Transcript: Statement by CA Finance Director Michael Cohen on the proposed 2014-15 state budget – Jan. 9, 2014

Partial transcript of remarks by Michael Cohen, Director of the California Department of Finance, on the proposed fiscal year 2014-15 state budget. The press conference was held on Jan. 9, 2014:

So as people leave, I did just want to give a public thank you to all the staff at the Department of Finance who worked very hard on putting together the budget as well as everyone else in the administration. This really is a major team effort that requires an unbelievable amount of work from everyone in the administration and I just wanted to thank all of them for that.

To just run through a couple of quick numbers before I hit the follow up to the questions, on the economy, the budget is built on a continued economic recovery but it remains modest. We’re expecting a personal income growth of 4.6% this year in 2014 and 5% in 2015.

Our revenues are clearly doing well largely based on the personal income tax and the capital gains as the chart showed.

Proposition 98 – just to explain the $10 billion investment. It’s because revenues are up, the minimum guarantee is up in 12-13, 13-14 as well as the growth in 14-15. So that $10 billion will be paid all in the coming budget but that’s attributable to three fiscal years. It allows us to eliminate more than $6 billion of deferrals to K-12 school districts and community colleges as well make a $4.5 billion further investment in the local control funding formula and the $400 million programmatic investment in the community colleges to improve student success at the community colleges.

The budget stabilization account – we are making the Proposition 58 constitutional – 3% of revenue transfers for the first time since 2007. That amounts to $3.2 billion. Under current constitutional provisions, half of it goes as a supplemental payment to the economic recovery bonds. For those of you new to budget, $15 billion in economic recovery bonds were approved by voters in 2004 basically to help pay for those three red bars there. And so by paying them off, they’ll be completely done in April of 2015 under this plan. We’d finally be done paying for those three budget years from the early 2000s.

Our cash situation – much much better than it has been over the last few years. There are no cash deferrals to our local governments or schools and our annual cash borrowing that we do to meet cash flow is down from where it’s been. We’re assuming $3.5 billion this year, which in the current year we’re doing $5.5 billion and it’s been a much higher level in previous years.

Moving on to follow-up questions…

First on the corrections question. Just in terms of how we built the budget, we needed to assume something. Negotiations are still ongoing with the three-judge panel as you’ve heard. So we’ve assumed a two-year extension. If we get that two-year extension based on SB 105 last summer, we do have $81 million in the recidivism reduction fund that allows us to make investments to reduce recidivism and prevent future crimes. If we don’t get the extension, the money is still in the budget and we won’t have a budgetary problem; we’ll just have to change what we’re spending those dollars on. And we will change our focus more to capacity to avoid early release as opposed to being able to make those $81 million in investments.

The court reserves – it’s not really a dollar issue. It’s more a where the reserve funds are. So what the reserve policy change from 2012 does is it moves reserve funds to the state-level judiciary, under the judicial council’s control rather than local individual courts. The reason for that is there was great disparity among individual courts, and it’s sort of one of the key final pieces to 1997 moving to a state-funded trial court system where the council will figure out the highest and best use of those dollars have been. We do add $100 million in the budget for trial courts to help them continue to transition to the new system.

Rainy day fund – just to walk through that. Under the current constitution, Proposition 58 was approved by the voters in 2004. It requires a balanced budget and an annual 3% transfer into the budget stabilization account – the “rainy day fund” – unless suspended by gubernatorial executive order.

There’s ACA 4 [Assembly Constitutional Amendment] that’s scheduled to be on the November ballot. That one is basically driving off a 20-year revenue linear regression, which gets extremely complicated and as the governor said, there’s not much flexibility. In addition, it doesn’t do anything regarding Proposition 98. So Proposition 98’s requirements are still in place and the reserve is basically all for the non-98 side of the budget.

What we’re proposing to do is we’re not changing any of the Proposition 98 calculations but we are smoothing out the spending of those dollars over time. We’re basically asking for a constitutional creation of a Prop. 98 reserve so we could avoid the types of layoffs that schools had to endure during the Great Recession.

Another big change would be instead of basing it on this 20-year revenue regression, we’d instead base it on our most volatile revenue source – capital gains. So any year in which our revenues are based on more than 6.5% capital gains, the extra increment would go into the rainy day fund.

Final big difference, I think, from current law and ACA 4 is the ability to pay down debts and liabilities. Under ACA 4, you wouldn’t be able to make sort of extra supplemental payments on any of these things. What we’ve done to date and what we want to propose continuing to do is kind of balance saving money for the future as well as chipping away at all of these huge liabilities. The amount of money wouldn’t change but whether you could spend it – you would either be able to spend it on extra payments on liabilities or put it into the rainy day fund.

So I think that covers that…

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