LAO thinks more cash is coming than  Gov. Brown

by Brian Leubitz

In his negotiations with the Legislature, perhaps Gov. Brown would prefer to bargain over less money and pocket any extra revenues that fall into the general fund over the course of the fiscal year. But alas, the LAO thinks that the bigger sum should be in discussion:

Legislative Analyst Mac Taylor projected state revenues Friday that are $3.2 billion higher than those projected by Gov. Jerry Brown this week in his revised budget proposal.

The difference translates into $400 million for the current fiscal year and $2.8 billion for the year that begins in July. The projection sets up a potential battle between Brown and fellow Democrats in the Legislature. who want to spend more than he proposes.

Both Brown and Taylor urge fiscal restraint, however, because revenue projections are largely dependent upon economic factors ranging from employment to housing prices. Both also agree that the bulk of the money will go to schools under state law.(SacBee)

Taylor is generally in favor of taking the cautious approach, so that’s no surprise. But acknowledging the extra cash will surely mean that the fight is more intense from legislators that are looking to restore funding for some of the state’s programs. Social services, the judiciary, higher education and other interests are competing with the Prop 98 K-14 funding guarantee, and the fight will be typically intense. This LAO report will only add intensity.

Mac Taylor at the Legislative Analyst’s Office (LAO) has made his preliminary assessment of the impact of the federal stimulus on California’s bottom line.  This is important, recall, because if the state can get over $10 billion in such a way that reduces the budget deficit, they would hit a “trigger” that would allow the state to eliminate $1.8 billion in tax increases and restore about $1 billion in really painful cuts to social services, particularly health care for the needy.

Taylor doesn’t think we can get there:

A significant portion of the $31 billion in aid to California will be available to address the state’s budgetary problems. We estimate that, based on the enacted state 2009-10 budget, California can use $10.4 billion in new federal dollars for this purpose over the life of ARRA. Of that amount, $8 billion would be available in 2008-09 and 2009-10. The Director of Finance and State Treasurer will determine their own estimate of the latter amount by April 1 of this year. If the amount is less than $10 billion, then annual state program reductions of nearly $1 billion and revenue increases of about $1.8 billion adopted as part of the 2009-10 budget package will go into effect.

Given the state’s continuing economic struggles, however, it is possible that state revenues (and the Proposition 98 minimum funding level) may continue to fall. In that case, it may be possible to use additional federal education dollars for budgetary relief.

This is an analysis of things as they stand right now, with no further changes from the legislature to qualify the state for more funding.  It is not the final version of things, as Taylor notes, because the legislature could act quickly on a number of fronts to put the state over that $10 billion dollar line.  And the Budget Act provision is written so sloppily that it’s hard to even know what money would be eligible under it.

The Legislature will need to take many actions in the coming months to ensure that the funds are used in ways that meet its priorities and preferences. To assist in this process, we offer the following considerations in making decisions regarding these new federal funds:

• Maximize the Benefit of Federal Funds to the General Fund Budget. In this report, we make specific recommendations about how to help the state’s budgetary situation under different scenarios.

• Act Quickly in a Handful of Cases. In certain instances, the state will need to act rapidly to ensure it receives the maximum amount of relief or to use the funds in the most effective way possible. Addressing a Medi-Cal eligibility issue and providing direction on the use of transportation funds are two such examples.

The Medi-Cal eligibility issue ALONE would make over $11 billion in funding available to the state.  In addition, we know that revenues are going to come up short, which would allow up to $3 billion in education funding to be shifted to budget relief.  Taylor makes a number of recommendations that would allow the state to cross the trigger.

Nevertheless, the headline from the LA Times is “Stimulus Money Might Not Be Enough For California”.  That’s only true if the legislature does nothing.  And so these opening grafs are really kind of misleading.

Reporting from Sacramento — California appears likely to fall short of getting the federal stimulus money it needs to avoid the full tax hikes and spending cuts lawmakers approved last month to settle a contentious 100-day budget stalemate.

A fresh analysis of California’s flagging fiscal situation says the state needs about $2 billion more than Washington is providing. Lawmakers will be unlikely to reduce the personal income tax increase the new budget contains, or to restore some of the money they cut for universities, courts, social services and health care programs.

John Myers at Capitol Notes has a much more nuanced take, and he updated it with the LAO report today.  In the hearings today, Taylor didn’t sound assured of his own analysis.

