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California Budget May Be Signed Tonight

arnoldschwarzeneggerAfter an all-night session of the Legislature, California's record-breaking 100-day budget impasse is over with a plan to close the $19 billion deficit presented to Governor Arnold Schwarzenegger Friday morning.
Both houses voted, first the Assembly in the wee hours of the morning Friday, then the Senate a few hours later, to send an $87 billion spending plan that calls for no new taxes or fees. Schwarzenegger is expected to sign the budget later today.
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The Governor's office issued the following statement after the Senate vote:
"The Governor today applauded the state legislature for passing a budget that includes historic, long-term structural reforms to the state’s pension and budget systems and holds the line on tax increases.
When the Governor proposed his budget in January, he promised the people of California that he would not sign a spending plan that raised taxes, failed to rein in California’s out-of-control pension costs or fixed our state’s broken budget system. This budget meets that test. The Governor has been fighting for these reforms since coming into office because they will fundamentally improve California’s fiscal health going forward.
“I am proud of the legislature for coming together to pass a budget that doesn’t raise taxes and implements long-term reforms,” said Governor Schwarzenegger. “I have been fighting to fix California’s broken budget and pension systems since I came into office, and I made a promise to the taxpayers this year that I would not sign a budget that didn’t include comprehensive reform. These historic reforms put California on the path to long-term fiscal stability, and I applaud the legislature for stepping up and implementing them.”
The pension reforms contained in the budget are projected to save CalPERS up to $100 billion over the years and decades to come by legislatively rolling back SB 400, permanently ending the practice of pension spiking and protects taxpayers by increasing transparency. Specifically, the budget:
  • Rolls back SB 400: The expansion of pension benefits adopted in 1999 as Senate Bill 400 will be rolled back for new employees.
  • Ends pension spiking: Employee retirement rates will be based on the highest consecutive three year average salary as opposed to the single highest year.
  • Increases transparency: The arcane assumptions made in establishing required pension payments have a major impact on the long-term cost of pensions and whether those costs are passed on to taxpayers for decades to come. Taxpayers deserve to know how these decisions are made. This legislation requires CalPERS, any time it adopts contribution rates, to submit a report to the Governor, Treasurer, and Legislature that in plain language describes (1) the discount rate it uses to report pension liabilities and how those liabilities would be valued if a risk-free discount rate was used, (2) the investment return it assumes for projecting contributions and how those contributions would change if a lower investment return assumption was used, (3) the period over which it amortizes unfunded liabilities and how contributions would change if unfunded liabilities were amortized over a period equal to the estimated average remaining service periods of employees covered by the contributions, and (4) the market value of its assets and how that value differs from its chosen actuarial value for those assets. It will also require the Treasurer to evaluate and provide its opinion of the report to the Legislature.
These legislative changes build on the Administration’s recent agreements with public employee unions. Thus far, the Administration has reached bargaining agreements with the following public employee unions, which cover a total of 132,000 public employees: the California Association of Highway Patrolmen, California Department of Forestry Firefighters, California Association of Psychiatric Technicians, American Federation of State, County and Municipal Employees, Union of American Physicians and Dentists, the International Union of Operating Engineers and the Service Employees International Union.
The Governor also won structural budget reform for the people of California. To help avoid boom-and-bust budget cycles in the future, a constitutional amendment will be placed before the voters to substantially strengthen the state’s Rainy Day Fund. The amendment will include more stringent deposit requirements in good budget years that will provide a greater cushion for bad budget years.  Specifically, the amendment will:
  • Make potential rainy day fund savings larger and make it harder to suspend an annual contribution:
    • The rainy day fund savings would go from 5 percent to 10 percent of General Fund Revenues.
    • The state would have to make three percent payments into the rainy day fund, except in years of high deficit.
    • Half of the annual payment into the rainy day fund could be used for one-time infrastructure and debt service.
  • Restrict the use of rainy day funds to rainy days:
    • Funds would be used to cover a budget shortfall – up to the previous year’s expenditures adjusted for inflation and population growth.
    • A 50%-50% regulator provision would prevent the legislature from spending all rainy day funds in a single year, or two.
    • If the rainy day fund exceeds 10 percent of General Fund revenue, annual payments to the fund would stop.
  • Capture unanticipated revenue for additional rainy day contributions:
    • The Department of Finance would create a projection of expected revenue based on the state’s last twenty years of revenue performance, and any revenue above that trend line would be put in the rainy day fund. Any above trend revenue over 10 percent of revenues could be used for one-time purposes.
    • Any new revenue needed to meet Proposition 98 obligations would be excluded, so that Proposition 98 will be fully funded without encroaching on funding for other programs.