Total State Revenue (change from January estimates):
    • Up $500 million in 2011-12
    • Up $4.2 billion in 2012-13
    • Down $3.2 billion in 2013-14
  • Proposition 98:
    • 2012-13: $57.4 billion - up $3.8 billion from Governor's proposed budget
    • 2013-14: $54.4 billion - down $1.8 billion from Governor's proposed budget 

 Scenario 2: Moderate January spike, with some ongoing effects

  • Total State Revenue:
    • Up $500 million in 2011-12
    • Up $3 billion in 2012-13
    • Up $500 million in 2013-14
  • Proposition 98:
    • 2012-13: $56.2 billion - up $2.7 billion from Governor's proposed budget
    • 2013-14: $56.5 billion - up $300 million from Governor's proposed budget 

 

 Scenario 3: Most of the January spike in revenue is one-time

  • Revenue:
    • Up $600 million in 2011-12
    • Up $4.4 billion in 2012-13
    • Up $2.5 billion in 2013-14
  • Proposition 98:
    • 2012-13: $57.6 billion - up $4.0 billion from Governor's proposed budget
    • 2013-14: $57.7 billion - up $1.5 billion from Governor's proposed budget 

 

I am no economist. However, based on what I'm seeing in the underlying economy, Scenario 3 is seeming the likeliest. In that scenario, a little more than half of the additional 2012-13 revenues would be expected to repeat. Of course, in a year with "normal" budget analysis, virtually all personal income tax revenue would be expected to repeat (and inflate by the growth number, with was last projected as 4.1% in 2013).

Thus, if we take Scenario 3, there would be roughly $7.5 billion in new state revenue, of which $2.5 billion would be ongoing and $5 billion one-time. Of this, K-12 and community college spending would eat up all but $ $2 billion of the new revenue and, more importantly, all but $1 billion of the new ongoing revenue. 

(This is an interesting spot to note that June is the third highest month for PIT collections, behind April and January. In the days of late budgets, projecting revenue was easier because June frequently could be taken into account. That's no longer the case, with Prop 25's requirement for a balanced budget to be approved by June 15.)

This will be the political challenge. Even if we take the most optimistic revenue scenario, there will be little ongoing revenue for program restoration, inflationary adjustments, and growth in programs from health and human services, higher education, and state employee compensation. Further, as I wrote last Thursday, there may not be enough money to get the education community to buy off on the governor's new school funding formula (some have suggested it would require an additional $5b--ongoing).

This will put pressure on the Legislature to characterize more of the money as ongoing to feed the hungry mouths. However, with the 2000s as a lesson and a compact with the voters to "fix" the state budget, Governor Brown can be expected to resist creative treatment of the revenues.

Having money to spend in the budget is a nice problem to have, but don't think for a moment that it makes the budget politically easier to put together.

 

 

TOP HEADLINES ON AROUNDTHECAPITOL.COM AS OF 12:00PM
Brown Says More Prison Releases Require Legislature To Act
Denny Walsh @
sacbee.com
The Brown administration told a federal court Thursday night that to further reduce inmate prison population the Legislature would have to agree to dramatically restructure the laws governing California's corrections system.

DWP Union Fights Salary Release; Mayoral Candidates Trade Blame
Jack Dolan, Kate Linthicum and Maeve Reston @
latimes.com
As lawyers for the Los Angeles Department of Water and Power employees’ union fine-tune a proposed lawsuit to delay release of their members' names and salaries, both candidates for mayor are calling on the department to make the information public as soon as possible.

Governor: Court Prison Order Neither Feasible Nor Safe
John Myers @
news10.net
In court documents just before the stroke of midnight, Gov. Jerry Brown argues that nothing short of the early release of violent criminals would fully meet the 2013 prison population target of federal judges... a mandate which Brown's team says they hope to avoid through a new appeal to the U.S. Supreme Court.

California Tax Revenue Yields Multibillion-Dollar Surplus
Chris Megerian @
latimes.com
State coffers contain about $4.5 billion more than expected in personal income tax payments. Business taxes have also rebounded, signaling an economic recovery.

California Governor Says Inmate Numbers Cuts Sufficient
Michael B. Marois & Karen Gullo @
bloomberg.com
California Governor Jerry Brown, under a federal court order to reduce prison rolls, laid out a plan to slash the number of inmates more than he already has while telling judges he is reluctant to take the steps.

Former Assemblywoman Bonnie Garcia To Run For State Senate
Torey Van Oot @
blogs.sacbee.com
Former Assemblywoman Bonnie Garcia is looking to return to the Legislature.

