Additional Revenue will be steered to education under Prop 98

by Brian Leubitz

The Proposition 30 funds will sunset in a few years, but the surplus revenue is nice while it lasts. With the economy picking up speed, and an additional few billion in unexpected revenue, Gov. Brown has some flexibility that wasn’t there a few years ago. So, he’s gone through his laundry list:

For the budget year (2014-15), the May Revision sets aside $1.6 billion to make the final payment on the Economic Recovery Bonds and another $1.6 billion for the Rainy Day Fund.

The May Revision reflects more than $2 billion in added costs over and above the January budget. This includes higher spending to provide health care coverage under Medi-Cal for a million more people, emergency drought assistance, added funding to meet the Proposition 98 guarantee for K-14 schools, caseload increases in the In-Home Supportive Services (IHSS) program, additional contributions to the California Public Employees’ Retirement System (CalPERS) and added staffing to administer California’s unemployment insurance program.

When Governor Brown took office, the state faced a massive $26.6 billion budget deficit and estimated annual shortfalls of roughly $20 billion. These deficits, built up over a decade, have now been eliminated by a combination of budget cuts, temporary taxes and the recovering economy.

Could he have done more to restore some of the massive cuts of the 2007-2012 era? Probably, but Gov. Brown was never going to wipe all that away in one cycle. That has just not been his style since his Oakland mayoral days. But the May revise moves the state forward and is a solid foundational document for the future.

Parts of this will clearly change as the Speaker and Senate leader get a hold of it, and there are certainly improvements to be made. However, with the rainy day deal already done, half the battle is behind us and the politicians are looking to the upcoming elections.

The AP has gotten a hold of the governor’s May Revise speech and therefore the major budget proposals that are to be unveiled tomorrow. The key elements are described below and over the flip I provide some analysis of each proposal.

• Arnold will float bonds using the state lottery as security. $15 billion over 3 years will be raised but $10 billion goes into “rainy day fund”
• If that fails, 1% sales tax hike to last no more than 3 years
• Prop 98 suspension abandoned; instead COLA will not be paid
• State parks closures abandoned; instead fees to rise $1 to $2
• $6 billion still left to cut or balance out somehow.”

Overall thoughts: Here we go again. Arnold Schwarzenegger came to office in the recall of Gray Davis in 2003 promising to solve our state’s budget problems once and for all. Instead he immediately blew a $6 billion hole in the budget with the Vehicle License Fee cut and then borrowed to close the rest of the gap – costing the state around $3 billion in annual debt service.

Now that Arnold’s solution has predictably failed, he is predictably offering more of the same. Borrowing against the lottery is a problematic concept for many reasons, the main one being it avoids the core issues of our budget. It’s yet another one-time fix that does nothing to solve the structural revenue shortfall that has plagued our state for 30 years.

It is significant that Arnold seems to be backing away from his most significant cuts – especially the K-12 cuts. Obviously the details released tomorrow will be key, and we should fully expect higher ed to take another crippling blow. But this does indicate that the activism many of us have launched against the primary schools cuts has had an impact.

And of course, there’s still $6 billion left over – $6 billion that the Yacht Party will insist come in the form of destructive cuts that damage the economy, $6 billion that Democrats will – we hope – insist come in the form of wise, long-term revenue solutions.

Finally, Arnold seems to be gambling that the economy will make a quick recovery and that the current woes are just a dip and not the opening stages of a deeper recession. That, I think, is a major and probably reckless gamble to make.

Thoughts on the specific items are below.

Borrowing against the state lottery: this seems to be at the core of Arnold’s new plan. As described by the AP:

The governor will propose raising $15 billion over the next three years by selling bonds based on anticipated lottery revenue. He will use about $5.1 billion of that for the 2008-09 fiscal year to help erase the deficit, administration officials told The Associated Press on Tuesday.

The other $10 billion would be left in a reserve fund the governor wants to create as part of a budget-reform proposal. It would be intended to ease the effect of year-to-year revenue fluctuations.

The revenue proposal – which administration officials refer to as “securitizing” the lottery – would require voter approval because the lottery was established through the initiative process.

