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April 5, 2005 > State Budget Controversy: Is The Governor Keeping His Promise?

State Budget Controversy: Is The Governor Keeping His Promise?

In February, Assemblymember Alberto Torrico called a "Town Hall" meeting to discuss Governor Schwarzenegger's education funding proposals for fiscal year 2005-06. A panel of local educators commented on the loss of revenue in 2004-05 from guaranteed Proposition 98 funds when $2.2 billion was retained by the state to help combat its budget woes. Assemblymember Torrico asserted that Governor Schwarzenegger pledged to replace the funds in the following year's budget but this promise has been broken.

TCV spoke with Assemblymember Alberto Torrico about Proposition 98 and the governor's proposed budget for fiscal year 2005-06.

TCV: What is Proposition 98 and why is there so much discussion about it this year?

Torrico: Proposition 98 sets forth a baseline of the state's General Fund that is mandated for education. Last year, because the economy started to pick up, schools were owed $2.2 billion more than they received the previous year. The governor proposed that, in order to balance the budget, the required Proposition 98 increase for that year be left with the state in exchange for a promise that these monies would never again be suspended and the $2.2 billion reimbursed the next year.

Now, the governor doesn't want to pay it back and this triggers a lot of things at the local level since school districts were budgeting with the inclusion of the $2.2 billion in mind. The governor's 2005-06 budget takes last year's figures and adjusts them for inflation but does not return the "borrowed" $2.2 billion. When school budgets were compiled for this year, the assumption was that the money taken last year would be returned.

TCV: Are the "pink slips" currently handed out by many school districts a direct result of this?

Torrico: Exactly

TCV: What can be done?

Torrico: Democrats of the state assembly will not vote on the budget if it does not include a payback of the $2.2 billion. That's what we can do. I hope the governor figures a way out of this mess.

TCV: Where can the money come from?

Torrico: We are talking about three different options: One is continued efforts by the governor and our congressional delegation to increase the amount of money we get back from the federal government - we get back seventy-nine cents for every dollar we send to Washington, D.C. We rank 47th in the country.

A second option is closing a number of corporate tax loopholes. This could generate hundreds of millions and maybe even a billion dollars of new revenue for the state of California. Companies that do business in the state and are incorporated in the Cayman Islands do not pay income tax. There are other loopholes including ways in which corporations manipulate Proposition 13 and are able to bypass reassessment when selling property. That is a $500 million loophole.

The third way is to eliminate tax breaks for millionaires by capping how much interest can be written off. If you own a house worth $2 million, why not put a cap on the amount of interest that can be written off?

Reinstatement of the upper tax bracket that was eliminated four years ago should also be examined. The president gave a big break to the wealthiest Americans and the state government did the same thing. We now have the phenomenon of someone earning $75,000 a year in the same income tax bracket as someone earning $75 million per year. Does that make sense?

TCV: Are there immediate solutions to this problem?

Torrico: The governor's budget does not go into effect, even if we approve it, until July 1, 2005. This is a pressing problem, but the impact of it does not kick in until July. The first thing the governor needs to do is say to the education community that they will get the $2.2 billion and not force additional cuts and increases of class size.

TCV: Can the reforms you suggested be done quickly?

Torrico: They can all happen within a year. If we pass a responsible budget before June 30, we would reap a lot of benefits. As a result, the state credit rating would improve meaning the interest we pay on bonds would decline. This would save a considerable amount of money.

TCV; How did we get into this situation? Why does California relinquish 21 percent of the money we send to Washington, D.C.?

Torrico: Ten or 20 years ago, we were doing better than many other states and did not have the financial needs we have today. Our reimbursement rate from the federal government has decreased every year since Ronald Reagan was governor. This has been a 30 year process - little by little, our share of federal dollars has been getting smaller and smaller. Over the last five years, the political party of the president has had no hope of "winning" California and little interest in sending money our way. The political aspect is part of it, but this is also a long-term trend.

TCV: Do you have hope for change or do you think the state budget will again become mired in partisan politics?

Torrico: I have a lot of hope. I think there is a genuine feeling, especially among those of us who are new here [state office] that we will balance the budget this year and keep our options open. I am hoping we can make progress.

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