Erik Bruvold, President of the National University System Institute for Policy Research.
Murtaza Baxamusa, Secretary-Treasurer, Middle Class Taxpayers Association-San Diego
CAVANAUGH: This is KPBS Midday Edition. I'm Maureen Cavanaugh. It's Tuesday, May 15th. Our top story on Midday Edition, Jerry Brown released his May revise of the state budget, and it contains some very bad news for services in California. The state received less in revenue than it expected, and some change cuts approved earlier this year were thrown out by federal court. So instead of facing a $9 million budget deficit, the governor says the deficit has grown to nearly $16 billion. My guests, Eric Ruvald is president of the national university system institute for policy research. Welcome to the program.
RUVALD: Good to be work.
CAVANAUGH: And Murtaza Baxamusa is is secretary treasure of the U.S. taxpayers' association of San Diego.
BAXAMUSA: Thank you for having me.
CAVANAUGH: What happened to the expected revenues? We've been told the economy is improving. How could the projections have been so far off?
RUVALD: Last summer, the state legislature and the governor put together a plan that was two parts fairy dust, and one part superglue. If we look at the revenue projections that were made last summer, everybody realized that they were overly optimistic. There were a set of cuts that involved agreement at the federal level, and those failed to materialize. And then the superglue is the constrains tthat we've put on the state budget for years, the voters, this isn't the legislature, this is us, who have said that there are certain revenues that have to be dedicated for particular purposes. So the government has had very little flexibility on how to deal with these crises. So I think everybody expected that the May revise would be bad, it was, and the choices that really needed to be made last summer are going to have to come home in this fiscal year.
CAVANAUGH: Let me go back just a little bit. In San Diego, we've heard that the City of San Diego projects a budget surplus in part because of increased tax revenues. Why didn't that happen for the state?
RUVALD: Well, the state relies, and we can get into this in greater depth when we talk about the initiatives, but the state's revenues are largely independent upon personal income tax. And in addition, it's a highly progressive form of personal income tax so that high income earners pay the large percentage of the share. Two things failed to materialize. One that unemployment has remained high, and so people are earning less income, and thus paying less taxes. And secondly, this is some expected capital gains by high income earners in California failed to materialize this fiscal year. And so that really led the two things that put a hole in the budget.
CAVANAUGH: And follow us just a little bit if you would about the Court battles California lost in trying to trim the costs to Medi-Cal. You said it would have taken an extraordinary agreement with the federal government. Obviously the state didn't get it.
RUVALD: Yeah, the state was proposing significant changes in the way that it paid and dealt with Medicare. Some increased copayments and reductions in reimbursement rates. The state was sued by both advocates and the federal governments, and the coral ruled that the solution, which really wasn't -- it was fairy dust, people knew this last summer, was deemed to be illegal. And so the state had to make those obligations.
CAVANAUGH: Now Governor Brown says he will have to go much if you recollect to make cuts far greater than at the beginning of the year. What healthcare and social service programs are now on the block?
BAXAMUSA: Well, programs that are essentially now affecting the middle class, it's quite pervasive in nature. So you must understand the extent of the cuts being proposed. And there is it a reason why we had an overly optimistic projection. These cuts are really the measure of last resort. The governor tried to put them off as long as he could, and he's come to a point of inevitably to cut these programs that affect a wide segment of society. That includes Medi-Cal cuts, hospitals and nursing homes will be affected, home care for the elderly and the disabled, child care for working families. So if there's a single mom that is in poverty that is going to work and has child provided, that 8 be cut. That's cal works program. We're also seeing potential cuts in education. These are a wide range of cuts, cuts in the justice system, so therefore there'll be delays in hearings both in civil and criminal. And building courthouses.
CAVANAUGH: So what you're saying is that this time around, you feel that the cuts go in so deep based on the cuts that we've already had in recent year, it is not just people who depend on the social safety net who are going to feel these things, it's basically all middle class people in California
BAXAMUSA: Right, this is quite pervasive in nature. It is really across the board that's going to impact, if you will, the term middle class, across California, across San Diego, all segments of society.
CAVANAUGH: And tell us about, if you would, this impact on redevelopment funds. We all know that redevelopment as we used to know it has gone away. But there were a whole list of projects that San Diego thought they could maybe get some redevelopment, lingering redevelopment funds for. What happened to that package of money?
BAXAMUSA: Well, at this time that there was last year, some amount of legislation in terms of redevelopment that there could be an Apolishm. Cities across the state scrambled to set aside to tie up a lot of property, in so-called cooperation agreement, so that they wouldn't be subject to loss. However, with both the Supreme Court decision as well as the this budget, the governor has made it clear that those assets will be used for funding public education, and county services, to fund state funds. This is $1.4 billion in assets that he has created a pathway for selling these assets in order to use it, free it up, for other state programs.
CAVANAUGH: Now, Eric, this is what Murtaza was just talking about, a one-time budget fix, which is exactly what Governor Brown said that he was going to try not to do, what he called budget trickery. What other one-time cuts and juggling and switching is there in this revision to the budget?
