The 2007–08 budget focuses on closing the gap between its General Fund revenues and expenditures for the fiscal year. The enacted budget, with the Governor’s vetoes, assumed that the state would spend no more than it received in 2007–08 and end the year with a $4.1 billion reserve. Since the budget’s enactment, however, the state has made a one–time payment to the state’s teacher retirement system of $500 million in response to a court decision. In addition, as discussed in more detail below, a number of additional risks will potentially further reduce the reserve.

Budget Overview

Total State Spending

The state spending plan for 2007–08 includes total budget expenditures of $131.5 billion. This includes $102.3 billion from the General Fund and $29.2 billion from special funds. As Figure 1 shows, this is an increase of 4.3 percent from 2006–07, primarily due to increases in special fund spending. The state also expects to spend $14 billion in bond funds for infrastructure during the fiscal year. This is an increase of almost $5 billion (51 percent) from the previous year—which reflects the beginning rollout of spending from $42.7 billion in general obligation bonds approved by voters in November 2006.

Figure 1 2007-08 Budget Package Total State Expenditures
(Dollars in Millions)
Fund Type	Actual 2005-06	Estimated 2006-07	Enacted 2007-08	Change From 2006-07
Fund Type	Actual 2005-06	Estimated 2006-07	Enacted 2007-08	Amount	Percent
General Fund	$91,592	$101,656	$102,258	$602	0.6%
Special funds	22,716	24,403	29,213	4,810	19.7
Budget Totals	$114,308	$126,059	$131,471	$5,412	4.3%
Selected bond funds	5,304	9,293	14,072	4,779	51.4
Totals	$119,612	$135,352	$145,543	$10,191	7.5%

The General Fund Condition

Figure 2 summarizes the estimated General Fund condition for 2006–07 and 2007–08 under the budget plan. (As described in more detail below, the General Fund condition will be affected by several developments that have occurred since the signing of the budget. The largest such action is the payment of $500 million to the state’s teacher retirement system.)

2006–07. The figure shows that 2006–07 began the year with a fund balance of $10.5 billion. This large balance is related to (1) the sale of over $11 billion in deficit–financing bonds and other forms of budgetary borrowing in previous years and (2) the carryover of unanticipated revenues received in 2005–06 and earlier. The state spent an estimated $6 billion more during the year than was received in revenues. Based on the 2007 May Revision revenue estimates, the year ended with a fund balance of $4.8 billion. However, revenues collected for the months of May and June were about $600 million less than the May Revision estimate. Revenue totals for 2006–07 will be finalized later in the fall.

2007–08. The budget plan projects revenues of $102.3 billion in 2007–08, an increase of 6.5 percent from 2006–07. The plan authorizes expenditures of an equal amount, an increase of 0.6 percent. At the time of enactment, this left the General Fund with a year–end reserve of $4.1 billion. The enacted budget reserve, however, was subsequently reduced by $500 million due to the teacher retirement payment. The reserve is made up of two components:

$2.6 billion in the state’s traditional reserve—known as the Special Fund for Economic Uncertainties.
$1.5 billion in the Budget Stabilization Account, which was established when voters approved Proposition 58 in March of 2004. The budget act provides authority for the administration to transfer these funds to the General Fund during the fiscal year if needed.

Figure 2 2007-08 Budget General Fund Condition
(In Millions)
	2006‑07	2007‑08
Prior-year fund balance	$10,454	$4,811
Revenues and transfersa	96,013	102,262
Total resources available	$106,467	$107,073
Expenditures	$101,656	$102,258
Ending fund balance	$4,811	$4,815
Encumbrances	745	745
Reserveb	$4,066	$4,070
Budget Stabilization Account (BSA)	$472	$1,494
Reserve for economic uncertainties	$3,594	$2,575

a 2006-07 amount includes $472 million and 2007-08 amount includes $1.023 billion in General Fund revenues transferred to BSA, which the administration excludes from its revenue totals. These different treatments do not affect the bottom-line reserve shown.
b Under the budget's revenue assumptions, the state would need to appropriate from the reserve roughly $400 million more each in 2006-07 and 2007-08 for Proposition 98 spending.

