|
TO: ACSA Leadership and
Members
Interested Parties
FROM: Adonai Mack, Legislative
Advocate
Brett McFadden,
Mgt. Services Executive
Budget Advisory:
LAO releases annual
Five-year Forecast
Yesterday, the Legislative Analyst's Office
released their annual California's
Fiscal Outlook: The 2010-11 Budget. The
release of the report serves as a prelude to
the annual budget deliberation process that
begins every January with the release of the
Governor's January Budget Proposal. The
following is ACSA's analysis and
perspectives on this matter.
Background - The LAO and this report
The Legislative Analyst's Office (LAO) is a
non-partisan, independent arm of the
California Legislature. Mac Taylor is the
appointed Legislative Analyst for the
Legislative branch of state government.
Serving Mac Taylor is a cadre of budget and
program analysts divided up into various
topic and program units. They are very
talented, highly competent, and put out
strong, independent analysis on behalf of
the legislative members. Since the passage
of term limits, their primary area of
responsibility is fiscal and budget
analysis. However, LAO staff will also
conduct policy analysis when requested by
members of the Legislature.
The annual Fiscal Outlook provides
analysis and projections as to the state's
overall revenues, expenditures, and fiscal
health during a five-year forecast period.
The report utilizes the latest data
available pertaining to economic conditions,
state revenues, and projected expenditures.
However, it is important to remember that
the report is a projection. It does not
dictate final policy decisions and /or
outcomes. In this regard, we utilize the
report to gauge what the budget picture
could look like next year and develop
appropriate advocacy strategies reflective
of that environment.
The complete report is available at
www.lao.ca.gov.
State's Budget Outlook
Similar to the past several years, the LAO
is forecasting challenging budgetary
conditions for the length of the forecast
period. In addition, without any corrective
action the LAO is predicting that the state
will be facing budget deficits year after
year that could exceed $20 billion annually.
The forecast provides yet another dire time
for California's budget cycle. The report
detailed another budget deficit between now
and the end of the 2010-11 fiscal year of
$20.7 billion. The current year budget
(without corrective action) will end with a
$6.3 billion deficit and the 2010-11 fiscal
year contains a projected deficit of $14.4
billion between revenues and expenditures.
Current Year 2009-10:
The July revisions to the 2009-10 Budget Act
contained a $500 million reserve, but also
relied on several questionable assumptions
and estimates and included several one-time
solutions to close a deficit that reached
nearly $60 billion over two years. The LAO
is estimating that the current fiscal year
is facing a $6.3 billion deficit between
revenues and expenditures. While revenues
are coming in slightly lower than the
estimates, the deficit is mainly due to
several budget solutions that failed to
materialize. These failed solutions
include:
-
The failure to reduce budget spending
for the Department of Corrections and
Rehabilitation to the tune of $1.4
billion.
-
Higher spending for the Medi-Cal Program
by $900 million because the state did
not obtain additional federal funding.
-
$800 million of higher General Fund
spending related to a transportation
lawsuit and the state's ability to use
"spillover" gasoline sales tax to reduce
General Fund spending.
In addition to the above failed solutions,
Proposition 98 spending is estimated to
increase by nearly $1 billion in 2009-10.
Budget Year 2010-11:
This may sound like a broken record, but the
budget year will contain a major operating
shortfall for the budget year 2010-11. The
LAO is estimating that the deficit for the
budget year will be $14.4 billion. This
stems mainly from the uses of several
one-time solutions to close last year's
deficit. These solutions included the use
of federal stimulus funds, shifting funds
from local governments to the state, and an
acceleration of revenues on a one-time
basis. In addition, the administration's
revenue estimates were far too optimistic
which created a shortfall in revenues by
several billions of dollars. The LAO is
using higher expenditure estimates based on
what they believe to be increased costs in
MediCal, the impact of the transportation
lawsuit and the failure to implement budget
reductions to the prison system.
The LAO is estimating that revenues will
stay flat for the 2010-11 fiscal year with a
slight decrease. The LAO estimates that
there will be a decline of $296 million in
revenues resulting in a total of $87.7
billion in state revenues.
