California: State plans to tap special phone funds

SACRAMENTO – A stalled state budget would take $278 million from two funds financed by fees on monthly telephone bills, a shift that alarmed phone companies and prompted a consumer group to call the plan "stealing."

The regulatory agency that oversees the funds, the Public Utilities Commission, found it had a surplus after being asked by the Legislature to help find ways to close a record $23.6 billion budget gap.

"There is a surplus in the fund, and we provided that data," said Loretta Lynch, the commission's president. "It's a policy call that the Legislature is entitled to make in a fund that the Legislature created."

Most of the money, $251 million, would be taken from High Cost Fund-B, created to subsidize lines into rural areas and other locations where a small customer base might not generate enough revenue to pay for the infrastructure.

The rest of the money, $27 million, would be taken from High Cost Fund-A, which provides supplemental revenue to 17 small local exchange carriers to help maintain similar rates in rural and urban areas.

"Sure, we need more money for the state budget," said Nettie Hoge of The Utility Reform Network, a San Francisco-based consumer group. "But it's just so easy for politicians to steal money from other sources. It seems like there should be some legal constraint to that."

If the funds have a surplus, Hoge said, the money should be returned to the customers who paid the excess through a refund or by lower monthly fees in the future.

The fee for High Cost Fund-B is 1.42 percent of the monthly telephone bill. The commission has been steadily decreasing the Fund-B fee since 1999, when it peaked at 3.8 percent.

The smaller High Cost Fund-A monthly fee began at 0.2 percent two years ago and has been increased to the current rate of 0.36 percent.

According to the PUC, Fund-B for telephone infrastructure, which would transfer $251 million to the state general fund, had a balance of $469.5 million at the end of June.

A spokesman said SBC Pacific Bell, which is studying the situation, does not think the balance is a surplus. The PUC said Fund-B paid out $450.5 million last year.

"We do draw from the fund," said John Britton of SBC Pacific Bell. "And, of course, when we draw from the fund, we hope there will be funds there to reimburse it."

The PUC said Fund-A for local exchanges had a balance of $14.6 million at the end of June – raising an obvious question about whether the state budget proposal to take $27 million from Fund-A is excessive.

But the PUC told the state Department of Finance that Fund-A is projected to have more than $27 million by the end of the fiscal year June 30. The money could be shifted any time before then.

"We will keep looking at it as time goes by," said Tim Gage, state finance director. "We don't anticipate a problem."

The California Telephone Association, representing 16 local phone companies, opposes the fund shift and is particularly concerned about the impact on High Cost Fund-A.

"Those small companies rely on that," said Margaret Felts, the association president. "For some of them, it's as much as 46 percent of their budgets."

Felts said some companies are already feeling pressure. No Fund-A money has been distributed since the fiscal year began July 1, she said, because there is no state budget.

"Smaller service areas may experience difficulties providing basic emergency services as the result of the budget stall," Felts said.

The transfer of the telephone funds is part of a state Senate plan to finance the restoration of $1.5 billion worth of cuts in health, welfare and payments to local governments proposed by Gov. Gray Davis.

The Senate approved a $99 billion budget June 29 with votes from all 26 Democrats and one Republican to reach the needed two-thirds majority. But the budget was blocked by Assembly Republicans, who oppose a tax increase and want future spending limits.

The Senate budget chairman, Steve Peace, D-El Cajon, said the Legislature's attorney concluded that the telephone fees are a broad-based tax that can be used for other purposes.

"We pretty much did that with every agency and department across the board," Peace said. "Any place there was excess money, we pretty much grabbed it."

He said the Department of Finance analyzed PUC information to ensure that enough money would be left to allow the telephone funds to carry out their original purpose.

"We discussed them all in public in conference committee," Peace said. "We were very open about it."

Followon to the above:

Vice Chairman's Column
Capitol Budget Brief
by Budget Committee Vice Chairman
Assembly Member John Campbell
A Legislator's Guide to Current State Budget Issues

February 12, 2002 Vol. 3 No. 1

Bonds and the Budget
AN OVERVIEW OF THE ADMINISTRATION'S BORROWING PROPOSALS

The 2002-03 Governor's Budget reflects 11 separate borrowing proposals, including one that is already on the March 2002 Ballot (Proposition 40, Clean Water Bonds). As shown in Table 1, eight of these borrowing proposals are intended to provide resources for the budget in 2002-03, while the other four address ongoing infrastructure or energy crisis issues. The total amount of the borrowing proposals is approximately $58 billion, although not all of this amount would be borrowed during 2002-03.

For each of the borrowing proposals, the table shows three figures. First, the table identifies the nominal amount of the borrowing that is proposed by the administration. Second, the annual cost of paying for the borrowing is identified. These amounts reflect the yearly cost associated with paying off the principal and interest on a bond. Because bonds are typically sold over time, this annual cost figure represents the approximate payment, including interest, once all of the bonds are sold. In the case of the short-term loans, the figure represents the expected cost of the repayment including interest. Most of these loans are to be repaid in 2003-04, although the repayment date for some was not specified. Finally, the table identifies the total cost of the borrowing over time, including interest expenses. Thus, in the case of the K-12/Higher Education Bonds, the Administration proposes a total authorization of $30 billion over three election cycles. These bonds will require an annual payment of about $2.4 billion once all of the bonds have been sold, and the state will pay out a total of $53 billion over the life of the bonds.

In the aggregate, the $58 Billion worth of borrowing reflected in the budget will result in total costs of $108 billion over the 30-year life of the borrowings. If all of the transactions are in fact concluded, the state could face much higher costs for debt service, peaking at about $5 billion (all funds) annually in 2006-07. In every year after the budget year, these additional costs are significant and make the state's long-term structural budget deficit worse. The Legislative Analyst's most recent estimates indicate that the General Fund's structural budget deficit is about $4 billion for the 2003-04 fiscal year. These borrowings could add almost $2 billion in General Fund costs to that 2003-04 deficit.

Nope. Just a few weeks back I was in a small town (more of a village really) in Mariposa County (not far from Yosemite). The "town" only had one telephone...a radio based payphone located in the center of its two-dozen or so homes. Although it's better than nothing, most of the residents admitted that they rarely make phone calls when there is four feet of snow on the ground. This fund is supposed to help these people get regular phone service within the next few years.

As the previous poster stated, we still have some extremely rural areas in this state. The Bay Area and the LA basin may get the headlines, but once you leave them behind and put some distance between yourself and the nearest freeway, you'd be suprised at just how backwards some of this state is.

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