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Legislative Update - March 22, 2011



March 22, 2011

Over the last 48 hours, Capitol insiders became much more pessimistic of the likelihood of a bipartisan plan to let the voters consider tax extensions. While some thought that "undecided" Republicans would be more willing to come to the table following the Republican convention, their demands on tax extension length, spending cap, pension reform and CEQA overhaul have only gotten greater.

Perhaps the greatest signal that a bipartisan plan is not likely was the leak of "Plan B" yesterday--the first acknowledgment that alternatives are being considered. And, as more alternatives are being talked about, the Republicans who had been negotiating feel its less necessary to come to the bargaining table.

Negotiations between the Republican and the GOP 5 are still officially "open." However, Democratic legislative leaders are reportedly considering two strategies--a simple majority vote for a June 21 election or an initiative campaign for a November 8 election.

While more options might sound promising, I believe it actually reduces the chance that we will have tax extensions to 10-15%.

Here's my assessment of the three options on the table, other than the much preferred bipartisan vote:

June election, Democrats-only (majority) vote: By holding the tax election in June, the sales and VLF taxes are "extensions," as they are scheduled to go up July 1. The personal income tax is an increase, as it went down on January 1, 2011. Voters are much more inclined to support tax "extensions" than tax "increases."

However, a "Democrats-only" package might lose the business and editorial support that Governor Brown has worked to gain. Republicans would campaign against it, arguing that Democrats weren't willing to cut "fraud, waste and abuse" or to accept their demands for a pension reform and regulatory relief.

The practical advantage to June is that we know our fate earlier and, in the all-cuts disaster, we have time to actually achieve the needed savings before the state runs out of cash.

My odds: Chance of happening: 50%; Chance of voter approval: 30%; Overall chance: 15%

November election, initiative measure: The new option is intriguing as it frames the ballot measure as a "citizens' initiative." However, it would still require Democrats to pass a bill calling the special election, as the governor doesn't have the authority. Politically, the initiative on the November ballot is more difficult because all of the taxes are "increases" rather than extensions, and (under the same tax package) voters would be asked to approve an eleven-month retroactive personal income tax increase. Further, $3 billion in revenue is lost by having the election in November, losing six months of sales tax and VLF revenue.

On the other hand, however, the voters will have a chance to see the impact of many of the cuts. One of the biggest problems is that, while the voters know that there have been cuts and aren't happy, they have little trust that the magnitude of cuts currently discussed will actually be implemented. In fact, the wolf may need to show up for the voters to believe that the boy isn't simply crying again.

The practical problem with November is that, if the voters say "no," $6-8 billion in cuts might have to be made with only seven months left in the fiscal year.

My odds: Chance of happening: 20%; Chance of voter approval: 25%; Overall chance: 5%

All-cuts or near all-cuts (small, majority vote revenues) either now, or after failed tax elections in June or November: Voting for deep cuts without trying is morally abhorrant to many Democrats, and to be clear, more people will literally die under the all-cuts budget.. There are strong indications that anti-tax conservatives will not join the Democrats to cast the hardest votes, leaving all the political and moral impact of the decisions on the majority party. Republicans argue that if the Democrats wanted the Proposition 25 authority for majority vote budgets, then there is no obligation to participate in the budget debate.

In the end, it's highly unlikely that $25 billion in cuts would be made in this scenario, but rather $15-20 billion in cuts that would still be devastating across state services. The remaining deficit would be closed through the state's very limited borrowing ability, majority-vote revenues of maybe $2 billion, and the time-honored tradition of gimmicks and overly optimistic projections.

Overall chance: 70%

I'm still leaving a 10% chance of a bipartisan vote to place the revenues on the ballot, although I think the odds are diminishing hourly. And, all scenarios this year rely on the very difficult premise of a special election. In the May 2009 special election, only 4.9 million voters cast ballots. Last November in the Brown v. Whitman contest, 11 million voted, 4.1 million of whom voted for Whitman. Thirteen million voted in Obama v. McCain. Anyway, a bipartisan election probably has a 40% chance of passage.

Long story short, very few people can be counted on to vote in a special election, and the most consistent voters are likeliest to vote against the taxes. This makes any revenue scenario relying on voter approval extremely difficult, although a "bipartisan" approach makes it a bit more likely.

Those numbers also give support to the argument of many tax supporters that, despite the miserable pain of an all-cuts budget this year, next November's presidential general election gives the best hope for a revenue package through the intiative process that puts this budget nightmare behind us.

Regardless of the option pursued, there is a strong likelihood that this will be sorted out in the next 48 hours. This is a three-day weekend for the Legislature for the Cesar Chavez holiday. Because of this, they need to meet on Friday, even if it's a late Thursday session that technically extends beyond the 12:01am calendar day. By doing so, it means an extra $519 in per diem for the three days for all but a few of the legislators of both parties.

If my numbers don't add up above, my apologies. Blame it on 16 years of working with the California state budget.


Scott Lay
President and Chief Executive Officer, The League
Orange Coast College '94

Community College League of California
2017 O Street, Sacramento, California 95811
916.444.8641 . www.ccleague.org

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Last Updated: 3/23/11