BILL ANALYSIS
AB 1645
Page 1
Date of Hearing: April 15, 2010
ASSEMBLY COMMITTEE ON BUDGET
Bob Blumenfield, Chair
AB 1645 (Nestande) - As Amended: April 15, 2010
SUBJECT : State Budget: Key Liabilities
SUMMARY : Requires the Governor to submit to the Legislature,
along with the annual budget proposal, a report identifying key
liabilities and how to retire those liabilities. Additionally,
the bill restricts the Governor from including revenue from laws
or programs not yet authorized or in effect in the annual budget
revenue estimates. Specifically, this bill :
1)Requires the Governor to submit, with the annual budget
proposal, a report identifying the state's key liabilities
that will affect the state's financial health in the future.
The report is required to discuss budget-related liabilities,
infrastructure-related liabilities, and retirement-related
liabilities. The report must also include recommendations for
the retirement of those liabilities.
2)Requires the Governor's budget to include a section that
specifies the percentages and amounts of General Fund (GF)
revenues that must be set aside and applied toward retiring
those key liabilities identified in the report required by
this bill.
3)Restricts the Governor's budget from including in its revenue
estimates any revenue expected to be generated from laws,
programs, or executive actions not in effect or effectuated at
the time the budget is submitted to the Legislature.
EXISTING LAW :
1)Requires the Governor to submit, within the first 10 days of
each calendar year, a budget for the ensuing fiscal year
(Article IV, section 12 of the California Constitution).
2)Requires the Governor's budget to include a complete plan and
itemized statement of all proposed expenditures and all
estimated revenues for the ensuing fiscal year. It must also
contain a comparison for those proposed "budget year"
expenditures and revenues with the actual revenue and
AB 1645
Page 2
expenditure amounts for the previous completed fiscal year and
the estimated revenue and expenditures for the current year.
3)Requires the budget to include a section that specifies the
percentage and amount of GF revenue that must be set aside for
schools and community colleges pursuant to Proposition 98.
4)Government Code 16320 requires the Director of Finance on
August 1st of each year to report to the Joint Legislative
Budget Committee the balance of any internal loans between
state funds. On February first, the Director of Finance is
required to update that report, and additionally include a
summary of all obligations for future payments of deferred or
suspended expenditures.
a) Staff notes that this section refers only to loans and
obligations related to the 2001-2004 fiscal years, but that
the Director of Finance in practice includes all years in
the report.
FISCAL EFFECT : Unknown
COMMENTS : The author states the intent of this bill is to
highlight state liabilities. This bill, however, does not
appear to achieve the outcome of focusing the budget discussion
on those specific issues. As discussed below, many of these
issues are already addressed within the existing Governor's
Budget. The fact that they are not recognized as being part of
the Governor's Budget simply demonstrates that adding another
page, another chart, or another table to a nearly 1,500 page
document does not provide a context or discussion point for the
budget. The idea of spurring discussion on these important
issues is a good one, but the effect of the bill merely
duplicates information within the existing Governor's Budget.
1)Revenue Estimates:
The bill, as written, precludes the Governor from including
revenue from laws, programs, or executive actions not in
effect at the time the budget is submitted. This, however,
would mean the programs and laws proposed in the budget, often
with the sole purpose of raising revenue, could not be
included in the Governor's revenue estimates. Additionally,
the budget often encompasses many other bills that help
implement the budget. The budget would not be able to account
AB 1645
Page 3
for those actions in revenue estimates either. The
Constitution and State Statute require the Governor to present
a balanced budget in a manner he sees fit. This provision
would severely limit the Governor's ability to do that, by
limiting all revenue estimates to be those in current law. It
doesn't make sense to limit projections to current law. The
Governor's Budget is intended to propose changes, allowing the
Legislature to adopt some of those changes, and rejects
others. As changes are made to the proposed budget and other
bills before the legislature, the revenue and spending
estimates are adjusted accordingly. The Author and Committee
may wish to consider removing this portion of the bill.
2)Key Liabilities:
The bill requires the budget to include the amount of GF
revenues that must be set aside and applied toward retiring
"key liabilities" but doesn't define what that means.
Liabilities generally refer to debts, but do not speak to the
time frame of that debt. The budget proposal is only designed
to address the ensuing budget year. Any liabilities, such as
debt payments, loan repayments, or retirement contributions,
which need to be paid in the budget year, are already included
within the budget. Liabilities that will be paid in future
years could confuse the budget document and imply the full
liability must be paid in the budget year.
