(January 14, 2008) Governor Arnold Schwarzenegger’s 2008-09 budget plan calls for difficult but necessary steps to bring the state’s chronic structural deficit under control, not only for this fiscal year but permanently, Director of Finance Michael Genest said at the California Chamber of Commerce Luncheon Forum on Friday.

Genest emphasized to the more than 110 luncheon attendees that the Governor’s budget takes a two-step approach to controlling the deficit. Step one involves imposing strict spending restraints in the current budget year while protecting and preserving essential state services. The second step is proposing a constitutional amendment to reform the budget process so that state government has the tools needed to avoid spending more money than it has in the future.

How Deficit Grew

The Budget Act of 2007 projected a reserve of $4.1 billion, the largest planned reserve in the state’s history, according to the introduction to the Governor's budget proposal. The 2007 act also showed that the deficit would re-emerge in the next fiscal year with spending exceeding revenues by $6.1 billion. Since those projections were made, the budget situation has deteriorated.

“The biggest component of our proposal are across-the-board cuts and I realize that a lot of people are really upset that certain programs that they like are going to see cuts, but no one can say that they were singled out, because pretty much every program in state government we are proposing to cut by 10 percent because we don’t see any other way out of this mess,” said Genest.

To close the $14.5 billion budget deficit, the Governor’s proposed budget includes 10 percent across-the-board reductions to all General Fund departments, programs, boards, commissions and elected offices--including the legislative and judicial branches--except where such a reduction is in conflict with the state Constitution or impractical, Genest explained.

Commenting on the administration's approach to previous budgets, Genest said, “We have not made the mistake of adding to the size of government and think that we had lots of money to do that with. If we made a mistake, we didn’t slow down the growth of government. All of those spending formulas, as the Governor likes to call them, all the entitlements were there and were placed there for the most part in the early part of the century and they really came home to roost during our administration.”

Size of Actual Cutback

In response to a question, Genest acknowledged that the actual amount of the proposed spending cuts is less than 10 percent. Comparing the spending levels in the last budget year with that proposed for the upcoming one, the total is several percent less, year over year, Genest said.

Michael Genest details the Governor's plan to control California's deficit during the January 11 luncheon at the CalChamber.

The 10 percent cutback figure arises from the state's practice of using as a base the projected amount to which programs are entitled for the coming year, he explained.

He emphasized, however, the need for lawmakers to decide on a course of action more quickly than in a typical budget year because of the rate at which spending is exceeding revenue coming into state coffers.

Reforming Budget Process

Genest said that California cannot tax itself out of this problem and that what is really driving this budget are the fundamental cuts and reforming the budget process.

Speaking about the Governor’s budget reform proposal, Genest said, “If we get this done -- on paper -- what needs to be done, including the Governor’s budget reform, we will be OK. We won’t have a cash crisis in March, or a cash crisis in July or August and there won’t be a threat to our solvency in July and August. We will have a balanced budget, and with the Governor’s budget reform, it will stay balanced out into the future.”

To prevent the state from relying on unsustainably high revenue gains, the constitutional amendment proposed by the Governor, the Budget Stabilization Act, will require that excess revenues -- revenues above a reasonable, long-term average rate of growth -- be deposited in the Revenue Stabilization Fund.

In years when revenue grows at a rate below average, monies will be transferred from the Revenue Stabilization Fund back into the General Fund in an amount not to exceed the shortfall. To ensure that the state quickly reduces spending to sustainable levels, the Budget Stabilization Act will provide for automatic reductions. These reductions will be triggered whenever the Governor projects that the state will be in a deficit.

“This may all seem like déjà vu, didn’t we just deal with the deficit last year,” quipped Genest. “We have a proposal to fix all that and I think the proposal will work if we can get it enacted.”

Governor Schwarzenegger appointed Genest as finance director on December 1, 2005. Genest first joined the department as chief deputy director in November 2003. He left the department in February 2005 to serve as undersecretary of the Health and Human Services Agency and returned to finance in September 2005 as acting director.

The Governor’s budget proposal, summaries and charts are available on the Department of Finance website at www.ebudget.ca.gov.