Now that the state isn't in dire straits, Brown's new budget (PDF) gives an additional $2.9 billion for K‑12 schools and community colleges, and it focuses on prioritizing how the state funds education. If Brown's budget is approved, school districts would get more flexibility in how they spend their money; controversially, the formula for divvying up funding would become more progressive. Brown wants 80 percent of school funding to be split on a standard per-student basis, which would be the same across the state, but the remaining 20 percent will be focused on funding schools and districts with higher portions of students who are poor, in foster care, or are English-language learners.

The budget also tries to knock down what Brown calls the "wall of debt," built by borrowing and budget tricks state legislators used over the years to "balance" the budget. The wall of debt totaled about $35 billion in 2011, and Brown's budget aims to reduce that to $5 billion by the end of the 2016‑17 budget year.

With the focus on education and paying down debts, other problems in the state go unaddressed. State courts, for example, have had to dramatically pare back services and delay cases; they won't get extra funding. The state prison system, which is fighting court orders to improve medical care or reduce its number of inmates, won't get more money, either.

Brown now heads into a month of budget negotiations with state legislators, who have already hinted they'd like to see more spending. Of course, as Brown has reminded lawmakers, he must approve any final budget.

Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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SOPHIE QUINTON
MAY 13 2013, 10:29 AM ET

The state wants to protect lower- and middle-class families, but Republicans are calling it "one of the most dangerous pieces of legislation I've ever seen"

When California State Sen. Kevin de Léon talks about his plan to help people save for retirement, he usually starts by describing his Aunt Francisca, a housekeeper. "She's north of 70 and she still cleans homes," says de Léon. Francisca can't afford to retire because she has no savings. Even with help from Social Security, she struggles to make ends meet.

Saving for retirement has never been easy for poor and middle-class workers, and employer-sponsored retirement plans have never been universal. But the recession and slow recovery have made it hard for many Americans to make a living, let alone put money away.

A new law authored by de Léon attempts to address what he calls the coming "retirement tsunami." Signed by Gov. Jerry Brown in September 2012, the California Secure Choice Retirement Savings Program would establish automatic payroll contributions into retirement accounts for 6.3 million Californians whose employers don't sponsor a pension plan or a 401(k). Legislators in left-leaning states such as Connecticut and Illinois have put forward similar proposals, as has U.S. Sen. Tom Harkin (D-Iowa). 

The California program aims to create an effortless savings vehicle for an underserved population. Three-quarters of eligible workers make less than $46,420 per year, putting them into a demographic that relies heavily on Social Security in retirement. The new law won't end reliance on Social Security, but it could provide workers with additional financial security.  

The program is designed to be privately run and managed, ideally at no cost to the state. Advocates like de Léon argue that its structure combines portability--one of the best features of 401(k)s and Individual Retirement Accounts--with professional management of pooled funds--one of the best features of traditional pension plans. The new system would deduct an automatic 3 percent contribution from the paychecks of eligible employees, unless they chose to opt out. Workers with unconventional employment arrangements--like housecleaners--could opt in. And businesses with more than five employees that fail to allow payroll deduction would pay a penalty of $500 per eligible employee.

The contributions would be saved in individual, IRA-type accounts, but the accounts would be managed collectively as an estimated $6.6 billion fund. To protect workers against stock-market crashes, no more than 50 percent would be invested in equities. "Looking at what happened in 2008, 2009--we can't have that happen for this population," says Lisa Chin, de León's legislative director.

Additional protections include a reserve fund that could be drawn from during years of slow growth, and private insurance, to guarantee account-holders a rate of return. The guarantee would likely be tied to the 30-year Treasury bond rate, which is currently about 3 percent.

"Automatic enrollment is great because the evidence we have so far--which comes from large companies that have traditional 401(k) plans--is that participation rates are extremely high," says Brigitte Madrian, professor at the Harvard John F. Kennedy School of Government. Automatic enrollment and payroll deduction are powerful tools that help people save, she says, because people don't tend to miss money they don't see.

Large, pooled funds are cheaper to manage than hundreds of individual accounts--and that lowers fees that account-holders have to pay, says Nari Rhee, manager of research at the National Institute on Retirement Security. Pension funds also tend to have higher returns, because they're professionally managed, invest over the long term, and spread market risk across a range of people of different ages and income levels.

De León insists that the savings program isn't a new entitlement. But California's existing pension obligations loomed over his bill. The measure didn't get a single Republican vote in the Legislature, and even many Democrats were skeptical. "It's one of the most dangerous pieces of legislation I've ever seen," Democratic State Sen. Ted Lieu, told The Sacramento Bee. The California Department of Finance Analysis, also opposed the bill, saying it could create a new "multibillion-dollar liability."

