The budget saga continues! After an all-night-all-day voting marathon last week, legislators approved a slew of bills to help erase the state's deficit, and then hit the road for summer recess after spending nearly 20 hours wrangling votes for various pieces of the revised 2009-10 budget package. Two components of the budget deal failed in the Assembly, one that would have allowed oil drilling off the coast of Santa Barbara and another that authorized taking about $1 billion in gas tax revenues from local governments. Governor Arnold Schwarzenegger used his blue pencil veto authority to trim mainly social service programs after legislators sent him a package that fell short of his planned reserves.

Fortunately for the CSU, there were no vetoes to CSU’s budget. However, even with the passage of the budget, California is not out of the woods and the state will continue to wrestle with several other critical issues over the next several months.

One of the hottest and most public issues revolves around the funding of prisons and early release of prisoners. This issue almost derailed the whole budget deal just prior to the vote early last week when Republicans were upset that Schwarzenegger and Democrats were said to be pushing a plan to cut corrections. The Republicans had hoped the issue of early release of prisoners wouldn't have come up until after the overall budget plan had passed. The Administration, on the other hand, argued that even those prisoners released early from prison - deported illegal immigrants and 6,300 aged or infirm inmates - would be under some form of supervision or out of the country.

The issue of water also continues to loom in the background and with it the possibility of a 2010 bond package or a system of fees to help finance water projects. There is a growing sense among players under the dome that Schwarzenegger wants to build a canal - and dams - for his political legacy. As the Legislature finishes their session and prepares to pull together a water plan, the political forces are taking shape, with the Governor, farmers and many public water agencies favoring options up to and including the construction of reservoirs and a canal of historic proportions. Many – but not all – environmentalists oppose the canal. The funding of these water projects have drawn fierce opposition, and the closer to the Delta the tougher the opposition. There are several water proposals that will most likely go to conference committee at the end of the legislative session in August and September to hammer out a water deal. In the mix of these swirling issues is the funding of the Water Resources and Policy Initiative at CSU Fresno which calls on the CSU system to assist in conservation accounting and implementation. The CSU is being asked to provide collaborative assistance on a statewide basis to help agencies increase their level of conservation and water use efficiency and keep an account of statewide aggregate savings to assure that total savings goal is assured.

Even as the ink has just dried from the Governor’s signature on the state’s budget, a major Wall Street credit rating firm, Moody’s, believes that California faces shortfalls in future years of more than $15 billion. Some analyses are saying that California will have a deficit projecting at $7 to $8 billion for the next fiscal year, but they cautioned that Moody's analysis was based on preliminary information that will be updated soon.

A few days prior to the budget deal, the State Controller John Chiang released his monthly report detailing California’s cash balance, receipts and disbursements in June and for the complete 2008-09 fiscal year.

He said “California continues to pay for its history of unbalanced budgets. The State spent $10.4 billion more than it collected last year alone, and is now without enough cash to cover all of its payment obligations.”

Personal income taxes in June were $987 million below (-18.0%) estimates in the May Revision, and sales taxes were short by $154 million (-5.8%). Corporate taxes were $1.31 billion above estimates (41.2%). Corporate taxes in May and June were boosted by a surge of payments from corporate taxpayers hoping to avoid a new State penalty.

Just after signing the budget, Governor Schwarzenegger announced that he will call a special session in late September so legislators can consider the Commission on the 21st Century Economy's recommendations for overhauling the state's tax system. An exact date for the special session has not been set, but the press release notes that the commission's deadline for submitting its findings has been extended yet again to September 20. That means legislators could be back in the Capitol just weeks after the regular session ends September 11. The state’s revenue system, dominated by a progressive personal income tax, is even more erratic. Taxes pour into the state treasury during even mild economic booms, but when the economy turns sour, revenue plummets. The Commission, however, is ideologically divided and has already missed two deadlines. Earlier in July, some on the commission focused on flattening the income tax to reduce its reliance on a handful of wealthy taxpayers whose incomes and tax payments vary widely, because some commissioners would not agree to push more of the tax burden onto middle-income taxpayers. At the time of this writing, the commission is trying to write a plan that reduces volatility with elements such as removing property tax limits on commercial property, extending the sales tax to services and imposing a "carbon tax" on fuel.

Political writer Dan Walter’s reports that “it's uncertain whether the commission can come anywhere close to a consensus on tax reform, but Schwarzenegger has now given it until September 20 to complete its plan, five months later than the original deadline. And he says he will call a special legislative session to act on it immediately – even though he doesn't know what it will contain.”

As we said, the budget saga continues…..