Probation Arms More Of Its Officers To Cope With Realignment
Christina Villacorte @
dailynews.com
Since Gov. Jerry Brown began enforcing a U.S. Supreme Court mandate to ease unconstitutional overcrowding at state prisons in October, the county Probation Department has found itself watching over more violent criminals than ever before - 499 "very high risk" and 7,197 "high risk" AB 109 offenders as of March 29, according to Supervisor Michael Antonovich.

Assemblyman's Home Threatened By Southern California Fire
Melody Gutierrez @
blogs.sacbee.com
Assemblyman Jeff Gorell is hurrying home from Sacramento after his wife and two children were evacuated from their Camarillo Springs home, which is being threatened by a Southern California brush fire.

State Prisons Chief Calls Plan To Reduce Crowding 'ugly'
Chris Megerian @
latimes.com
SACRAMENTO -- Jeffrey Beard, secretary for the California Department of Corrections and Rehabilitation, said the court-ordered plan filed by the Brown administration Thursday night to reduce prison crowding would force the state to take measures he and other officials do not support while still failing to meet the population cap demanded by federal judges.

Apple Avoids $9.2 Billion In Taxes With Debt Deal
Peter Burrows @
bloomberg.com
If the funds had come from Apple’s offshore cash pile of about $100 billion, the Cupertino, California-based iPhone maker would have had to pay a 35 percent tax to repatriate the money, Granovsky said. That means Apple avoided about $9.2 billion in taxes. And since interest payments are tax-deductible, that’s another $100 million a year, Granovsky said.

Prisons Chief Calls Court-ordered Plan 'unnecessary And Unsafe' - Capitol And California - The Sacramento Bee
sacbee.com
An ambulance leaves California State Prison-Sacramento followed closely by a van carrying a corrections officer.

States Try To Tackle 'Secret Money' In Politics
Matea Gold @
latimes.com
With campaign donations up and a lack of federal action, states are working together in a joint effort to lift the shadows on tax-exempt political advocacy groups and trade associations.

Tribal Casino: Inland Tribes Lose Assembly Vote
JIM MILLER @
pe.com
The Pechanga Band of Luiseno Indians near Temecula and the Morongo Band of Mission Indians near Cabazon are among the critics of the pact that allows the North Fork Rancheria of Mono Indians to open a casino with 2,000 slot machines along busy Highway 99, miles from its remote reservation.

Calif. official tapped for Conn. Regents president
utsandiego.com
The search committee for Connecticut's Board of Regents for Higher Education is recommending the chancellor of a California community college system as the board's new president.

Calif. May Speed Inmate Releases To Ease Crowding
Don Thompson @
mercurynews.com
California may speed up the release of some inmates while allowing other inmates with a violent history to become firefighters, under a proposal to cut crowding in state prisons filed by Gov.

North Fork Casino Compact Passes Assembly
Jeremy B. White @
blogs.sacbee.com
California's North Fork Rancheria Band of Mono Indians is a step closer to getting a casino after the Assembly narrowly ratified a gambling compact on Thursday morning.

Kaiser hospital workers vote to keep their union
Sandy Kleffman @
mercurynews.com
Rivalry between two unions affects more than 45,000 health care workers statewide

Barbara Boxer Talks Tough About Her Bill To Label Genetically Engineered Foods
Josh Richman @
contracostatimes.com
Despite last years defeat of Proposition 37, Sen. Barbara Boxer says the time is ripe for her "right to know" bill that would require labeling of genetically engineered foods.

California Senate Approves Protections For Minors On Internet
Patrick McGreevy @
latimes.com
Despite opposition from Internet firms including Facebook and Google , the California Senate on Thursday approved legislation that would require social networking sites to remove identifying information about teens and younger children from their pages if their parents request it.

UC Berkeley Jumps Ship, Will Leave Uc-run Student Health Plan - San Francisco Business Times
liner @
bizjournals.com
This was printed from San Francisco Business Times

DWP Union Sues To Stop Release Of Salaries - La Daily News
dailynews.com
The union representing workers at the Department of Water and Power filed a lawsuit against the agency this week, seeking to block the release of employee salary information.

Jerry Brown Offers Early Releases, Private Prisons To Ease Crowding
Paige St. John @
latimes.com
SACRAMENTO -- Gov. Jerry Brown's office late Thursday produced a court-ordered plan to reduce prison crowding that includes the early release of elderly inmates and the relocation of thousands of offenders to private lockups or state fire camps, among other measures.