COUNTY OF SAN MATEO

Inter-Departmental Correspondence

County Manager’s Office

DATE:

July 14, 2008

BOARD MEETING DATE:

July 22, 2008

SPECIAL NOTICE/HEARING:

None

VOTE REQUIRED:

None

TO:

Honorable Board of Supervisors

FROM:

John L. Maltbie, County Manager

SUBJECT:

County Manager’s Report #8

A.

State Budget Update

RECOMMENDATION:

Accept this report.

VISION ALIGNMENT:

Commitment: Responsive, effective and collaborative government

Goal(s): 1—Government decisions are based on careful consideration of future impact, rather than temporary relief or immediate gain.

BACKGROUND:

The protracted national and state economic downturn and housing slump are having an unprecedented impact on the state budget. The nearly $17 billion shortfall is one of the largest in state history. Negotiations continue into the second week of the new fiscal year. There was a brief glimmer of hope last week when temperatures in Sacramento hit triple digits, encouraging all to escape with an early departure to attend the impending national conventions.

DISCUSSION:

It did result in the two-house budget Conference Committee completing its work. On a party-line vote, the Committee approved upwards of $9.7 billion in new revenue, including:

§ Reinstatement of the 10 percent (couples earning above $321,000) and 11 percent (couples earning more than $642,000) income tax brackets for $5.6 billion;

§ Suspension of the net operating loss deduction for three years for $1.1 billion;

§ Elimination of the annual inflation indexing of state income tax brackets for one year for $815 million;

§ Rollback of the dependent care credit for adjusted gross incomes over $150,000 for $215 million;

§ Restoration of the Franchise Tax (Bank and Corp) level from 8.4 percent to 9.3 percent for $470 million; and

§ Approval of a Tax Amnesty program providing $125 million in tax relief generating upwards of $1.5 billion.

Others actions of interest to counties:

§ Adopted the insurance policy surcharge of 2.8 percent in high- risk areas and 1.5 percent in low-risk areas to fund wild land firefighting;

§ Approved semi-annual reporting for children in Medi-Cal with a three-year sunset;

§ Adopted the CalWORKS compromise including a $40 per month additional Food Stamp benefit and Pre-Assistance Employment Readiness System (PAERS);

§ Approved $10 million in Pay for Performance funding for employment services;

§ Eliminated the TANF Reserve;

§ Rejected the proposal to reduce funding provided to counties for new caseload growth within the Medi-Cal provider rate reductions effective September 1, 2008;

§ Increased premiums paid by families of children enrolled in the Healthy Families program with incomes from 151 to 200 percent of FPL by $3 per child per month and those over 200 percent FPL premiums would increase $2 per child per month:

§ Rejected the reduction to county administration of IHSS and restored the $7.7 million in General Funds;

§ Eliminated the $35 million detention funds triggering local booking fees;

§ Eliminated the $18.5 million funding for small/rural sheriffs program;

§ Rejected the “securitization” of lottery proceeds, but encouraged staff to continue working on the proposal as debt repayment for an out-year solution;

§ Eliminated the Mentally Ill Offender Crime Reduction Grant (MIOCR); and

§ Approved $9.5 million to fund 41 county Methamphetamine Enforcement Teams;

§ 10 percent reduction to Williamson Act funding and rejected the LAO proposal to phase-out the elimination of the Williamson Act.

The Conference Committee adopted a parole reform package that includes something dubbed “direct discharge” or no parole for non-serious, non-violent, non-sex offenders and early earned discharge from parole for those who have accrued “clean time” thereby reducing state parolee caseloads. The Conference Committee action also reduced funding for the Citizens’ Options for Public Safety (COPS) to $100 million and Juvenile Justice Crime Prevention Act (JJCPA) to $100 million.

Also, please note that last week State Controller Chiang, reported that the state overspent its budget by $3.9 billion as the fiscal year ended, with General Fund FY 2007-08 expenditures totaling $107.3 billion and total revenue receipts were pegged at $103.4 billion.

FISCAL IMPACT:

Unknown.

B.

Summary of State Ballot Measures

RECOMMENDATION:

None. Information only.

VISION ALIGNMENT:

Commitment: Responsive, effective and collaborative government.

Goal(s): Goal 20—Government decisions are based on careful consideration of future impact, rather than temporary relief or immediate gain.

BACKGROUND:

The State of California currently has about $43 billion of General Obligation bonds outstanding, on which it is making principal and interest payments. There is another $72 billion in unsold bonds that have already been approved by the voters. According to the Legislative Analyst Office, the state’s annual debt service through 2007 is projected to rise from $4.5 billion in the current year to $8.3 billion by 2017.

The Secretary of State has qualified 11 measures for the November 4, 2008 ballot. If approved, among other actions, the measures would authorize an additional $15.9 billion in new general obligation bonds. The ballot measures include:

§ Proposition 1, The Safe, Reliable High-Speed Passenger Train Bond Act, would authorize $9.95 billion of state General Obligation Bonds;

§ Proposition 2, Fair Treatment of Farm Animals;

§ Proposition 3, would authorize $980 million in state general obligation bonds to fund the construction, expansion and equipment for children’s hospitals;

§ Proposition 4, Waiting Period and Parental Notification of minor Pregnancy;

§ Proposition 5, Nonviolent Offenders, Sentencing, Parole and Rehabilitation;

§ Proposition 6, Criminal Penalties, Public Safety Funding;

§ Proposition 7, Renewable Energy, would require 20 percent of all energy, including that produced by government, to be from renewable sources by 2010, increasing to 40 percent by 2020 and 50 percent by 2025;

§ Proposition 8, Limit on Marriage;

§ Proposition 9, Criminal Justice System, Victim’s Rights/Parole;

§ Proposition 10, would authorize $5 billion in state general obligation bonds to fund grants to buyers of high fuel economy and alternative fuel vehicles, research and development of renewable clean energy and among other things, to make grants to train college students in these new technologies; and

§ Proposition 11, would shift from the Legislature to a 14-member commission, the responsibility to draw political boundaries.

Finally, the following measures are currently moving through the Legislative process that would authorize, subject to voter approval, $22.4 billion in additional general obligation funds:

§ Assembly Bill 100 (Mullin) would authorize $9.087 billion for education facilities;

§ Senate Bill 1516 (Simitian) would authorize $4 billion for library constructions;

§ Senate Bill 1572 (Wyland) would authorize $ 900 million for veterans mortgage assistance;

§ Senate Bill 1670 (Kehoe) would authorize $2 billion for energy efficiency and carbon reduction-related programs;

§ Senate Bill 2 (Perata) would authorize $6.835 billion for water-related projects; and

§ Senate Bill 6 (Machado) would authorize unspecified amount of funds for water projects.

DISCUSSION:

California’s debt-service ratio (DSR), the amount of the annual debt-service to General Fund revenue, is used as an indicator of the state’s debt burden. For more than 20 years the DSR limit has prudently been set at or below 5 percent. According to the Legislative Analyst Office (LAO), in the early 1990’s the DSR peaked at just over 5 percent and then fell below 3 percent in the early 2000’s. Assuming no other general obligation bonds are authorized the state DSR would peak in FY 2011-12 at 6.3 percent.

Taken together, there is $38.272 billion in increased general obligation bond authority pending action, which if approved will further increase the state’s debt service and exacerbate the state’s structural deficit.

FISCAL IMPACT:

Unknown.