(January 15, 2010) Without corrective action, California is projected to face a budget gap of $19.9 billion in fiscal year 2010‑11, state Finance Director Ana J. Matosantos said at the California Chamber of Commerce luncheon yesterday.

Mirroring sentiments voiced by the Legislative Analyst’s Office (LAO) from the fall, Matosantos said, “Absent corrective action, absent changes and reform to our budget, the state is looking at a budget shortfall in the $20 billion range for a number of years… We need to close that gap and ensure we right our fiscal house.”

Matosantos explained to the more than 75 Luncheon Forum attendees that since the Amended 2009 Budget Act was signed in July 2009, the estimated budget gap has grown from $6.9 billion to $19.9 billion, due to the following principal reasons:

• Decreased revenues from the ongoing effects of the historic economic recession;
• Court decisions that have blocked implementation of some solutions approved by the Legislature in 2009;
• The erosion in the value of some of the savings adopted in 2009; and
• Additional costs associated with population-driven and caseload-driven entitlement programs.

Defining Budget Gap

California is projected to face a budget gap of $19.9 billion in fiscal year 2010‑11. This figure is comprised of a current year shortfall of $6.6 billion, a budget year shortfall of $12.3 billion, and a modest reserve of $1 billion, Matosantos said.

Various factors contribute to the increase in the 2010‑11 deficit from the $6.9 billion that was projected when the 2009‑10 budget was enacted. Specifically, revenue estimates are $3.4 billion lower, federal and state court decisions have reduced or eliminated budget solutions adopted in previous years and imposed costs totaling $4.9 billion, erosions of previous solutions result in $2.3 billion of the budget gap, and population and caseload growth adds $1.4 billion in costs.

Closing Budget Gap

Matosantos said the Governor’s Budget proposes a combination of spending reductions, alternative funding, fund shifts and additional federal funds to close the $19.9 billion budget gap.

Given the re‑emergence of a current year shortfall and the time needed for budget solutions to achieve their full value, it is imperative that many of the solutions proposed in the budget be adopted immediately, Matosantos said. This is why the Governor has declared a fiscal emergency and called the Legislature into Special Session. The budget proposes solutions for action in the Special Session that will close $8.9 billion of the budget gap. Any delays in the adoption of these proposals until the enactment of the 2010‑11 budget would result in the loss of up to $2.4 billion in budgetary solutions and thereby necessitate even deeper cuts in 2010‑11, Matosantos said.

Reforming the Federal‑State Relationship

Matosantos explained that minimizing the potential additional impact on state programs will require a new level of cooperation by California’s counterparts in Washington, D.C.

The budget proposes structural changes in the state and federal relationship to address federal constraints on California’s ability to effectively manage program costs within available resources and proposes that California be reimbursed for money owed to the state, she said. These program reforms and recouping federal funding will provide $6.9 billion in solutions to address next year’s shortfall and help reduce projected deficits into the future.

Federal mandates, including spending requirements, constraints on program reductions and federal court decisions delaying reductions of services have contributed more than $1.4 billion toward the current budget gap, Matosantos said.

California needs greater federal flexibility to more effectively manage program costs in state and federal programs within available resources. Without this flexibility and without the level of federal funding proposed in the budget, California will be forced to make even more difficult spending reductions, Matosantos said.

For example, Matosantos commented that California receives a 50 percent reimbursement share from the federal government for Medi-Cal, the lowest possible reimbursement share. The average of other populous states and the national average is 57 percent, she said.

Matosantos said costs owed to California as a result of providing services for MediCal patients that should appropriately have been federal monies amounted to $1 billion in 2010-11 and $750 million on an ongoing basis.

Plan to Address Anticipated Cash Shortfall

Although the state does not face as serious a cash shortfall as it did 12 months ago, action will be needed this spring to ensure that the state has adequate cash resources to meet its critical obligations in a timely manner, Matosantos said. She promised  that her department will work with the State Controller and the State Treasurer to develop a cash management plan that will achieve that goal.

However, Matosantos did warn that the re‑emergence of a budget shortfall threatens to undermine the state’s cash management plan. Absent corrective action, she said, the state will once again face substantial challenges in meeting all General Fund cash needs beginning in July 2010.

Matosantos explained that proposals to close the budget gap will substantially reduce this cash gap. In addition to budget solutions, however, the state will need to obtain external financing early in the fiscal year.

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