Programmatic Features of the 2007–08 Budget

Spending by Program Area. Figure 3 shows General Fund spending by major program area for 2005–06 through 2007–08. Specific program area features include:

K–12 education spending remains the single largest area of the budget, accounting for 38 percent of the General Fund total. Education funding is expected to grow by $921 million (2.4 percent). The bulk of new spending is for a 4.53 percent cost–of–living adjustment (COLA).
The fastest growing area of the budget is criminal justice, which is budgeted to increase $770 million (6.3 percent). This reflects costs to comply with various health care court cases and implement Proposition 83 (Jessica’s Law).
The second fastest growing area is higher education, expected to grow by $631 million (5.6 percent). Under the budget plan, the University of California, California State University, and California Community Colleges segments all receive base augmentations to address salaries and other cost increases, as well as augmentations to fully fund anticipated enrollment growth.
Transportation funding declines by 50 percent—reflecting a one–time $1.4 billion loan repayment made in 2006–07 associated with Proposition 42 transfers that had been deferred from earlier years. (Not reflected in the figure is special fund support for transportation, which increased by 19 percent over the same period.)

Figure 3 2007-08 Budget Package General Fund Spending by Major Program Area
(Dollars in Millions)
	Actual 2005-06	Estimated 2006-07	Enacted 2007-08	Change From 2006-07
	Actual 2005-06	Estimated 2006-07	Enacted 2007-08	Amount	Percent
K-12 Education	$36,425	$38,523	$39,445	$921	2.4%
Higher Education	10,232	11,310	11,941	631	5.6
Health	17,124	19,542	20,276	734	3.8
Social Services	9,218	9,876	9,443	-434	-4.4
Criminal Justice	10,243	12,154	12,924	770	6.3
Transportation	1,699	2,986	1,481	-1,505	-50.4
All other	6,651	7,264	6,749	-515	-7.1
Totals	$91,592	$101,656	$102,258	$602	0.6%

Budget Solutions. In order to address the state’s operating shortfall, the budget includes the following major solutions:

Proposition 98. The Governor’s May Revision revenue forecast (assumed by the Legislature in enacting the budget) results in a higher Proposition 98 guarantee for 2006–07 than included in the 2006–07 Budget Act. Due to uncertainty regarding this revenue projection (particularly as it relates to final 2006–07 revenues), the budget does not provide $411 million in 2006–07 Proposition 98 “settle–up” funds. Carrying this lower base into 2007–08, the budget also assumes the 2007–08 minimum guarantee will be lower by $427 million, generating additional General Fund savings. If the May Revision revenue forecast proves accurate, therefore, the state would owe more than $800 million in additional funds to education under the Proposition 98 minimum guarantee. These funds would come from the budget’s reserve.
Transportation. The budget uses almost $1.3 billion in Public Transportation Account funds to reduce General Fund expenditures. The budget plan also assumes $596 million in General Fund benefit for 2008–09.
Revenue Assumptions. The budget package assumes $1 billion in one–time revenues from the sale of EdFund, the state’s nonprofit student loan guaranty agency. The budget also assumes $293 million in new General Fund revenues from amended tribal gambling compacts. The budget package accelerates the transfer of $600 million in tobacco securitization funds to the General Fund. These tobacco funds were originally scheduled to be transferred in 2008–09 and 2009–10. Moreover, the budget benefits from an additional $357 million in higher–than–expected revenues from the securitization.
Social Services Savings. The budget achieves ongoing savings of about $247 million from suspending a California Work Opportunity and Responsibility to Kids (CalWORKs) COLA for one year and permanently delaying the state Supplemental Security Income/State Supplementary Program (SSI/SSP) COLA for five months.
Governor’s Vetoes. The Governor vetoed $703 million in General Fund expenditures from the budget passed by the Legislature. The largest veto was a $332 million reduction to the state’s Medi–Cal Program based on the administration’s assertion that earlier estimates were too high. The second largest veto was a $72 million reduction in the amount provided for higher state employee compensation costs. The administration expects departments to pay for these higher employee compensation costs from existing funds.

Budget–Related Developments Since Enactment

Since the budget’s enactment in August, there have been a number of other budget–related developments.

