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Governor Releases Revised FY 2013–14 Budget

Proposes Shifting Enterprise Zone Funding to Three New Economic Development Programs; Borrows $500 Million in Cap-and-Trade Revenues for General Fund

May 14, 2013
Gov. Jerry Brown unveiled his revised budget for FY 2013–14 at a news conference on Tuesday morning by characterizing his revised budget as grounded in prudence and restraint. 
“For first time in more than a decade we have a balanced budget and it’s solid,” proclaimed Gov. Brown.
Explaining changes to his education and health care proposals dominated most of the almost-75 minute event, with the press also peppering the Governor and Department of Finance (DOF) Director Ana Matosantos on projections for the remainder of FY 2012–13 and the fiscal year that begins July 1.
Revenue projections in the May Revise for the remainder of FY 2012–13 are $2.8 billion higher than the Governor’s January budget projection. That increase, however, is considered temporary. For FY 2013–14, state revenues are projected to decrease by $1.3 billion compared to the Governor’s January projection. Contributing to the revenue decline is the end of the federal two-percent payroll tax holiday and sequestration.
The Revise also recognizes the future uncertainty and risk for California’s budget. The state must make higher contributions into the CalPERS system starting in FY 2015–16 to pay down the $38 billion unfunded liability for state employees’ pensions. Additionally, the cost for retired state employees’ health care is projected to rise by 59 percent, totaling $63.8 billion in unfunded liability for future obligations. At the same time, tens of billions of dollars of maintenance on critical infrastructure has been deferred.
The Governor’s January budget proposal and the May Revise are available online.  
Enterprise Zones
While framing it as a “modernization of the state’s job creation and economic development incentives,” the details of the May Revise and follow-up discussions with the Administration reveal a plan to eliminate Enterprise Zones. Jurisdictions with a current Enterprise Zone designation would wind down activities as funds are re-purposed. Administration representatives told the League that the plan could include allowing any issued Enterprise Zone hiring tax credits to continue for the full five years.
The proposal shifts the current $700 million allocated for the Enterprise Zone program away from specific geographic areas in favor of providing three new statewide incentives including:
  • A sales tax credit for the purchase of manufacturing equipment. The sales tax credit (the state’s share) would be eligible to all businesses at the time of purchase, as opposed to filing an income tax return. Administration officials represent this proposal as an expansion of a credit that is currently offered in Enterprise Zones.
  • The Governor’s Office of Business Development (Go-Biz) would be authorized to offer $100 million or more a year in income tax credits that can be negotiated with employers based upon the number of jobs created, the size of the business, and other factors. 
  • An additional $255 million from an existing undersubscribed ”hiring tax credit” would be converted into a new hiring credit focused on census tracts with the highest 20 percent of unemployment and poverty for jobs offering at least two times the minimum wage (approximately $16 per hour).
Budget trailer bill language is not yet available, but such changes would likely require a two-thirds legislative vote. An Administration official conveyed that the Governor did not support the Enterprise Zone Program and that should the above proposals be rebuffed, remaining zones should expect continued regulatory efforts and audits of their activities.
Proposition 39
The Governor continues to propose to allocate all Proposition 39 energy efficiency funding, now estimated at $462.5 million, to K-12 and community colleges, and to score these allocations against the state’s Prop. 98 school funding requirements. The only significant revision is a $50 million allocation to the Energy Commission to assist smaller school districts. 
The Legislative Analyst previously questioned the appropriateness of counting these expenditures against Prop. 98, and dedicating all revenues to schools. Several pieces of legislation propose alternative allocations: AB 29 (Williams), AB 39 (Skinner and Pérez), SB 39 (de León and Steinberg), and SB 64 (Corbett). However, SB 64 is the only measure that specifically allows local governments to compete for energy efficiency projects funding. Cities are encouraged to continue to support this important bill.
The Governor’s May revise proposes to loan approximately $500 million of cap-and-trade proceeds to the General Fund to be paid back with interest and appropriated in FY 2014–15. The delayed allocation also allows the California Air Resources Board to refine the Investment Plan and to update the Scoping Plan, both scheduled this year.
The League has been actively involved in supporting two cap-and-trade expenditure proposals:
  • AB 416 (Gordon) creates the Local Emission Reduction Program and allocates non-transportation-related cap-and-trade revenues to local governments for grants and other financial assistance to develop and implement GHG-emission reduction projects.
  • AB 574 (Lowenthal) creates the Sustainable Communities Infrastructure Program and allocates funding from the transportation-related cap-and-trade revenues to integrate transportation and public infrastructure investments to reduce GHG emissions.
Both these proposals set up the framework for programs, but neither is contingent on an appropriation in FY 2013–14. Cities should continue to support these proposals.