Additionally, the bill, as drafted, requires the budget to
identify the funding that must be set aside "in accordance
with the recommendations contained in the report." This
implies the recommendations made solely by the Governor, to
address long term liabilities, somehow compels that the budget
include those actions. In reality, these long term
liabilities could be addressed over many years, using funds
other than general funds, using very different methods than
those recommended independently by the Governor. The bill
requires a separate report, which includes recommendations for
the retirement of those liabilities, and is likely a more
appropriate place for those discussions to occur. The Author
and Committee may wish to consider removing the requirement
for the budget to specify GF set asides to be applied to the
key liabilities identified in the separate report.
3)Bond/Infrastructure Debt:
AB 1645
Page 4
The report proposed by the bill must identify the state's key
liabilities, including infrastructure liabilities. The budget
submitted by the Governor currently contains a great deal of
information regarding the state's existing bond debt. On page
18 of the Governor's 2010-11 proposed budget summary, both
Debt Service and Infrastructure are identified as
expenditures. On page 66 of the same document, there is a
discussion as to where the debt service costs come from. The
appendix to the Governor's budget summary includes "Schedule
11 - Statement of General Obligation Bond and Commercial Paper
Debt of the State of California." This two page chart lists
each active bond act, that amount of authorized funds, how
much of that has been issued, how much has been redeemed, and
how much remains outstanding. It may be duplicative to
request this information in the report.
4)Retirement-Related Liabilities:
Both the Public Employees' Retirement System (PERS) and the
State Teachers' Retirement System (STRS) operate, to some
extent, independently of the legislature. They each have the
fiduciary responsibility to operate their systems responsibly,
thus adequately addressing all unfunded liabilities. As such,
it doesn't make sense for the Governor to provide estimates of
costs to pay off those liabilities. The systems annually
address the need to increase payments (or decrease payments)
as necessary based on the fund status.
The more pressing retirement liability relates to state
retiree health benefits. These benefits are currently funded
on a pay-as-you-go basis, as opposed to pre-funded. These
liabilities are reported upon annually by the State
Controller's Office. Some groups have recommended that these
benefits become pre-funded, such as the Post-Employment
Benefits Commission created by the Governor. This would
present significant costs to the state, but would be paid over
a long period of time. As such, this bill would be tasking
the Governor with identifying the preferred method/time period
for pre-funding these benefits (which is not required by law),
and identify those costs as a current liability on the budget.
It may be more appropriate for the Legislature to consider
such options and determine the best way to handle those costs
in the future, rather than task the Governor with this
responsibility. Information on these liabilities is already
available from the State Controller annually
AB 1645
Page 5
(http://www.sco.ca.gov/Press-releases/2010/OPEB_February_2010.p
df). It may be duplicative to request this information in the
report.
5)Loans:
This bill requires the report to list "other liabilities" that
will affect the state's financial health in the future. As
drafted, this section is vague and leaves to the Governor's
discretion what items should be included. Pursuant to
Government Code 16320, the Governor is already required to
report to the Legislature twice a year on internal borrowing
between state funds, as well as other obligations for future
payments.
Rather than add a few pages to be lost in the Governor's
Budget, the Author's idea of a report on these issues may be a
better solution. The report would allow the Administration to
consolidate this existing information into one place for easy
access and would provide a starting point for discussions on
the state's debt service and the need for a long-term view of
how to handle those costs. The timing of the report could be
far more beneficial to the budget process than including it in
the Governor's budget as well. Requiring the report to be
submitted by February 1st of each year would allow data from
the full previous calendar year to be processed and would
provide the information during budget discussions, allowing
appropriate changes to be incorporated into the final budget
proposal.
Potential Language:
AB 1645 - Strike the entire bill, and insert:
Section 16321 is added to the Government Code to read:
(a) On Feb. 1 of each year, the Director of Finance shall submit
a report, in writing, to the Chairperson of the Joint
Legislative Budget Committee including:
(1) A summary and list of loans to the General Fund, their
balances, and the dates that the loans are due.
(2) A summary and list of General Fund obligations for
AB 1645
Page 6
future payment of deferred or suspended expenditures or
transfers to any special fund or account and the dates
those obligations are due.
(3) A summary and list of the state's key liabilities in
the nature of debt, infrastructure, budget, retirement and
other liabilities that will affect the state's financial
health in the future.
(4) Recommendations for potential methods to retire those
liabilities listed over time.
REGISTERED SUPPORT / OPPOSITION :
Support
American Council of Engineering Companies
Howard Jarvis Taxpayers Association
California Communities United Institute
Desert Contractors' Association
Whitley's Construction Corporation
TandemWest Glass
Opposition
None on file.
Analysis Prepared by : Adam Dondro / BUDGET / (916) 319-2099