As I explained above this is a clever way to avoid the basic issues here – ride it out another year or two and dump the problem onto the 2010 gubernatorial race. Borrowing the lottery funds is designed to ease the need for the most destructive cuts without raising taxes, and the rainy day fund seems to be a clear sweetener for Republicans to along with this scheme.

Schools: The AP describes the education budgeting as follows:

The budget the governor will release Wednesday backs away from some of the less politically popular proposals in the $141 billion budget plan he released in January, including a proposal to suspend the minimum school-funding guarantee, Proposition 98.

Instead, the budget proposal will include a $1.8 billion increase in funding to schools over 2007-08 levels. Schools still will lose about $4 billion in anticipated revenue because Schwarzenegger’s plan would not include program cost-of-living increases.

This does not necessarily take the 20,000 pink-slipped teachers off the hook. Losing the $4 billion in anticipated COLA revenue will still cause problems for many school districts – and as I indicated above, higher ed is likely to face major cuts anyway even if K-12 is somehow spared the worst. In any case, teachers are being forced to balance the budget on their backs.

Here again Arnold has chosen quick fixes over long-term solutions. California’s educational system was once the envy of the nation. 30 years of tax cuts have reduced CA to nearly the level of Mississippi, and while the January proposals were bad enough, major reinvestment in all levels of public schools are needed for California to ease widening inequality, provide prosperity and jobs, and thrive in the 21st century.

The devil is in the details here, so until we see those, schools don’t seem out of the woods just yet.

Parks: The proposed park closures were always a rather idiotic idea. Although parks should be free of charge, as California’s natural patrimony, it makes far more sense to raise fees than to close parks. Outright closures would have blown an even bigger hole in the parks budget, so this is clearly the more intelligent plan.

Remaining cuts: Even with Arnold’s lottery borrowing scheme there will be $6 billion left in the deficit. Obviously a restoration of the VLF would close that for good, but expect bitter fights over that last $6 billion between Democrats who will want to provide some sensible ways to close the gap with new revenues, and Republicans – Arnold included – who will prefer destructive cuts to sensible tax solutions.

Overall the May Revise doesn’t appear to be the cataclysm that some expected, but even if Arnold’s lottery plan is embraced – which is far from certain – the basic issues remain, and we’re likely to be debating this well into the fall.

The first major change in the May Revise budget has leaked to the SacBee – Arnold Schwarzenegger’s plan to release 20,000 low-risk offenders from prison has been dropped in the face of legislative opposition:

Gov. Arnold Schwarzenegger has dumped his plan to release about 22,000 lower-risk inmates from prison before they complete their terms, The Bee learned Monday.

The revised budget he will present on Wednesday will jettison the plan, which would have freed prisoners doing time for crimes such as drug possession and car theft who had less than 20 months to go on their terms.

The governor had sought the change as part of a 10 percent, across-the-board general fund budget cut to deal with a multibillion-dollar deficit.

His plan was unlikely, however, to win support in upcoming budget negotiations. Not a single legislator in the state had expressed support for the idea.

It’s unfortunate that this plan is being dropped, as most of these inmates targeted for release are not particularly violent offenders. California’s prison population has grown too large for us to handle capably or safely, and the cuts were one of the low-hanging fruit in finding savings within the current budget.

Obviously this raises the question of what cuts will be proposed in tomorrow’s budget revise. If Arnold is willing to abandon the early release plan is it too much to hope that he’s going to abandon the destructive schools cuts too? Yeah, probably is. Those cuts will likely remain, and are probably going to be augmented by other damaging cuts to core public services, especially as Arnold’s now got to find $1.2 billion in the budget that was otherwise going to have been saved by the early release.

The other major question surrounding the May Revise is what, if any, new revenues Arnold will propose. I don’t hold out much hope that Arnold is going to propose major new revenues, as his Republican predecessors Pete Wilson and Ronald Reagan did. That’s not Arnold’s style. There may be a few revenue solutions here, but they will likely be small in proportion to the much larger cuts that he is going to insist upon.

Democrats have a short amount of time now to make their case to the public. New Speaker Karen Bass understands that the budget is her top priority – let’s hope she will be able to provide the budget leadership that has been sorely lacking from Democrats these last 30 years.

