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TOUGH QUESTIONS from page 1 ....................................... In order to finance the ERAF payments, the legislature is considering additional gen- eral fund budget cuts. First —The Facts • California state government has a $38+ billion deficit. It is operating on bor- rowed money and is essentially bankrupt. It has been notified that its bond rating (now the lowest of all the states) will be downgraded to junk bond status if it does not clean up its fiscal house. • Its vendors and nonprofit agencies that depend on state funding are not going to be paid in the next few weeks and months if a budget is not adopted soon. • The bond house Lehman Brothers has advised state leaders the state cannot issue another round of temporary debt obligations in September if it does not have a budget by July 15. • The Attorney General has said the state needs a new, dedicated revenue source to finance $10.7 billion of the deficit without violating the Proposition 98 school funding guarantee. He has said the same problems would occur if the existing state sales tax were lowered and increased again, dedicated to the deficit bonds. • Republican legislators have consis- tently refused to vote for a new, dedicated tax for the deficit reduction bonds. • The only other option apparently under consideration right now to established a dedicated source of revenue to finance the bonds is the "triple flip." • Republican legislators considering this proposal have indicated they would hold local governments harmless from any revenue loss, saying future revenue growth would at least match sales tax growth rate. • A number of Democratic legislators have indicated opposition to the idea since it produces no net gain to the state and would require more than $2 billion in additional cuts in the budget year or will raise the structural deficit a similar amount. The League's Concerns It is important to note that, at this stage, we don't have the information we need to fully analyze this proposal. The League would clearly oppose an AB 1221 -type flip. We are attempting to get details on this budget pro- posal so we can formulate a final position. We do, however, have serious concerns. These are reflected in the questions (below) that we urge you to also pose to your legisla- tors. In fact, they might help legislators think through the proposal. Here Is What We Urge You to Ask Your Legislators 1. Why Take Local Funds? Why is it necessary to finance the state deficit with local taxes? Will your legislators support raising state taxes or using existing state revenues to do the same thing? Do they have other choices, like rolling over the deficit from year to year (e.g., Senate Republican budget plan)? 2. How Long Will the Flip Last? Will it sunset at the end of the financing of the bonds? 3. How Will Local Governments Be Protected? What will protect local govern- ments from state raids of the property tax in future years? Will legislators support a bind- ing commitment in state law and in the state's contracts with bondholders not to reduce or redirect the new property taxes? 4. What About the Revenue Growth? How will the growth of the new property tax be allocated? Will cities and counties receive no less than their actual sales tax growth? 5. Will the Plan Flip Back and Return the Local Sales Tax to Local Govern- ments? Are state legislators willing to return the local sales tax at the end of the deficit financing? 6. Will Legislators Cast the Tough Votes to Make the Flip Work? Are legisla- Continued on Pale 9 Visit the League's Official Web Site••www.cacities.org PRIORITY FOCUS/PAGE 7