Governor Jerry Brown signed a budget compromise this week that relies on strong economic growth to remain balanced, but only after additional painful spending cuts to basic state and local services.

The budget deal, consummated before the start of the 2011-12 fiscal year, recognized that the Republicans were not going to vote to extend the temporary tax increases adopted in 2009. New or extended taxes would require two-thirds approval by the Legislature, meaning at least two Republicans in each house would have to agree.

As a result, the state sales tax rate will drop down by one percentage point and rates will be reduced on vehicles newly registered or renewed starting this month. The income tax surcharge in effect in 2009 and 2010 expired on December 31, 2010.

Economic Recovery Key

California Chamber of Commerce President and CEO Allan Zaremberg commented on the June 28 budget vote the next day by saying, “The budget passed last night is predicated upon economic recovery. This makes it clear that legislators must work to ensure no more harm is done to California’s economy.

“We all must work together to do everything possible to create certainty for employers. Any job killing bill has the potential to impact the state budget and result in more cuts to critical programs. Whether the priority is private sector jobs or public sector services, all will be hurt if job killing legislation is passed.

Majority Vote Budget

The $86 billion General Fund budget was the first spending plan adopted under the new procedures approved last November by the voters in Proposition 25. That measure reduced the vote threshold for the budget from a two-thirds margin to a simple majority of the Legislature. The budget was approved with no Republican votes.

Even under a streamlined approval, all parties gave up some cherished demands. Legislative Democrats had insisted on new or extended taxes to support a higher level of spending. Governor Brown had insisted on a statewide vote of the people on a five-year extension of the 2009 temporary tax increases and using part of the extension to begin reducing the state’s outstanding budget debt. Legislative Republicans had insisted on pension and regulatory reforms, and a tougher spending cap as a condition of higher taxes or a popular vote on taxes. None of these demands came to pass.

Key Budget Elements

The ultimate compromise included a mix of tough spending cuts, hopes for a more robust economic recovery and, failing that, additional spending reductions and a guaranteed continuation of budget deficits. Key elements of the budget include:

• No new, increased or extended taxes. As of July 1, the state sales tax and vehicle license fee will revert to January 2009 levels. Personal income tax rates have already dropped by one-quarter of a percentage point as of last January. On an annual basis, this means taxes are about $9 billion less than in 2010.

• Several new fees and tax collection schemes. Vehicle registration fees were increased by $12 to support the Department of Motor Vehicles and a new fire suppression fee for rural homeowners was adopted. Also, e-commerce vendors with affiliates in California, such as Amazon, will be required to collect sales taxes on in-state purchases. Amazon has indicated it may terminate its relationships with California affiliates.

• Major cuts to higher education. Together, the University of California and California State University budgets will be reduced by $1.3 billion, plus another $200 million if the optimistic revenues don’t materialize. These legislative actions will lead to higher tuition and reduced enrollment opportunities.

• Further cuts to courts and public safety. The state’s trial courts will be cut a total of$350 million in the latest compromise and more than $300 million in courthouse construction will be delayed, which will eliminate numerous private sector jobs. Also, the state Department of Justice will see its budget reduced, which the Attorney General indicates will compromise public safety.

• Public schools have been spared the worst of the budget ax this year. They are fully funded with the Proposition 98 guarantee. If the $4 billion in hoped-for revenues fails to materialize, however, school funding will fall by $1.5 billion, which could trigger a seven-day reduction in the school year. A companion to the budget bill provides a guarantee that any money cut by the trigger will be restored in future years. In addition, it appears to prevent school districts from terminating teachers in 2011-2012 due to lack of funds.

• Redevelopment agencies eliminated. In one of the more controversial outcomes of this year’s negotiations, the Legislature agreed to eliminate and replace redevelopment agencies. These local economic development bodies have been under fire for reasons ranging from abusing property rights to wasteful and ineffective practices. Savings to the state are estimated at $1.7 billion, but this assumes the proposal survives a vigorous legal battle by the League of California Cities

Third Try Signed

The budget signed this week was the third budget the Legislature approved this year. The first was passed in March, but not transmitted to the Governor, pending further negotiations on tax and reform issues. The second was passed just before the June 15 legislative deadline, in order to meet the requirements of Proposition 25 that the budget be passed by then or else legislative pay and expenses cease. The Governor unexpectedly vetoed that budget, which was laden with gimmicks and debt, but the State Controller stopped paying legislators anyway, saying the budget must not only be timely, but balanced. Observers have commented that the Controller’s tactic may have increased the incentive for the Legislature to reach a budget compromise.

The budget is predicated upon the belief that $4 billion in new revenues is possible based on recent increases in state revenues, so that essential programs should not be cut until the state knows for sure that its income hasn’t met projections.

On the other hand, some economists have expressed skepticism over what they consider to be rosy revenue estimates in the adopted budget.