May 2, 2006
By Clea Benson, The Sacramento Bee
The state is collecting record-breaking tax revenues this year, outstripping even the most optimistic fiscal forecasts and setting the stage for a debate among lawmakers over what to do with the bounty as they craft next year's budget.
The Franchise Tax Board said it took in $11.3 billion in personal income tax payments this April, an amount larger than the $10.5 billion the state received in April 2001 at the height of the high-tech stock market boom.
The pace of revenues is amazing even the experts who make a living predicting how much the state will earn.
"We're very surprised by the strength," said Brad Williams, director of fiscal forecasting in the Legislative Analyst's Office, the Legislature's nonpartisan budget adviser. "The numbers we saw in April were extraordinary, way above expectations."
Experts in Williams' office and at the Department of Finance are scrambling to come up with an explanation for the dramatic increase in state income, up 40 percent over last April, before lawmakers begin to deliberate over the budget for the fiscal year that begins July 1.
No single factor - the stock market, real-estate deals, or business growth - seems to explain it, Williams said.
And with Gov. Arnold Schwarzenegger due to come out this month with an updated version of next year's budget, policymakers will need to know whether to view the new money as a one-time bonanza or as a dependable stream of income that could continue into the future.
No matter what the reason, officials at the Department of Finance say the state could end up with about $4 billion more in its bank accounts this year than the governor predicted in January when he released his proposed $125.6 billion spending plan for the 2006-07 fiscal year.
H.D. Palmer, a spokesman for the Department of Finance, said the governor would likely take a cautious approach in the revised budget that will be released on May 12. Schwarzenegger will likely propose using some of the new money to pay down debt and enhance the state's savings accounts, he said.
The Department of Finance believes the revenue increase is likely a temporary spike due to sales of stock options and real estate, Palmer said.
"When the dot-com boom went spectacularly bust and those one-time revenues disappeared, that increased the structural deficit that we are still working to close," Palmer said. "The governor is very mindful about how California got into this ditch, and we want to make sure we don't make the same mistake twice."
The biggest question is how much of the money will go to schools. Education advocates say Schwarzenegger shortchanged them by billions of dollars in previous budgets.
With Schwarzenegger up for re-election this year, the California Teachers Association has been airing radio ads reminding the public about the dispute over education funding.
Schwarzenegger in January proposed a $4.1 billion increase for education from kindergarten through community college. But education groups say that's about $3.2 billion short of what schools are owed under the terms of Proposition 98, the state law guaranteeing schools a minimum level of funding.
Senate President Pro Tem Don Perata, D-Oakland, has proposed paying that amount back over several years.
Barbara Kerr, president of the CTA, said education groups would prefer to get the money in big chunks all at once.
"What has usually happened is that education takes more than its share of the cuts in bad times, and in good times education seems to get only the minimum," Kerr said.
"I want this to be a time when education gets what it deserves."
Palmer said there was "no question" that the Republican governor's new budget would include more money for schools, but he did not specify how much.
Though a $4 billion windfall sounds large, a lot of the new money is already spoken for.
Prison costs are up by hundreds of millions of dollars this year because the number of inmates is growing and a federal court has ordered improvements in prison health care. State employees are bargaining for raises. Welfare recipients could get about $500 million in back raises if they win a pending lawsuit.
Legislative leaders, too, are urging caution.
Assemblyman John Laird, D-Santa Cruz, chairman of the Assembly budget committee, said the increased revenue is just about enough to cover all of those expenses that were not included in the governor's January spending proposal, plus a couple of other things that Democrats want, such as cost-of-living increases for poor, disabled and elderly SSI recipients.
"This is not like free money," Laird said. "This just allows us to almost entirely fund things that were not in the January budget. ... There are more demands than actual money."
Sen. Wes Chesbro, D-Arcata, called the spike in tax revenue "very good news."
However, he said, "It has to be tempered with an honest assessment of the state's fiscal situation. ... We as Democrats need to be careful and focus on getting ourselves out of this hole so we don't have a permanent structural deficit."
Meanwhile, Republicans are hoping to use the money for debt payment, Assembly Republican leader George Plescia said. Plescia said his definition of debt includes money that education advocates said was owed to schools and money the state borrowed from funds earmarked for transportation projects.
"With prudent budgeting over the next two years, we can get out of this debt," Plescia said.
"That money goes into some good things. We could pay back the transportation loans and pay back the education loans."
Note from ACSS: How will this revenue spike affect state workers, especially excluded employees? How will the governor, the Legislature, the Department of Finance and DPA utilize this windfall? ACSS will follow the money, ask the hard questions, and get back to YOU, our members, with the answers -- as soon as we get them!