Teachers’ Retirement Payment. In 2003–04, as a budget balancing solution, the state reduced by $500 million a statutory annual appropriation to the purchasing power protection program of the California State Teachers’ Retirement System (CalSTRS) on a one–time basis. In September 2007, the Third District Court of Appeal ruled that the reduction unconstitutionally violated the contractual rights of system members. Consequently, the administration repaid the $500 million using the underlying statutory appropriation. The amount of interest owed on the payment is still being determined and will require a future appropriation to be paid. The interest owed could total in the range of $200 million.

Public Transportation Fund Lawsuit. On September 6, 2007, the state was sued by public transit advocates arguing that the budget’s redirection of more than $1 billion in transportation funds to benefit the General Fund is illegal. The case has not yet been heard.

Fifth Indian Compact Approved. The budget package assumes receipt of $293 million in new General Fund revenues from amended compacts negotiated between the Governor and five Southern California Indian tribes. At the time of the budget’s enactment, only four of these compacts had been approved by the Legislature. On September 7, the Legislature approved SB 941 (Padilla) which ratifies the Fifth compact between the state and the San Manuel Band of Mission Indians.

General Fund Spending Over Time

Figure 4 shows General Fund expenditures from 1990–91 through 2007–08 both in current dollars and as adjusted for population and inflation (that is, in real per capita terms). The figure illustrates that after growing rapidly in the late 1990s, real per capita spending fell significantly throughout the first part of the 2000s. From 2004–05 through 2006–07, real per capita spending rebounded somewhat. For 2007–08, the rate of inflation is expected to be greater than the authorized expenditure increase of 0.6 percent—resulting in a drop in real per capita spending.

Out–Year Impacts of the 2007–08 Budget

As described above, many of the budget solutions are of a one–time nature. Based on the 2007–08 budget plan’s policies, therefore, the state would once again face operating shortfalls of more than $5 billion in both 2008–09 and 2009–10. In addition, the CalSTRS payment has already reduced the reserve by $500 million. Other optimistic assumptions and legal risks threaten to reduce the reserve even further. A lower reserve will reduce the carryover funds available to help solve these future budget problems. We will be updating our fiscal projections for 2007–08 and future years in November 2007, when we release our annual publication California’s Fiscal Outlook.

Evolution of the Budget

In this section, we highlight the major developments in the evolution of the 2007–08 budget, beginning with the Governor’s original January budget proposal and ending in August 2007, when the budget was signed into law.

Governor’s January Proposal

The 2006–07 budget benefited from surging revenues to significantly increase education spending and prepay budgetary debt. In contrast, the outlook for the 2007–08 budget was more troubling. Although 2007–08 revenues were forecast to outpace revenue growth in 2006–07, 2007–08 expenditures were expected to exceed available revenues. As a result, the January budget proposed more than $3 billion in budgetary solutions. Even after these solutions, the plan assumed that budget–year expenditures would exceed revenues by almost $1 billion and relied on part of the carryover reserve to make up the difference. It projected a reserve of $2.1 billion at the end of the budget year.

Major Proposals. Figure 5 (next page) summarizes the administration’s major proposals from January. The administration’s major proposal for increased spending was a $595 million supplemental payment towards the retirement of the state’s deficit–financing bonds earlier than scheduled. The administration’s largest budget solutions were:

A redirection of $1.1 billion from transportation purposes to benefit the General Fund.
The assumption of more than $500 million in new revenues from amended tribal gambling compacts.
$496 million in savings from changes to the CalWORKs program, including placing new time limits and sanctions on children whose parents cannot or will not comply with participation requirements.

May Revision

Worse Budget Outlook. Between January and May, the administration’s view of the budget outlook worsened by more than $2 billion. While its revised revenue forecast projected a similar amount of tax revenues in 2006–07 and 2007–08 combined, more of the revenues were now expected in 2006–07. Consequently, the state’s minimum funding requirement under Proposition 98 went up by almost $500 million over the two years combined. In addition, lower property tax receipts in 2005–06 increased state General Fund obligations for K–12 education by about $300 million. In other program areas, higher correctional officer costs from an arbitration decision and higher firefighter costs pushed expenditures upwards. In addition, the administration shifted the expected sale of the pension obligation bonds from 2007–08 to 2008–09—eliminating a $525 million budget–year solution. (A court ruling against the state in July 2007 later forced the administration to drop this proposal altogether.)

