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Copyright 2009 California Association of School Business Officials
2009-59

Legislative Analyst projects ongoing budget challenges despite expected recovery
Nov. 18, 2009
By Carrie Marovich

Dennis Meyers is traveling so we invited a guest to write today’s NewsBreak concerning the LAO report on the state budget. Carrie Marovich is a freelance writer based in Sacramento. She has many years of experience at the staff level with the California Legislature where she worked mainly on education-related legislation.

The LAO today released its analysis of California’s current-year fiscal situation, as well as projections for the following five years. In short, the LAO estimates a General Fund shortfall of $20.7 billion that must be addressed between now and the adoption of the 2010-11 budget, as well as significant ongoing deficits caused by a failure to reduce spending and increase revenues as expected in the July 2009 budget. The forecasted gap between revenues and spending is expected to be the greatest ($23 billion) in 2012-13. The analyst warns that addressing the shortfall will require “painful choices” on top of those made by the Legislature earlier this year.

The discrepancy between the projected and actual spending is attributed to the state’s inability to implement several of the solutions included in the July 2009 budget plan, including the inability of several programs – notably the prison system and Medi-Cal – to reduce spending to the levels specified in the budget; California’s inability to sell the State Compensation Insurance Fund for $1 billion; and a legal barrier preventing the General Fund to utilize $800 million in transportation funds.

Proposition 98

Also contributing to the shortfall is a nearly $1 billion increase in the Proposition 98 guarantee. The analyst explains that although the decline in state revenues for 2009-10 will be greater than expected (by approximately $400 million more than the July budget assumed), the decline is still projected to be smaller than the decline in the previous year. Because Proposition 98 is calculated in part by the year-to-year change in revenue, a smaller drop in 2009-10 compared to 2008-09 is expected to result in the $1 billion increase to the guarantee in the current year.

The analyst offers three options for handling this year’s $1 billion increase in the minimum guarantee: (1) Pay $1 billion in a lump sum at the end of 2009-10; (2) Create a “settle-up” obligation and pay, for example, $200 million annually over five years; or (3) Suspend the guarantee and maintain existing funding levels, which would save an additional $4 billion over six years, since it would reduce the base for calculating the 2010-11 guarantee. This option would result in a $1 billion future maintenance factor obligation to schools.

For the longer term, the LAO foresees two years of declining Proposition 98 funding requirements in 2010-11 and 2011-12, due largely to projected declines in state revenues from the phase out of temporary tax increases in the February 2009 budget agreement. While reduction to school district budgets for 2008-09 and 2009-10 are benefiting from the inflow of $6 billion in federal stimulus funding, the full force of declining revenues is likely to be felt by districts beginning in 2010-11 if the state fails to backfill these federal dollars.

On the brighter side, the analyst expects an economic rebound in subsequent years, with three years of significant increases to the minimum guarantee beginning in 2012-13 and a return to pre-recession Proposition 98 funding levels by 2013-14. The LAO also suggests that these increases are likely to be more than sufficient to resume funding of annual COLAs.

Revenue Projections

These projected increases in Proposition 98 stem from the LAO’s estimations that California’s revenues will steadily increase over the next six years. “Baseline” General Fund revenues are expected to bottom out in 2009-10 and increase an average of 6.5 percent over the following two years.

The analyst notes that tax revenues are coming in at slightly lower levels than assumed in the 2009-10 budget plan. General Fund revenues and transfers are now expected to be $83.6 billion for 2008-09 ($496 million less than budgeted) and $88.1 billion for 2009-10 ($1.5 billion less than budgeted).

While the revenue picture is still grim for the next two years, the LAO projects that from 2012-13 to 2014-15, “revenues will increase at rates that are typical during times of sustained economic growth…” The analyst expects this revenue from growth to replace that from the revenue increases set to expire in 2012-13.

Unavoidable Reprioritization

Despite the expected economic recovery in the long term, the scale of the deficit prompts the LAO to warn that California will have to continue to make significant reductions to major spending programs, as well as find ways to add new revenues. Otherwise, there will undoubtedly be future crises in which the state will “teeter near the brink” of insolvency. If the Legislature hopes to restore California’s fiscal health and the public’s trust, the LAO continues, it must work to create “a sustainable framework for California’s public finances.”

We’ll keep you posted.

All CASBO NewsBreaks are posted on the CASBO website at www.casbo.org. The legislative status indicated for the bills in this report reflect the location of each of these measures as of the day the report was posted. To get up-to-the-minute status of bills including additional information on bills, bill text, analyses, legislative vote records, and veto messages, log on to the state’s Official Legislative Information website at www.leginfo.ca.gov. For other questions regarding topics covered, you may contact Dennis Meyers, CASBO Assistant Executive Director, Advocacy and Policy, at dmeyers@casbo.org.