The California Chamber of Commerce argued that the plan was unnecessary, as any worker with taxable income and a bank account can open an IRA. De León counters that if the current system was working, there wouldn't be so many Californians who lack retirement savings plans.

Still, implementation of the new law will be slow, partly in order to address concerns about liability and cost. Many of the details of the program--like how retirees will be able to access their money-- will be determined by a yet-to-be appointed board. The board must raise private money to pay for a market analysis of the program to find out what tweaks are needed to smooth implementation. 

Despite language in the bill freeing the state of all liability, it is unclear what responsibilities the state will have under federal law to ensure benefit payments. The final program must be submitted to the Internal Revenue Service and the Department of Labor to make sure the individual accounts qualify for the same tax treatment as IRAs, and that they doesn't constitute an employer benefit plan. If the plan passes both assessments, it will be resubmitted to the state legislature for authorization.

Enrollment won't begin until 2015, at the earliest. It could be years before de Léon finds out if the new program helps workers like his aunt Francisca--or if, for those with little income to put aside for retirement, the only way to ensure financial security in old age is to keep on working.

Read the Entire Article on TheAtlantic.com >>

But public education is the only area of the state budget that is seeing a significant increase in the revised budget plan. Democrats in the Legislature had anticipated a significant surplus for next year, but Brown said actions by the federal government - including the automatic spending cuts and the increase in the payroll tax - eliminated any such surplus.

The governor said his budget "is a call for prudence, not exuberance." He credited the passage of Proposition 30 by voters in November as key to stabilizing the budget and providing more money for education, but cautioned, "this is not the time to break out the Champagne."

The boost for education is due to Proposition 98, which voters approved in 1988 to force the state to set aside a certain portion of budget dollars for schools. Brown said that under the complex funding formula, all of the unanticipated revenue the state collected this year - plus about $100 million more - would go for K-12 public schools and community colleges.

In addition, the state still owes schools billions from past years when payments owed to schools were delayed. The revised plan proposes to pay back $2.5 billion of that, $700 million more than he had proposed in January.

Per-student increase

California currently spends roughly $8,000 per K-12 public school student. That amount is expected to drop in the next fiscal year but then pick up in the following years, reaching an additional $2,754 per student by 2016 when compared with 2011-12 funding levels.

The drop in per-pupil spending next year is due to the drop in revenue. This current year's revenues are projected at $98.2 billion and next year's are projected at $97.2 billion.

The governor's plan forecast that California will have less tax revenue coming into its coffers in the next fiscal year than was anticipated just four months ago, when he said he expected $98.5 billion. Before the recession, California's general fund spending peaked at $103 billion.

The general fund is the state's main checking account that pays for most government services, including K-12 public schools and higher education, prisons, health and human services and parks. Including special fund spending, which is money raised by fees for specific purposes related to those fees, California would spend $137 billion in the next fiscal year.

The news of smaller revenues disappointed some Democrats who were eager to use any extra money to begin restoring cuts made in the darkest budget days.

'Humbling' drop

Sen. Mark Leno, D-San Francisco, the chairman of the Senate Committee on Budget and Fiscal Review, called the forecasted drop in revenue "humbling."

"It's important for voters to remember that the passage of Prop. 30 in effect just stopped the bleeding," Leno said, adding that it "just reversed that course and stabilized it. It doesn't do much more than that."

Other new pieces in Brown's revised proposal include an additional $48 million next year in CalWORKS job training and in subsidies to employment programs. He also plans to give an additional $72 million to county probation departments, which have been inundated with work due to the governor's prison realignment program.

Brown made some minor revisions to his plan to send additional money to schools with high concentrations of students who are low-income, learning English as a second language or who are in foster care.

One major policy decision in the plan is for the state to handle the expansion of Medi-Cal, California's Medicaid program, as part of the implementation of the Affordable Care Act as opposed to handing that responsibility to the counties. As part of that, however, Brown wants to take back money the state currently gives to counties for medical care of indigent people and use that for social welfare programs.

Health care advocates were unhappy with the proposal.

Cap-and-trade issue

Brown also disappointed environmental advocates and advocates for poor people in polluted areas, who were eager to learn how the state would spend money generated by the cap-and-trade program. That money, about $500 million, was supposed to go toward various efforts to reduce greenhouse gas emissions in the state. Instead, the governor has proposed "borrowing" it from the special fund and moving it all to the general fund.

One other proposal made by Brown that doesn't come with a price tag is to allow counties to move people who are serving lengthy jail sentences to state prisons as long as the counties take into jails state prisoners who are serving shorter sentences.

Lawmakers have a constitutional deadline of June 15 to pass a spending plan for the 2013-2014 fiscal year, which begins July 1. Legislative budget committee hearings on the proposals begin later this week.

Wyatt Buchanan is a San Francisco Chronicle staff writer. E-mail: wbuchanan@sfchronicle.com