We received this from the Governor’s office on September 19, 2008. Due to the impact of the budget on commerce and the economy, we thought it prudent to reprint it.

The Governor and legislative leaders have agreed to a 2008-09 budget that concludes a very difficult budget negotiation process with a real win for California: true budget reform. It addresses California's $15.2 billion budget shortfall with a combination of cuts and increased revenues. It fully funds education’s Proposition 98 guarantee and does not borrow funding from voter-approved local government or transportation funds. While California is certain to be faced with a difficult budget situation again next year, this agreement puts the state on the path to fiscal stability for the long-term. The key components of the agreement are as follows:

A Rainy-Day Fund With Teeth
Increases the size of California's Budget Stabilization Account (BSA) from 5 percent of General Fund expenditures to 12.5 percent - or approximately $13 billion dollars today.
Requires annual transfers to the BSA of 3 percent of General Fund and eliminates the ability to suspend those annual transfers. During economic downturns, when funds can be drawn out of the BSA, the transfer would not occur.

In addition to the annual transfer of 3 percent of General Fund to the BSA, requires that all current-year revenue that is above 5 percent of the amounts included in the Budget Act be transferred to the BSA, after first providing funding to education as required under Proposition 98. This would mean that any unexpected spike in revenues that occur during the fiscal year – normally recognized in the Governor’s May Revision – would be transferred to the BSA.

Funds could only be transferred out from the BSA under the following conditions: 1) actual revenues during the Fiscal Year must be below a specified level: prior year spending adjusted by population growth and per capita personal income growth; 2) funds transferred from the BSA back into the General Fund must be appropriated in a stand-alone bill. The amount transferred out of the BSA during a fiscal year would be limited to the amount which would bring revenues up to prior year spending adjusted by population and per capita personal income growth. ● When the balance in the BSA reaches 12.5 percent, the excess would be available for one-time purposes only.

One time purposes would include: paying down debt, paying off outstanding General Obligation bonds, investing in infrastructure and capital outlay projects, paying of “settle-up” dollars owed to education, pre-paying health care liability for retired employees (OPEB), and tax relief.

If this mechanism had been in place over the past decade, California’s budget deficit this year would have been $13 billion smaller, our surplus at the end of 2008-09 would have been approximately $9 billion, and we would have had $23 billion over the past ten years to spend on projects such as infrastructure.

Mid-Year Reduction Authority
Authorizes the Director of Finance to do the following when s/he determines, mid-year, that revenues have fallen below specified levels:
Reduce state operations budgets by up to 7 percent without modifying or suspending the law.
Freeze Cost of Living Adjustments (COLAs), rate increases or increases in state participation in local costs, as designated in the Budget Act, for up to 120 days.
Requires the governor to submit urgency legislation to permanently suspend COLAs and other rate increases. If the governor fails to act within the 120 days, or the Legislature fails to adopt the suspension, the COLAs and other rate increases are reinstated.

Additional Budget Cuts
Makes an additional $1.4 billion in cuts on top of the reductions adopted by the Conference Committee Report, for a total of $9.3 billion in spending reductions in 2008-09 (this is prior to any additional cuts the Governor may make through line-item vetoes).

Lottery Modernization and Securitization
Proposes a ballot measure to modernize the state Lottery and improve the performance of this underperforming state-owned asset.
Future proceeds of an improved state Lottery would be securitized (estimated to be approximately $5 billion in 2009-10) with the additional revenues used to pay down debt and fill the rainy-day fund in the out-years.

Education Funding
Funds the Proposition 98 guarantee at $58.1 billion – $1.5 billion higher than the current-year funding. This level of funding eliminates the proposed reductions in the Governor’s May Revision and maintains funding to base categorical programs such as class size reduction, special education, child nutrition programs and child care.

For the complete report, you may click here.