Long Term Forecast:
For the past several years, the LAO has
noted that the state will face ongoing
budgetary challenges throughout the forecast
period. This year is no different. In
examining the state's finances through the
2014-15 fiscal years, the LAO estimates that
the Legislature will have to solve budget
shortfalls consistently through 2014-15.
The operating shortfalls for each year are
created by several different factors. In
2011-12, the temporary taxes implemented in
2009 will expire.
However, the spending requirements will
likely increase. The LAO also estimates
that this will cause the deficit to reach
$21.3 billion for the 2011-12 fiscal year.
Similarly, the 2012-13 fiscal year is
estimated to have a shortfall of $23 billion
due to the state being required to pay back
the funding that was borrowed from local
government under Proposition 1A. The
deficits decrease slightly at the end of the
forecast period, but still hover between $18
and $20 billion.
Legislative Challenges and Outstanding
Issues: Even though the Legislature
maintains control of the budgeting process,
the Legislature may not have its traditional
flexibility in developing a state budget.
The LAO notes that the Legislature may have
their hands tied because of stimulus
funding, lawsuits and use of one-time
solutions in the current year which are no
longer available for the budget year. There
are some unusual constraints related to the
development of the budget for 2010-11.
These include the receipt of federal
stimulus funds and the maintenance of effort
requirements. The maintenance of effort
requirements are still applicable through
the 2010-11 fiscal year. This is truly
evident in K-12 education and higher
education. Further, Medi-Cal eligibility
changes are also not possible due to the
stimulus funding. Lastly, there are several
ongoing legal issues based on budget actions
that could increase the states
expenditures. These include:
-
Challenges to the requirement in the
2009-10 budget for redevelopment
agencies to make payments totaling $1.7
billion in 2009-10 and $350 million in
2010-11 to benefit the General Fund.
-
Over 20 lawsuits challenging the
Governor's state employee furlough
policy, which was budgeted to provide
over $1 billion in savings in 2009-10.
-
The federal three-judge panel that is
making a determination regarding prison
overcrowding.
The LAO also noted that there are several
other budget related items that will likely
impact future state budget development.
Currently, the state's retirement systems
arecarrying unfunded retirement-related
liabilities after declines in their
investments in 2007-08 and 2008-09. The
unfunded costs could exceed $130 billion.
Also, the state's debt service ratio is
rising rapidly due to a 2006 bond package.
The LAO noted that the state's debt service
will comprise 9 percent of the General Fund
revenues by the end of the forecast period.
LAO Suggested Budget Options: The LAO offers
several suggestions for the Legislature to
adopt to address the budget deficit and
solve the ongoing shortfall between revenues
and expenditures. These suggestions
include:
-
Taking action early in an effort to
prevent the budget gap from growing and
losing out on savings that could be
implemented now.
-
Focus on solutions that have ongoing
impacts because the state's problems are
long-term in nature.
-
Prioritizing state funding and make hard
decisions on which major state programs
should be reduced.
-
Include revenue options and prioritize
revenues in the same manner that
expenditures are prioritized
-
Aggressively seek new federal assistance
especially in programs where the federal
government provides much of the funding.
-
Trying the ballot again is a reasonable
option, but the ballot initiatives
should be straight-forward and not as
complicated as the initiatives placed
before the voters in May.
Economic and revenue conditions
As we have mentioned previously, the
economic conditions of the nation have a
direct impact on the economic conditions of
California. Last year at this time, the
national economy had deteriorated
dramatically due to the decline of the
housing market, a sharp increase in the
energy market, and the credit market
crisis. The nation as well as California
faced the worst economic times since the
Great Depression.
The LAO believes that there is evidence that
both the state and national economies are
stabilizing and easing out of an economic
recession. The LAO believes that we will see
some recovery in 2010 and 2011. Many of the
economic indicators are showing signs of
recovery. Indicators such as the pace of
job losses have lessened. In addition, some
housing markets in the state's urban areas
are showing signs of improving. The LAO
expects to see modest growth in personal
income and the housing market in the next
two years. However, the LAO noted that
unemployment will like take more time to
recover. It is likely that unemployment may
increase slightly next year with gradual
decreases toward the end of the forecast
period.
