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State Budget Update

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Sacramento Lawmakers Reach Agreement on FY 2009-10 Budget

Wednesday, July 29, 2009 Update:
On Tuesday, July 28, Governor Schwarzenegger signed the revised FY 2009-10 state budget, vetoing $489 million in General Fund spending in order to provide a $500 million cash reserve. In a last-minute change adopted by the Assembly, the final budget does not divert local gas tax funds from cities and counties but it still contains deep cuts to public transportation funding, with about $1 billion in public transit funds redirected to the General Fund.

4:00 p.m., July 24, 2009 Update:
In a surprise but welcome twist, the California State Assembly approved the state budget but rejected the diversion of $1 billion in local gas tax funds (HUTA). The budget will now go to Governor Schwarzenegger for approval. More details will be provided when available.

July 24, 2009
Sacramento legislative leaders and the governor have reached an agreement on how to close an estimated $23 billion shortfall in the state’s General Fund for FY 2009-10. The Senate approved the budget last night and the Assembly is expected to adopt it later today, Friday, July 24. The proposed budget deal includes a transfer of approximately $1 billion (about 85 percent) of local gasoline tax funds that would otherwise go directly to cities and counties to fund local street and road repairs, with the exception of 139 small cities (click here (PDF) for a list of exempt cities) that already received their minimum allocation amount of $400,000 from the Proposition 1B (2006) local street and road funds. A last minute lobbying effort by cities and counties resulted in a change to the budget that requires these funds to be repaid over 10 years beginning in FY 2011-12.

There is also a slim chance that the local gasoline tax funds will not be redirected to the state at all. This is because of a provision related to redevelopment agencies whereby if enough redevelopment agencies agree to extend the period of their redevelopment authority by 35-40 years and transfer to the state 10 percent of the additional revenue to be generated by that extension, the state would forgo the transfer of gas tax subvention funds (as well as the borrowing of local property tax revenue). However, under the provisions of the budget agreement, two conditions must be met by December 1 in order for this “trigger” to be pulled:

  • The courts need to affirm its constitutionality
  • Enough redevelopment agencies need to opt in to allow the state to issue $7.4 billion worth of bonds.

Regardless of whether these requirements are satisfied, cities and counties will not receive any funds between now and December 1 as the state will defer the disbursement of local gasoline tax funds during that period.

Bay Area Transportation Impacts

Major Hit to Local Street and Road Repairs

In the San Francisco Bay Area, the diversion of local gas tax funding will reduce by $184 million funds available to cities and counties for local street and road repairs in FY 2009-10 and almost $140 million in FY 2010-11, as shown here (PDF). Cities below X in population are exempt from the diversion.

To put these cuts in context, the region’s local street and road network – an asset valued at $40 billion – has an estimated repair backlog of $6 billion, and an annual funding shortfall of more than $200 million. Experience shows that delayed maintenance eventually leads to even costlier rehabilitation down the road, costing five times more than timely maintenance. In addition, these cuts constitute the primary funding source available to local government to fund the staffing and operating costs of their public works departments.

The diversion of local gas tax subvention funds will not only exacerbate the infrastructure backlog, it will also result in the layoff of hundreds of public works employees across the region. In county public works departments alone, the funding cuts will cause over 700 public works staff to be laid off, according to a survey taken by the California State Association of Counties. Upon hearing that the diversion was included as part of the budget deal, CSAC announced its intention to sue the state on the grounds that the diversion violates the State Constitution.

Public Transit Diversion Remains Key Part of Budget “Solution”

While the elimination of state funding for transit operations was made in the February version of the FY 2009-10 budget and therefore is not a surprise to transit operators, the repercussions of these cuts are being felt across the region as local operators raise fares, cut service and lay off workers. The latest revenue projections from the Department of Finance indicate that $584 million in State Transit Assistance (STA) funds will be diverted statewide, including $211 million for the Bay Area. Click here (PDF) for a detailed breakdown of the loss of STA funds by Bay Area transit operator. When combined with $439 million in other public transit funds that would have gone towards transit capital projects in the State Transportation Improvement Program or intercity rail improvements, the total loss of transit funding statewide is $1 billion.

Property Tax Diverted from Three Bay Area Transit Agencies

In addition to the local street and road and STA diversions, several Bay Area transit operators are also affected by the borrowing of local property taxes, including AC Transit and BART, which will lose $7.5 million and $2.5 million. If there is a silver lining to this diversion, it is that these funds will be repaid within three years with interest.

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