Figure 5

Key Elements of Governor’s January Proposal
2007-08 Budget

Deficit-Financing Bonds

• In addition to the $1.5 billion payment from the sales tax through the “triple flip,” provided a $1 billion payment from the Budget Stabilization Account.

• Provided an additional $595 million supplemental appropriation for the accelerated payoff of the bonds.

Proposition 98 Education

• Implemented 2006‑07 program expansions, but did not propose new expansions for 2007‑08. Provided Proposition 98 support for CalWORKs-related child care, resulting in General Fund savings.

• Rebenched the minimum guarantee related to a home-to-school transportation proposal, thus lowering it in future years.

Transportation

• Used $1.1 billion from the Public Transportation Account to replace General Fund spending in three areas: Proposition 98 funding for home-to-school transportation; transportation services provided by regional centers; and debt service on general obligation bonds issued for transportation projects.

Social Services

• Suspended the July 1, 2007 COLA for CalWORKs grants, and placed new time limits and sanctions on children whose parents cannot or will not comply with CalWORKs participation requirements.

Revenues

• Assumed $506 million in new General Fund revenues from amended gambling compacts with five tribes.

• Assumed sale of pension obligation bonds in 2007‑08 with a General Fund benefit of $525 million.

New Solutions. In response to the worsening budget outlook, the administration proposed more than $2 billion in new solutions, which are summarized in Figure 6. The largest proposed solution was the sale of EdFund, at an estimated price of $1 billion. The May Revision took advantage of $357 million in higher–than–expected revenues from the state’s securitization of its tobacco settlement funds. In addition, the administration accelerated the General Fund transfers of $600 million of these funds that were originally scheduled to be transferred in future years. The largest proposed reduction in program services was a suspension of the statutory January 2008 SSI/SSP COLA, reducing state costs by $185 million. With these solutions, the May Revision projected a reserve of $2.2 billion.

Figure 6

May Revision—Key Differences From January
2007-08 Budget

Proposition 98 Education

• Modified home-to-school transportation proposal to eliminate the rebenching of the minimum guarantee.

• Provided more than $400 million in 2006‑07 settle-up funds to reflect a higher estimated minimum guarantee due to revised revenue estimate.

Higher Education

• Proposed selling EdFund to a private buyer for an estimated $1 billion.

Transportation

• Proposed to use $200 million in additional transportation funds for General Fund benefit through a modified home-to-school transportation proposal.

Social Services

• Suspended the statutory January 2008 SSI/SSP COLA.

Revenues

• Reduced estimate of tribal gambling revenues by $192 million.

• Counted $957 million in additional and accelerated revenues from tobacco securitization.

• Shifted sale of pension obligation bonds to 2008‑09 due to legal delays.

Lease of Lottery. The administration also proposed a long–term lease of the State Lottery to a private vendor. Although suggesting that the one–time benefit of such a lease could total in the billions of dollars, the May Revision made no budgetary assumptions regarding the revenue benefit.

Final Budget

Following the May Revision, the Senate and Assembly took actions on the administration’s revised proposals, and the budget was sent to the Conference Committee to reconcile the differences between the houses. The adopted Conference Committee version of the budget had a reserve of $2 billion. It made a number of key changes to the May Revision including:

Rejection of the $595 million supplemental payment on the deficit–financing bonds.
Rejection of the Governor’s proposed CalWORKs time limits and sanctions.
A reduced General Fund benefit from the redirection of transportation funds.
Reduced 2006–07 Proposition 98 expenditures by not providing settle–up funds.

After the close of the Conference Committee, the Governor and the Legislature continued budget negotiations. On July 20, the Assembly passed the Conference budget bill along with a supplemental bill that made amendments to the plan. After another month, on August 21, the Senate passed these bills along with additional amendments to the package. After making $703 million in General Fund vetoes promised during negotiations, the Governor signed this budget package on August 24. Figure 7 summarizes the key differences between the enacted budget compared to the May Revision. In comparison to the Conference version of the budget, key negotiated changes were:

A reserve of $4.1 billion, compared to $2 billion.
Reducing 2007–08 General Fund Proposition 98 expenditures by assuming a lower minimum guarantee in 2006–07 carried forward to 2007–08.
Increasing the use of transportation funds to benefit the General Fund to the May Revision’s level.
Delaying the SSI/SSP COLA by five months.