The LAO believes that the state revenues
will decrease in the coming years before
some growth returns in the out years. The
LAO noted that revenues will stay flat in
2010-11 but will drop significantly in
2011-12. The main culprit for the decrease
in revenues in 2011-12 is the tax policy
changes that expire that year. The
temporary tax increase implemented in the
2008 and 2009 Budget Acts will expire that
year. The loss of that increase will
overwhelm any growth the state might have
seen. However, the rest of the forecast
period will see some growth return to the
state's revenues.
Proposition 98
The interrelated relationship between the
state's economic condition and the
calculation of the Proposition 98 minimum
guarantee continues in the LAO's estimate
for education funding for the next several
years. The decline in revenues over the past
two years has caused the calculation of the
minimum guarantee to fluctuate consistent
with the state budget conditions.
Proposition 98 and COLA:
The LAO predicts that the Proposition 98
guarantee for 2009-10 will increase by $1
billion to $51.3 billion. However, the LAO
believes that the guarantee will see drops
to the guarantee in the two consecutive
years after that. In 2010 -11 the guarantee
is estimated to fall to $51 billion and then
decrease further in 2011-12 to $49 billion.
The loss of the temporary taxes which expire
in 2011 will have a significant impact on
the calculation of the minimum guarantee.
The up and down nature of Proposition 98 is
also reflected in the cost-of-living
adjustment calculations. While the COLA
stays fairly flat for the majority of the
forecast, the LAO projects a negative COLA
for the 2010-11 fiscal year.
Below are the LAO's five-year K-14 COLA
estimates:
-
2010-11: -.35%
-
2011-12: 1.62%
-
2012-13: 1.67%
-
2013-14: 1.92%
-
2014-15: 2.28%
Out-year predictions: After consecutive
years of decline, the LAO estimates that the
minimum guarantee will begin to see
increases beginning in 2012-13 through
2014-15. The LAO believes that there will
be a corresponding increase to property
taxes during the last years of the forecast
period and Proposition 98 will return to
pre-recession levels by 2014-15. However,
it should be noted that in past years the
LAO forecasted huge increases in Proposition
98 for these similar years.
Proposed budget actions: As noted above, the
LAO is estimating that education is owed an
additional $1 billion in the current year.
The LAO suggested several options to address
the increase in funding. These options
include:
-
Pay it now with the understanding that
the Legislature would have to make
additional cuts to other state programs.
-
Create a settle up account and pay at
another date or create a payment plan.
-
Suspend the minimum guarantee and create
a maintenance factor.
The LAO acknowledges that each of these
options has positives and negatives for the
Legislature.
ACSA perspectives
The LAO's forecast foreshadows what is
likely to be another difficult year for K-12
financing. The LAO forecast also provides a
framework for the coming budget conditions
and sets the stage for the release of the
governor's January Budget Proposal. With
that said, it is too early to determine how
these budgetary conditions will interact
with the capitol's political landscape.
While the news of additional deficits is
hardly surprising, the LAO is not
recommending any mid-year cuts to public
education. The LAO goes so far as to
comment that it could be difficult to make
any reductions to education funding because
of the receipt of federal funds and the
protection of the federal maintenance of
effort requirement.
The state's fiscal condition combined with
the attempt to qualify for federal Race to
the Top funding will ensure that the next
legislative session will continue to be
interesting and challenging. With that said,
ACSA is committed to ensuring that education
receives adequate funding and that the
integrity and solvency of school districts
remains a top priority. We will continue to
provide additional advisories and alerts as
budget discussions progress. Should you
have any questions, please contact me at
1-800-608-2272
or email me at
amack@acsa.org.
Addendum: 2010 Budget Perspective Workshops
ACSA, along with School Innovations &
Advocacy, will once again host a series of
Budget Perspectives 2010
workshops around the state. These workshops
will be held in various locations on January
13, 14 and 15. Locations will be provided
soon. |