But the LAO presentation, during this morning’s hearing of the Assembly Budget Committee, certainly didn’t sound definitive when it came to the $8 billion estimate. “This was our best kind of shot at it,” said Taylor […]

But when the question and answer session from legislators wrapped up, it was clear that a feisty debate is brewing as to whether to count more federal stimulus money towards deficit relief… thereby allowing some of the cuts and taxes to be set aside… or let the budget package stand as it is.

“I think taking for granted the $8 billion figure,” said Assemblymember Mike Feuer (D-LA), “is a big mistake.” Feuer went on to say that the Legislature should try to reach the magic $10 billion figure “any way we can,” thus maximizing federal matching dollars that state government has often left unused.

The California Budget Project’s analysis shows that there are plenty of ways to reach that $10 billion, through competitive grants and moving items to offset the budget, without costing the state very much at all and saving the worst budget cuts from being enacted.  There’s no reason not to get creative and do this.

Two other things.  The original trigger was set at $9 billion, until Abel “My Precious Tears” Maldonado wouldn’t sign off unless the gas tax increase was eliminated and lawmakers had to raise the trigger.  So if you want to blame someone for IHSS services being cut (or, if you prefer, raising your taxes), there’s your man.

Second, this will largely be resolved at a public meeting next week between Mike Genest, the finance director for the Governor, and state Treasurer Bill Lockyer.  And because the wording is so vague in the Budget Act, that meeting could erupt into chaos:

The actual bill says the two jointly have the responsibility of whether to “trigger off” those budget items. What if they disagree on the analysis? Ummm, well, no one really knows.

Well, at least it’s simple and elegant.

As the special session gets underway, the new “Budget Nun” Mac Taylor, and since it’s a he this time I think we’ll go with “Budget Priest”, has released an overview of the Governor’s proposals.  The first thing that pops out is we now have a new shortfall number: $28 billion for the next 20 months, and an unsustainable long-term deficit thereafter.

State Faces $27.8 Billion Shortfall. We concur with the administration’s assessment that the state’s struggling economy signals a major reduction in expected revenues. Combined with rising state expenses, we project that the state will need $27.8 billion in budget solutions over the next 20 months.

Long-Term Outlook Similarly Bleak. The state’s revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013?14 absent corrective action. From 2010?11 through 2013?14, we project annual shortfalls that are consistently in the range of $22 billion, as shown below.

Overall, Taylor is generally supportive of the Administration’s proposals for closing the gap, but I think that has a lot to do with the fact that the Governor is finally using realistic numbers and not employing any borrowing gimmicks.  Compared to the 2008-09 budget, this is extremely welcome.  However, Taylor makes the point that a short-term increase in the sales tax cannot possibly be the backbone of a long-term solution, and three years out we’d still see deficits in the range of $9-11 billion.  Instead, he offers a couple points.  First is one that I’ve been making a lot, that California needs to lobby hard for state and local government relief in the second stimulus package:

In the coming months, there is a good chance that Congress will pass economic stimulus measures in an effort to boost the national economy. In the past, some components of such measures have directly provided state fiscal relief. To date, the administration has not built any estimates of such relief into its budget numbers.  For the time being, this is appropriately cautious to avoid counting on relief that may never come.  The state, however, should continue to press the federal government for economic stimulus measures that will provide California with flexible fiscal relief. While such relief would not solve the state’s budget problem, it could provide several billions of dollars in budgetary solutions.

(While we’re at it, we could also recoup the $2 billion giveaway to Wells Fargo precipitated by the Treasury Department illegally changing the tax code to allow banks to avoid corporate taxes.  Any California Congresscritters want to hop right on that?)

He also rightly notes that the Governor’s tax proposals are regressive in nature, and offers one final solution – fix the VLF that you broke as your first act in Sacramento.

Alternative Program Realignment. As noted above, raising the VLF tax rate to 1 percent has merit from a tax policy perspective. If the Legislature made it the foundation of a program realignment with local governments, programmatic outcomes could be improved as well. Under this approach, $1.6 billion of state criminal justice and mental health programs could be realigned to counties and supported by (1) the revenues raised by the increase in the VLF rate and (2) most of the VLF fee revenues currently retained for administrative purposes by the DMV. By consolidating these program responsibilities at the county level, and giving counties significant program control and an ongoing revenue stream, we think California could achieve greater program outcomes and significant budgetary savings.

