California Faces First Deficit Since 2012

Lagging revenues have put the state's financial outlook on shaky ground, and Gov. Jerry Brown warned Tuesday that California could face a $1.6 billion deficit -- the first shortfall since 2012 -- if spending is not tempered.

By Melody Gutierrez

Lagging revenues have put the state's financial outlook on shaky ground, and Gov. Jerry Brown warned Tuesday that California could face a $1.6 billion deficit -- the first shortfall since 2012 -- if spending is not tempered.

The governor issued the warning at the State Capitol as he unveiled his $122.5 billion general fund spending plan for the fiscal year that begins July 1. The plan is slightly less than the current budget of $122.8 billion. He also proposed solutions to eliminate the projected deficit that made some members of the Democrat-controlled Legislature cringe.

"We are in very uncertain times," Brown said. "We are subject to a lot of unpredictability. ... I think it is time for precaution."

The state's general fund pays for basic state services such as education, prisons and social service programs. Among Brown's budget-cutting proposals:

--Eliminating last year's one-time allocation of $400 million for affordable housing that was never spent after lawmakers could not reach a deal with Brown. The governor said he wanted to remove red tape for developers to build affordable housing, not just increase state subsidies.

--Eliminating last year's one-time allocation of $300 million for state building modernization that was not spent.

--Spending $2.1 billion more on public schools and community colleges in 2017-18, instead of $3.8 billion more, by adjusting the Proposition 98 formula that guarantees funding. K-14 would receive $73.5 billion in the next fiscal year under the proposed budget.

--Pausing rate increases for child care and freezing state spending, including money that implements new legislation.

--Phasing out the Middle Class Scholarship program so that no new University of California or California State University students receive them. The 37,000 students who already receive the grants would remain eligible, but by 2020-21 the program would be eliminated to save the state $115.8 million a year.

Assembly Speaker Anthony Rendon, D-Paramount (Los Angeles County), said he will not support the Middle Class Scholarship cut, which would come as the University of California and California State University systems propose raising tuition.

"Ending the Middle Class Scholarship would increase the cost of a student's four year education by up to $9,000 at CSU and up to $20,000 at UC," Rendon said in a statement.

Budget negotiations in recent years have been characterized by Brown's insistence that the state be cautious in its spending, with his January proposal providing a starting point for six months of negotiations. The last time the governor's proposal projected a deficit was in 2012.

"I was surprised by how pessimistic the budget is," said Assemblyman Phil Ting, D-San Francisco, chairman of the Assembly budget committee. "He's asking everyone to tighten their budgets without much belt-tightening from the executive branch."

The governor cited lower than expected revenue, which fell short of estimates in five of the past seven months. Despite that, revenues are up 3 percent overall.

He proposes expanding the rainy-day fund by an additional $1 billion, bringing the total to $7.9 billion in reserves.

Republican lawmakers praised Brown's commitment to setting aside money, but several said the governor is not doing enough to address the state's huge unfunded pension liabilities.

"These need to be addressed," said Senate Republican Leader Jean Fuller, R-Bakersfield.

State lawmakers have emphasized the need to address the state's woefully dated roads and bridges. In his budget, the governor pushed the same transportation package he introduced in 2015, which would create a new $65 highway user fee paid by California drivers, plus higher taxes at the gas pump.

His proposal, a 10-year funding plan of nearly $43 billion, would need two-thirds approval in both houses of the Legislature to pass. Republicans said they do not support the new fee and tax increase, while some Democrats said the plan doesn't go far enough to address the state's long-term transportation needs.

In addition to the gas tax hike and driver fee, Brown's budget proposal calls for spending $4.2 billion each year to fix the state's aging highway system, much of which was built from the 1950s to the early 1970s.

Brown said Tuesday that it's critical that the state look ahead at the likelihood a recession is on its way. The state's economy has been on an eight-year upswing, three years longer than an average recovery. He said the best way to protect against future cuts is to continue to build the state's rainy day fund and limit new spending.

One of the biggest questions heading into Brown's release of his budget proposal was how the governor would address the potential loss of the Affordable Care Act and the federal funding that comes with it.

President-elect Donald Trump and congressional Republicans have vowed to dismantle the Affordable Care Act, but little is known about what they will have replace the law. The Affordable Care Act dramatically increased the number of residents enrolled in Medi-Cal, the state program that provides free health care to low-income people, seniors, people with disabilities and children in foster care.

The federal government covers the bulk of the state's cost for the $19 billion expansion to the Medi-Cal program, which now serves a third of the state's population, or about 14 million people.

"It's sufficient to say if they go down that road (of repealing the Affordable Care Act) it will be extremely painful for California and we will respond the best way we can at that point," Brown said.

(c)2017 the San Francisco Chronicle

Caroline Cournoyer is GOVERNING's senior web editor.
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