Figure 7

Final Budget—Key Differences From May Revision
2007-08 Budget

Reserve

• Increases reserve by almost $2 billion, to $4.1 billion.

Deficit-Financing Bonds

• Rejects proposal to make $595 million supplemental payment for outstanding deficit-financing bonds.

Proposition 98 Education

• Does not provide 2006‑07 settle-up payment and builds off this lower base for its assumption of the 2007‑08 minimum guarantee.

Transportation

• Uses $1.3 billion in transportation funds for General Fund benefit, but modifies the administration’s home-to-school transportation proposal.

Social Services

• Delays a SSI/SSP COLA for five months, rather than suspend it for a year.

• Rejects the administration’s proposals for CalWORKs time limits and sanctions.

Revenues

• Deleted pension obligation bonds from spending plan due to appeals court decision against the state.

The Legislature took no action related to the leasing of the Lottery. Additional key features of the enacted budget package are described in the “Expenditure Highlights” section.

Corrections Capital Outlay

As the Legislature was considering the 2007–08 budget, it was also reviewing a proposal by the Governor to authorize $9 billion in lease–revenue bonds for prison construction. The plan would have dedicated $5 billion for the expansion of state prison capacity and $4 billion for local jail beds for adult offenders. After several months of negotiations, the Legislature passed a somewhat different prison construction package, which the Governor signed into law in May as Chapter 7, Statutes of 2007 (AB 900, Solorio). Chapter 7 appropriates $300 million from the General Fund to improve and expand infrastructure capacity (such as water, electrical, or sewage capacity) at existing prison facilities, as well as $50 million from the General Fund to improve rehabilitation and treatment programs for prison inmates and parolees. Chapter 7 also authorizes $7.4 billion in lease–revenue bonds. The lease–revenue bonds authorized by Chapter 7 are intended to add approximately:

12,000 beds and programming space at existing prison facilities in order to replace “temporary beds” currently in use.
16,000 reentry facility beds for inmates who are within one year of being released to parole.
Medical, dental, and mental health treatment space and housing for approximately 8,000 inmates.
13,000 beds at local jail facilities.

The costs of the lease–revenue bonds appropriated by Chapter 7 will largely be incurred in subsequent budget years as these bonds are sold and paid off.

The Legislature also approved SB 99 (Senate Budget and Fiscal Review Committee) which, if signed into law, would in effect earmark $146 million of these funds for a centralized health facility at the state prison at San Quentin ordered by the court–appointed Receiver currently overseeing the department’s inmate medical system.

Budget–Related Legislation

In addition to the 2007–08 Budget Act, the budget package includes a number of related measures enacted to implement and carry out the budget’s provisions. Several such measures were passed at the end of the legislative session. Figure 8 lists these bills.

Figure 8 2007‑08 Budget and Budget-Related Legislation
Bill Number	Chapter	Author	Subject
Budget Package
SB 77	171	Ducheny	Budget bill (conference report)
SB 78	172	Ducheny	Budget bill revisions
SB 79	173	Committee on Budget and Fiscal Review	Transportation
SB 80	174	Committee on Budget and Fiscal Review	Education
SB 81	175	Committee on Budget and Fiscal Review	Corrections
SB 82	176	Committee on Budget and Fiscal Review	Justice
SB 84	177	Committee on Budget and Fiscal Review	Human services
SB 85	178	Committee on Budget and Fiscal Review	Resources
SB 86	179	Committee on Budget and Fiscal Review	General government
SB 87	180	Committee on Budget and Fiscal Review	Taxation
SB 88	181	Committee on Budget and Fiscal Review	Proposition 1B
SB 89	182	Committee on Budget and Fiscal Review	EdFund
SB 90	183	Committee on Budget and Fiscal Review	Information technology
SB 91	184	Committee on Budget and Fiscal Review	EdFund
SB 97	185	Dutton	California Environmental Quality Act
AB 199	186	Budget Committee	General government revisions
AB 201	187	Budget Committee	Proposition 1B revisions
AB 203	188	Budget Committee	Health
Post-Budget Legislation
AB 191	Pending	Budget Committee	Corrections cleanup
AB 192	Pending	Budget Committee	General government cleanup
AB 193	Pending	Budget Committee	Transportation spillover
AB 194	Pending	Budget Committee	Governor’s vetoes modified
AB 195	Pending	Budget Committee	Health clinic services
AB 196	Pending	Budget Committee	Proposition 1B—local streets