The May Revise makes minimal changes to transportation-related funding compared to the Governor’s January budget. As required by Executive Order B-13-11, Caltrans has completed a zero-based budget review in two additional areas, resulting in two additional actions:
  • Equipment Program: A reduction of $12.8 million and 41 state positions to reflect saving associated with the fleet reduction, and a one-time augmentation of $10.3 million in operating expenses to replace equipment.
  • Stormwater Program: A redirection of $2.1 million from contract services to fund 25 new positions to implement CalTrans’ new National Pollution Discharge Elimination System (NPDES) stormwater permit.
Public Safety
Local Assistance Grant Funding: There is no change in front-line public safety funding for cities as described in the January budget. The figure remains $27.5 million. The January budget augmented the $20 million grant for local assistance for realignment implementation by $4 million in the current fiscal year, for a total allocation of $24 million in FY 2012–13. The budget increases the local assistance grant to $27.5 million in FY 2013–14.
The May Revise does however include several additional “realignment-related” expenditures:
  •  $72.1 million increase in funding to county probation departments for continued implementation of SB 678 Community Corrections Performance Incentive Act. This funding incentivizes reductions in the number of adult felony probationers going to prison for either new crimes or probation violations.
  • $15.4 million increase to Corrections for Expansion of Fire Camps (response to federal court order to downsize prison population). The funding increase would accommodate an additional 1300 inmates.  
The May Revise also reduced the projected amount counties will receive in FY 2013–14 for public safety realignment by $21 million.
Funding Available from Redevelopment Dissolution
The Governor’s January budget projected that the state would realize General Fund savings from the dissolution of redevelopment agencies in the amount of $2.1 billion in FY 2012–13 and $1.1 billion in FY 2013–14. The May Revise has altered those figures somewhat based on the Recognized Obligation Payment Schedules (ROPS) reviews conducted by DOF.
The Administration projected in January that over a two-year period (FY 2012–13 and FY 2013–14), counties would receive approximately $1.6 billion, cities $1.2 billion, and special districts $400 million. The May Revise now projects that counties will receive $1.4 billion (net reduction of $200 million), cities will receive $1.1 billion (net reduction of $100 million), and special districts $500 million (net increase of $100 million). In each case, the figures represent unrestricted funding that can be used by local governments to fund police, fire, and other critical public services.
Implementation of Federal Health Care
Rather than expand county-based assistance programs, the May Revise proposes a state-based expansion of the Medi-Cal program to accommodate for the newly eligible individuals under the federal Affordable Care Act. The state plans to work with counties over time to monitor implementation.  Actual savings incurred by counties due to a reduction in their case loads for existing state mandated indigent care will be redirected to support expansions of county responsibility for other human services programs. Counties continue to remain concerned with several critical details of this proposal that may reduce funding levels or shift costs.
Federal Sequestration Impacts
The May Revise proposes several responses to recent federal sequestration: 
  • Backfilling losses to social services programs funded through the Social Services Block Grant (Title XX), Special Education Program, and Early Start Part C Grant Reallocation Program.
  •  Increasing by $73 million funding for the Labor and Workforce Development Department, which brings the agency’s funding level to $17.6 billion. This increase was necessary in part to accommodate for sequestration reductions including: loss of Unemployment Insurance (UI) emergency extension benefits for workers that have exhausted regular UI benefits and the reduction in available UI administration funding by an additional $31.2 million in 2013–14.
  • Proposing budget control language that will provide flexibility to decrease spending authority and make any reductions in spending subject to legislative review.
  • The sequester has also resulted in General Fund offsets related to Build America Bonds subsidy payments and the State Criminal Alien Assistance Program.
Significant Changes to State Programs
Higher Education: The Governor proposes three years of tuition and funding stability for University of California and California State University. Additional base funding will be provided to these institutions in exchange for a cap on tuition and various improvements to graduation rates, community college transfers, and reduced cost per degree.  
Adult Education:  An earlier proposal to restructure the adult education system was withdrawn; instead a funding augmentation is proposed to transition to a new adult education partnership program over the next two years that will better coordinate adult education efforts and focus on critical areas of instruction.
CalWORKS: Increased funding for CalWORKS of $48.3 million for job training and subsidized employment opportunities to assist getting Californians back to work under reforms adopted last year that limit adult access to cash assistance and employment services to 24 months.
Secretary of State: The Governor proposes to increase of $112 million and 559 positions to eliminate backlogs and maintain an average of five business day processing time for business filings until the implementation of an automated business filing system.
Next Steps

The League will continue to analyze this budget proposal and provide additional information to cities as necessary.

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