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are redirected to the State. In an effort to eliminate the adverse impact of the sales tax revenue
<br />redirection on local governments, the legislation then redirects property taxes in the ERAF to
<br />local governments. Because the ERAF monies were previously earmarked for schools, the
<br />legislation provides for schools to receive other State general fund revenues. The swap of sales
<br />taxes for property taxes will terminate once the deficit financing bonds are repaid, which is
<br />currently expected to occur by 2016.
<br />State Economic Challenges, Prior Year State Budgets and Related Events As noted
<br />above, the City's budget has, generally, been revised after the delivery of delayed State
<br />Budgets to reflect necessary changes in budgeted revenues and expenditures. Delays in the
<br />delivery of State budgets cause an element of uncertainty for the City and its Finance
<br />Department to contend with. Delayed payments from the State to the City, which are more
<br />common during periods in which the State faces economic challenges, also subject the City to
<br />additional risk, possibly causing the City to increase the size or frequency of its cash flow
<br />borrowings, or to borrow earlier in the fiscal year, with concurrent, market - contingent, borrowing
<br />costs for the City.
<br />Since the beginning of 2010, the nation and the State have been gradually recovering
<br />from the worst recession since the Great Depression. National economic output has grown
<br />slowly as has personal income in both the State and the nation, and job growth has resumed.
<br />However, because of the magnitude of the economic displacement resulting from the recession,
<br />the State continues to face significant financial challenges, and related budgetary stresses.
<br />Exacerbating the State's challenges, as the State entered the recession, annual revenues
<br />generally were less than annual expenses, resulting in a "structural" budget deficit. This
<br />structural deficit was due in part to overreliance on temporary budgetary remedies in prior State
<br />Budget years, including one -time revenues, internal borrowing, payment deferrals, accounting
<br />shifts and expenditure reduction proposals that did not materialize.
<br />Moreover, in recent years, the State's then - seated Governors and State Legislatures
<br />have repeatedly failed to deliver a timely State budget. The Governor signed the 2010 -11
<br />Budget on October 8, 2010, the latest budget in the State's history. Prior to signing this 2010
<br />State Budget, and as a consequence of the State's ongoing budget deficit and financial
<br />challenges, Governor Arnold Schwarzenegger undertook several extraordinary and
<br />controversial fiscal measures. On July 1, 2010, Governor Schwarzenegger reduced over
<br />200,000 employees' pay to the federal minimum wage until the then - ongoing budget impasse
<br />ended. The State Controller refused to pay employees at this minimum wage level, and, on July
<br />16, 2010, a Sacramento County Superior Court judge denied the Governor's administration's
<br />request for a temporary restraining order that would have forced the State Controller to begin
<br />such payment.
<br />Thereafter, on July 28, 2010, Governor Schwarzenegger declared a financial state of
<br />emergency and ordered 150,000 State workers to take three furlough days per month. On
<br />August 23, 2010, in an effort to conserve cash and delay the need to issue State promissory
<br />notes for payment of the State's accounts, State officials elected to delay payments of $2.5
<br />billion per month to the State's public school districts, for the months of September through
<br />December 2010. This occurred after a prior $2.5 billion deferral in July 2010.
<br />On August 18, 2010, the California Supreme Court issued a stay of a temporary
<br />restraining order of the Alameda County Superior Court issued, which would have prohibited the
<br />Governor from imposing the three furlough days on State workers. As a result of the stay,
<br />furloughs of State workers were to continue until arguments in a larger case regarding their
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