Expenditure Highlights

Proposition 98

Proposition 98 funding constitutes about three–fourths of total funding for K–14 education (K–12 schools and community colleges). In this section, we review Proposition 98 funding in the 2007–08 Budget Act. We also review various related issues, including the effect of General Fund revenue changes on total Proposition 98 funding levels, the additional funding provided to K–12 schools and community colleges as a result of a recent settlement, and the K–14 education credit card. In a following section, we discuss the total K–12 budget in more detail, and in the “Higher Education” section, we discuss the total community college budget in more detail.

The 2007–08 budget package includes $57.1 billion in total ongoing Proposition 98 funding for K–14 education. This represents an increase of $2.1 billion, or 3.9 percent, from the revised 2006–07 spending level. General Fund support covers about one–third of this increase ($697 million) and local property tax revenue covers the remainder ($1.4 billion). Figure 1 (next page) displays Proposition 98 funding, by source, for K–12 schools, community colleges, and other affected agencies. (In addition to the totals displayed in Figure 1, $300 million is being allocated to K–12 schools and community colleges as a result of a recent settlement agreement. (Please see box on page 16 for additional detail.)

Budget Relies Heavily on One–Time and Special Fund Monies. As shown in Figure 1, the budget contains $2.1 billion in new ongoing Proposition 98 funding for 2007–08. This year–to–year growth is insufficient to cover all 2007–08 K–14 baseline costs. For example, providing cost–of–living adjustments (COLAs) to existing K–12 and community college programs at the statutory rate (4.53 percent) costs roughly $2.4 billion. To fund baseline costs without appropriating more than the Proposition 98 minimum guarantee, the Legislature used other funding sources to supplement the ongoing Proposition 98 budget. In particular, the budget package uses a considerable amount of one–time and special fund monies ($567 million) to support baseline costs. The state, therefore, will enter 2008–09 with a large “hole” in the ongoing Proposition 98 budget. (The shortfall involves only K–12 programs and is discussed in more detail in the K–12 education section. The budget fully funds all community college baseline costs.)

Figure 1 Ongoing Proposition 98 Budget Summary
(In Millions)
	2006-07 Revised	2007-08 Budget Act	Change
	2006-07 Revised	2007-08 Budget Act	Amount	Percent
K-12 Education
General Fund	$36,637	$37,203	$565	1.5%
Local property tax revenue	12,346	13,594	1,248	10.1
Subtotals	$48,983	$50,797	$1,813	3.7%
California Community Colleges
General Fund	$4,030	$4,157	$127	3.2%
Local property tax revenue	1,857	2,052	195	10.5
Subtotals	$5,886	$6,209	$322	5.5%
Other Agencies	$114	$119	$5	4.3%
Totals, Proposition 98	$54,984	$57,125	$2,141	3.9%
General Fund	$40,781	$41,479	$697	1.7%
Local property tax revenue	14,203	15,646	1,443	10.2

Revenue Fluctuations Affect 2006–07 Proposition 98 Decision Making. Estimates of state revenues fluctuated notably throughout 2006–07, which, in turn, affected estimates of the 2006–07 Proposition 98 minimum guarantee. Most significantly, the Governor’s May Revision revenue forecast resulted in a higher estimated Proposition 98 obligation for 2006–07 compared to earlier estimates. Specifically, the May Revision forecast assumed the state would have to provide $411 million in additional Proposition 98 “settle up” to meet the minimum guarantee for 2006–07 (see Figure 2). Although the Legislature assumed the May Revision revenue forecast in enacting the overall 2007–08 budget, it chose to use more recent revenue estimates for the purposes of Proposition 98. At the time most Proposition 98 decisions were being made, both state General Fund revenues and the Proposition 98 minimum guarantee for 2006–07 appeared down relative to the May Revision. Based on the updated revenue projections, the state no longer appeared to owe Proposition 98 settle–up for 2006–07. As a result, the budget act does not contain the $411 million settle–up payment proposed in the May Revision.