You can see the total savings chart at the end of this PDF, but clearly the VLF raise is the big story here.  The LA Times picked it up as a news story and also on their op-ed page today.  For those who counter that the VLF is just as regressive as the sales tax, it doesn’t have to be.

Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It’s true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that’s not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.

You can also build progressivity into the VLF by having it function as a carbon tax, essentially. You could set the VLF at a higher rate for cars that produce greater emissions, and at a lower rate for cars that are cleaner. As California is about to get a waiver to regulate tailpipe emissions under the Clean Air Act in a new Obama Administration, they would certainly be empowered to do so.

This is a repudiation of the very issue Schwarzenegger ran on in 2003.  We’ll see if he’s inclined to own up to his mistake.

(We’re having some problems with our database. But this needed to be seen ASAP. I hope we can get it back up to speed soon, but if you have any questions, email me. – promoted by Brian Leubitz)

In 1991, California faced a severe budget shortfall.  The LAO’s documentation of how it was addressed can be found in its “State Spending Plan for 1991-92” [pdf], a 54-page document.  But to spare you the suspense (and me the time I don’t have to read the whole thing), the entire story is neatly summarized in this chart:

What?!?!?  Almost three times as much in increased revenues compared to cost cuts???  Signed by Pete Wilson?  And herr Gropenator is a post-partisan?

Not so much.

An excerpt from the top of the LAO’s document can be found on the flip

The State’s Budget Funding Gap

The 1991-92 Governor’s Budget, released in January of 1991, projected that the state faced an 18-month General Fund budget funding gap of $7.0 billion. As shown in Figure 1(next page), this funding gap represented the amount of savings, increased revenues, and other resources needed to offset:

• A projected 1990-91 fiscal year deficit of $1.9 billion.
  

• The projected 1991-92 operating shortfall of $3.7 billion which is the difference between 1991-92 “workload budget” expenditures and available revenues.
  

• The funding requirements for rebuilding the state’s reserve fund of $1.4 billion.

The workload budget expenditure level essentially represents the level of expenditures needed to pay for the cost of currently authorized services, adjusted for changes in caseload, enrollment, and population. In addition, adjustments are made for certain price and statutory cost-of-living changes, legislation, and certain other factors, pursuant to Ch 1209/90 (AB 756, Isenberg). On this basis, 1991-92 state General Fund expenditures were projected to increase by more than 10 percent over 1990-91 levels, while available revenues were projected to increase by only 4 percent.

Evolution of the Budget Funding Gap

Figure 1(next page) also shows how the administration’s estimates of the budget funding gap changed after the 1991-92 Governor’s Budget was introduced. In late March, the Governor announced that the gap had increased from $7.0 billion to $12.6 billion, reflecting substantial revisions to the administration’s estimates of revenues and expenditures. Specifically, the failure of the state’s economy to perform at the level anticipated in January caused the administration to revise its estimates  of revenue downwards by $4.5 billion during the 1990-91 and 1991-92 fiscal years combined. In addition, increasing caseloads and other factors caused the administration to increase its estimate of expenditures by $1.1 billion.

The budget funding gap was increased further at the time of the May Revision. Noting the continued weakness in the state’s economy, the administration announced that the budget funding gap had grown from $12.6 billion to $14.3 billion. This change was attributable entirely to a

further $1.7 billion reduction in the administration’s estimates of revenue for the 1990-91 and 1991-92 fiscal years. Thus, in crafting a state budget for 1991-92, the Legislature and the administration faced a budget funding gap equivalent to one-third of the state’s General Fund workload budget.

Summary of Actions Taken to Close The Gap

Tale 1 identifies the major legislative actions taken to close the state’s budget funding gap, together with the administration’s estimates of the fiscal effect of these actions. As shown in the table, these actions provide:

• $9.1 billion in increased resources, primarily from higher state and local taxes, fund transfers, and accounting changes.
  

• $3.4 billion in expenditure reductions.
  

• $1.6 billion in cost shifts, including retirement contribution savings.

Together, these actions constitute $14.1 billion of the budget solution. The remaining $200 million needed to fully close the $14.3 billion gap was accomplished by lowering the funding target for the state’s reserve fund from $1.4 billion to $1.2 billion. Each of the major elements of the budget agreement are more fully described in Chapter IV of this report.

Just three words in comment: Pete fricken Wilson.