Governor Schwarzenegger Announces Plan to Address Budget Emergency, Stimulate California’s Economy

FROM THE OFFICE OF THE GOVERNOR

November 06, 2008

To remedy California's urgent budget situation due to economic conditions radically deteriorating since the 2008 Budget Act was signed, Governor Arnold Schwarzenegger today called a special session of the legislature and announced an action plan to get our budget back on track, invigorate our economy and generate jobs for the state's unemployed. The Governor called for a combination of cuts and revenue increases to solve California's budget shortfall which has now reached $11.2 billion. The actions prescribed by the Governor must be taken up as quickly as possible in order to prevent a cash crisis that will jeopardize vital state services.

"In the six weeks since I signed our last budget the mortgage crisis has deepened, unemployment has increased and the stock market has lost almost 20 percent of its value," Governor Schwarzenegger said. "We have drastic problems that require drastic and immediate action-we must stop the bleeding right now. We must first close a projected current year shortfall of $11.2 billion, and then we must address the mortgage crisis to keep people in their homes, implement an economic stimulus package to help retain existing jobs and create as many new ones as possible, and fix the state's Unemployment Insurance Fund. I look forward to working with all the legislators, hearing their ideas and doing what is best for the people of California."

While Governor Schwarzenegger has worked to fix the state's spending problem, and has kept state spending relatively flat for the past three budget cycles, the dramatic drop in our revenue projections over the past six weeks presents an extraordinary situation which, combined with the volatility of our tax system, creates a revenue problem. To address this extraordinary situation, the Governor is proposing $4.5 billion in difficult cuts and $4.7 billion in new revenues for the current-year budget which will ensure the state can protect vital services.

Governor Schwarzenegger's proposal calls for a temporary increase in the state sales tax, from 5 percent to 6.5 percent, which will generate additional sales tax revenues of $3.219 billion in 2008-09 and $6.606 billion in 2009-10 for the General Fund. It will also effectively protect significant education funding. At the end of three years, the state sales tax would revert back to 5 percent. Additionally, the Governor called for additional revenue increases including broadening the sales and use tax to include certain services, imposing an oil severance tax upon any oil producer that extracts oil from the earth or water in this state and increasing the alcohol excise tax by five cents a drink.

Yesterday, the Governor announced an aggressive plan to help shore up our state's economy by helping Californians stay in their homes. His proposal would bring down foreclosure rates by helping both borrowers and lenders modify existing home loans in ways that benefit both parties. Also, to prevent another mortgage crisis in the future, the Governor is prescribing changes to the way mortgages are brokered and originated to make lenders more accountable, guard against risky mortgages and prevent unsustainable bubbles from ever arising again.

Governor Schwarzenegger has also unveiled a plan of targeted actions that will stop our economy's downward spiral now. His prescription is full of specific actions to generate jobs, keep jobs and businesses that are tempted to leave in California and lure those that have left back to the Golden State. The major elements of the Governor's plan are workplace reforms to assist California businesses and put an end to costly lawsuits and clearing regulations in order to push specific funding that is already "in the pipeline" out into the economy sooner.

The Governor's plan to stimulate employment in our state includes:

Accelerating hospital construction to inject approximately $160 million into California's economy. Pushing out and expediting infrastructure bond monies to create jobs and help unemployed residential construction workers in the hardest hit areas of the state get trained in a new type of construction. Keeping high paying jobs in California by providing overtime exemptions and allowing more flexible work schedules to increase productivity. Clarifying meal and rest periods to save businesses hundreds of millions of dollars in litigation costs and create less confusion from meal break violations which will mean fewer terminations. Reducing barriers to public-private partnerships and "design-build" agreements to enable more infrastructure to be built better, faster and cheaper and generate more jobs during the housing downturn. Keeping television and film production in California by providing targeted tax credits and keep thousands of jobs in the state and economic output in our state. Governor Schwarzenegger also unveiled a plan to continue to help those Californians most in need by ensuring benefits for the state's unemployed through restoring solvency to the unemployment insurance fund. The financing system for the trust fund is over 20 years old - and while benefits have increased, contributions have remained the. The fund is projected to be $2.4 billion in the red for the coming calendar year and $4.9 billion in the red in 2010. If no changes are made, federal taxes for California employers will increase in 2012.

To shore-up the fund and protect benefits to unemployed Californians, the Governor has called for a gradual increase in contributions into the fund, combined with a small reduction in benefits in order to maintain the fund's solvency.

In an effort to avoid the extreme revenue swings that have caused crippling deficits in our state, the Governor and legislative leaders last week announced the long-term action of creating the bipartisan Commission on the 21st Century Economy to re-examine and modernize California's out-of-date revenue laws that contribute to our feast-or-famine state budget cycles. The commission will suggest changes that will result in a revenue stream that is more stable and reflective of our economy while maintaining a fair and equitable revenue structure that will ensure our continued competitiveness and attraction to employers and workers.