Among the big news from today’s announcement of Arnold’s May Revise is the proposal to sell off EdFund for $1 billion. EdFund is a public non-profit that manages $27 billion in student loans. Arnold plans to sell it off for the one-time windfall it might provide, even while his revised budget takes even more money from public transportation and social services.

Why is this such a catastrophically bad idea? Because even as people complain about screwing us young folks over with state bond debt, privatized student loans put us in a FAR worse financial situation, crippling young folks and young families right when their entrepreneurial and creative energies are at their peak.

Sallie Mae provides the cautionary tale. Originally a public non-profit, Sallie Mae was privatized between 1997 and 2004, and remains the nation’s largest holder of student loan debt (EdFund is #2).

The privatization has led to financial stress for millions of Americans. Sallie Mae execs, as described by the excellent Student Loan Justice site, gave themselves massive payouts and sought to improve profits. How? By screwing borrowers.

Sallie Mae makes more money from a defaulted loan than from a borrower who is paying as agreed. Such a borrower must begin making larger payments, with interest capitalized and tens of thousands of dollars in penalties added. Since they make so much money this way, they have little incentive to help borrowers return to solvency. Instead they seek to inflate the collection debt. And since student loans cannot be discharged in bankruptcy, and can only be refinanced once, Sallie Mae has you over a barrel.

Student Loan Justice has chilling stories from Californians who have been victimized by the privatized Sallie Mae:

I have been on top of my loan from the start and it just keeps growing.

I too borrowed money for student loans and when I graduated in 1994 Sallie Mae called me and convinced me to consolidate my guaranteed student loans. I had one small loan of $2500.00 that was unsubsidized the rest of $35000.00 was subsidized. They told me nothing  about this. It took me four years to get them to tell me what happened to my loan. See, I was a single mother of two and didn’t get a job right from college. In order to keep my certification I had 5 years to complete 18 more credits. So my plan was to accrue 2 years or so of interest until I got a job and could go back to school and be in deferment. The deferment would have put my loans on hold and I would not accrue interest. This is what they told me. In the third year I didn’t have a full time job, but I did start back at school half time. So my loans should have become defered without interest acrruing. Well that didn’t happen. When I called (which was often) Sallie Mae they told me “My loans were none of my business and why don’t you just get a job.” After several years I started to record the comments and rude remarks. They told me I wasn’t allowed to record the conversation. After 8 years Sallie Mae sends me another notice. This time the note has a place called Ombudsman. Ombudsman was supposed to be a go between. She was all supportive and ready to go after Sallie Mae and a week later she called and said “That is the nature of your loan, so pay it.” I have been paying a small amount for 2 years. I pay $100.00 a month. Edfund has my loan now and are threatening to garnish my wages. When they do this I will have to quit my job. I have my grandson and when they garnish my wages I won’t be able to pay for daycare. Your right, they don’t care about the human element. All I want to do is pay back my loan. The original loan of $37,000.00. I am now ordered to pay $86,000.00. I thought the same thing you did. That they would make an offer and I could begin to manage my loan. The Edfund person told me why would we do that. We wouldn’t make any money. I have been on top of my loan from the start and it just keeps growing. I am a teacher that works in a low income school and will never be able to do what they are demanding. I truly believe in my soul that Sallie Mae is just as responsible for this getting out of hand. They can’t tell me about ignorance isn’t an excuse. I didn’t have the knowledge to ask the right questions. I had to take their word and they told me all my loans were subsidized. Now they have a form that separates subsidized and unsubsidized loans. They didn’t have this when I signed their promissary note.

The horror stories are truly frightening, of wrecked lives and dashed dreams. Some on other state pages talk of committing suicide to get rid of the debt burden. And as the current kickbacks scandal involving Nelnet and other private lenders widens, the true danger of privatized student loans becomes even clearer.

California’s foolish refusal to make hard choices about taxes, choosing instead to balance its budgets on the backs of students, forced millions of students and their families to take out loans.  Arnold’s desire to privatize EdFund will cause a serious financial crisis for millions more Californians. It is an unconscionable and indefensible act, one that California Democrats have no other choice to oppose.

Privatizing the lottery would be merely foolish. Privatizing EdFund would be a catastrophe. Let’s make sure it doesn’t happen.