Depending on Final 2006–07 Revenues, K–14 Funding Could Increase. If finalized revenue figures for 2006–07 result in a higher minimum guarantee than the level provided in the budget, the state will automatically owe a settle–up payment for 2006–07. The state will need to provide this funding through subsequent budget action. In contrast, if finalized revenue figures come in lower than projections, the state cannot reduce Proposition 98 spending for 2006–07 because the fiscal year has already ended. Instead, the state will have spent more than required by the Proposition 98 minimum guarantee.

Budget's Proposition 98 Appropriations Based on Lower Revenues Compared to May Revision

Decisions for 2006–07 Affect Estimated Proposition 98 Minimum Guarantee for 2007–08. Because the Proposition 98 requirement for 2007–08 builds off the 2006–07 spending level, not providing the settle–up payment in that year also lowers the minimum guarantee for 2007–08. Specifically, as shown in Figure 2, this action reduced the 2007–08 minimum guarantee by $427 million compared to the May Revision. As suggested above, if final 2006–07 revenues come in higher than anticipated, then the estimated Proposition 98 obligation for 2007–08 also would be correspondingly higher.

K–14 Credit Card Update

From 2001–02 through 2003–04, the state achieved substantial budget solution by delaying certain Proposition 98 spending. Specifically, the state decided to defer significant education costs ($1.3 billion) to the subsequent fiscal year. (Rather than a budget reduction, these deferrals resulted in districts receiving some state funds a few weeks later than normal.) In addition, the state delayed reimbursement of outstanding mandate cost claims. (At that time, the state had outstanding claims dating back to 1995–96.) In 2003–04, as a further budget solution, the state also made reductions to K–12 revenue limits. We have referred to these various delays as the education “credit card.”

Still Carrying Almost $1.9 Billion on Education Credit Card. Figure 3 displays the balance of the credit card in 2005–06 and 2006–07 and our estimate of the amount owed in 2007–08. The figure shows that the education credit card balance was reduced by almost $1 billion in 2006–07, with the substantial repayment of K–12 mandate claims and full restoration of K–12 revenue limits.

Figure 3 Update on the K-14 Education Credit Card Balance
(In Millions)
	2005-06	2006-07	2007-08
Deferrals
K-12	$1,103	$1,103	$1,103
Community Colleges	200	200	200
Mandates
K-12a	$900	$275	$435
Community Colleges	100	90	115
K-12 revenue limits	$300	—	—
Totals	$2,603	$1,668	$1,853

a Excludes claims that are unlikely to be paid as the result of court decisions or recent determinations by the Commission on State Mandates.

In contrast, the 2007–08 budget package increases the credit card balance—making no progress toward paying down outstanding deferral and mandate obligations, providing no funding for new K–12 mandate costs, and providing little funding ($4 million) for community college mandate costs. (We expect K–14 claims for mandated local programs to reach about $185 million in 2007–08, which adds to the $365 million still owed from prior years.) As a result, the credit card will grow to almost $1.9 billion in 2007–08.

Additional Funds Provided Through First Settlement Payment

The Quality Education Investment Act (QEIA), established by Chapter 751, Statutes of 2006 (SB 1133, Torlakson), formalized a settlement agreement between the Governor and the California Teachers Association. Consistent with the lawsuit, QEIA appropriated a total of roughly $2.7 billion over a seven–year period beginning in 2007–08. (As a result of this legislation, QEIA payments are not part of the annual budget process.) As required in QEIA, the state is allocating $300 million to K–12 schools ($268 million) and community colleges ($32 million) in 2007–08. These funds are to be used primarily for class size reductio

California Spending Plan 2007–08

The Budget Act and Related Legislation

Contents

Key Features of the 2007–08 Budget

Expenditure Highlights

Key Features of the 2007–08 Budget

Budget Overview

Total State Spending

The General Fund Condition

Programmatic Features of the 2007–08 Budget

Budget–Related Developments Since Enactment

General Fund Spending Over Time

Out–Year Impacts of the 2007–08 Budget

Evolution of the Budget

Governor’s January Proposal

May Revision

Final Budget

Corrections Capital Outlay

Budget–Related Legislation

Expenditure Highlights

Proposition 98

K–14 Credit Card Update

Additional Funds Provided Through First Settlement Payment