RUVALD: You know, people will differ on this, but in my look at it, it's about a 3-1 ratio, about three times the one-time cuts in transfers and fixes, and then about 1 quarter of the solution is ongoing changes. We've got continued fund transfers, and one-time borrowing from a variety of funds. We continue to see the state shift payments from the state to local school districts out of 1 fiscal year into the other to sort of push the can down the road. California has to have a real discussion. So if you sort of step back from the budget minutia, since 2002, adjusted for inflation, revenues in the state are down by about 5-7%. The state's grown about 10%, and we've yet to really have an honest conversation in this state about how do we balanced obligations that we're making to people with the revenue that we're bringing in. Of the second thing that we've really done, and the initiatives if we talk about that, just exacerbate this problem. We've decided in this state that we like a progressive tax system. I think we like it because it means we think that other people are going to pay the bill. But the problem with that is that revenue has become much more volatile on a year to year basis. So we get these situations where we get booms and busts. We didn't used to pay care givers that were in people's homes, oftentimes family members, up until the point that the state had some revenues and it decided to move forward with that. And now we're faced with a situation where the state doesn't have those moneys, and seeking to cut them back, and people are angered that what was an important safety net is being taken away.
CAVANAUGH: I do have to ask you about one thing that might qualify as minutia, I was surprised to find that Facebook has something to do with one of these one-time revenue sources.
RUVALD: Facebook is a great example. So the state's general fund about $90 billion. The Facebook IPO alone is expected to bring in somewhere between 1.5-$1.7 billion. That's 1-2% of your budget being made up on a one-time deal, a company that's maybe a once in a decade or 2-decade long IPO, and the state is not only using that money is needs it, it's obligating it to ongoing operations as opposed to a one-time sort of windfall. And we've gotten ourselves into that situation because of the way we structure taxes in the state.
CAVANAUGH: The state workers are also going to be feeling the pinch of these cuts. Are we back to furlough days?
BAXAMUSA: I think it's going to be a 4-day that state offices are going to be open, as well as a 5% cut in salaries. Going to the issue about the volatility of the revenue basically focused on capital gains has subjected the state to ups and downs. At the peak it was 2007 it was $100 million. So now just a drop in $15 billion for a state like California is significant. Now think of it in terms of the share of the general fund to the entire economy. We are at 1973 levels. That's before I was even born. So the share in terms of how much we invest in education, in social services, needed social services, in healthcare is significantry lower than it has been historically. That's why we're seeing the brunt of these cuttings.
CAVANAUGH: I'm wondering about education. Now I know that the governor made the point that in this May revision that the K-12 was not going to be impacted by any further cuts. But the higher education was asking the governor to please restore some money so it wouldn't have to implement these drastic tuition hikes that the UC system and the cal state system are going to have, and also to be able to restore enrollment numbers, but neither one of those things happened, right?
RUVALD: That's right. Higher education had asked for some restorations. They're didn't get it. They received, I think it's about a $68 million reduction on top of what was proposed in January. So it's likely that the trustees and the regents will move forward with some sort of tuition increase. K-12 was spared in the May revise, but, and that's important, with the contingency that if the governor's tax increase is not passed in November that they would face somewhere between a 5-five.five billion dollars decrease.
CAVANAUGH: Governor Brown says he's linking all the serious budget cuts in the proposal with a plea to voters to approve his temporary tax increase plan this November. Can you remind us what this temporary tax initiative is all about?
RUVALD: It does two things. It extends a quarter-cent sales tax for a number of years, then is it institutes three new tax brackets in upper income earners in California, families making over $500,000 a year. That extends for about 5-seven years. It would meet the obligations that the state has for K-12 funding under prop 98 and cushion K-12 education from any further cuts and class size increases that we've seen over the last decade.
CAVANAUGH: Now, a sales tax increase hits the wealthy and poor alike. Is this the best revenue plan to put on the ballot is at least that part of the tax initiative?
BAXAMUSA: Well, the important thing here is to some extent, it cushions the future revenue. So a broader system of taxation naturally helps in easing the ebb and flow of revenue coming in. What is important here is that if this deal does not happen, that November -- really this is the last resort for education and public safety, then what we're seeing is at this point schools are relying on this. If the November ballot does not pass, there will be a 3-week cut in the school year, there will be a 6% tuition hike for UC system, and there will not be life guards at state beaches, for example.
CAVANAUGH: Eric, you wanted to respond?
RUVALD: Well, and I think that's important here locally. Some school districts are betting that the tax increase will pass. Others are not, and others are adopting a worst case scenario, that the tax increase fails and that they're looking at this lower revenue. And I think that we've got -- voters have to ask themselves what kind of school planning do they want to adopt? And I think that's an important consideration. And it's one which is really important because schools spend money on employees, that's the principle expenditure for them, and it's very can I have cult to cut back when things are bad and revenue doesn't throw in.
CAVANAUGH: One of the critics of the governor say he is overestimating the problem and that the tax initiative is not that crucial. I wonder if either one of you would like to mention whether or not you agree with that assessment.
BAXAMUSA: Well, I strongly feel that there is a need for revenue in order to fill the education gap. Especially with the lowest -- spending one of the lowest in the nation. Then I think there is a need of additional investment in education. I'm in the CSU system and the UC system as well.
RUVALD: I think that the governor's revenue projections seem reasonable for this May revise. And it's likely that there would be cuts. I think it is a open question whether we could meet expenditures with the existing revenue. But more importantly, I think there's a real question before voters of whether they want to continue to increase, and that's what the governor's budget proposal would do, increase future year volatility so we'll see again more booms and more busts. And they'll be bigger then and deeper than what we've experienced over the last decade, if it passes. Of
CAVANAUGH: Between now and November, we're going to talk a lot about this tax initiative. Thank you both for talking about this budget revise.
RUVALD: Thank you.
BAXAMUSA: Thank you, Maureen.