Friday, May 18, 2012

Senate Republican Analysis of May Revise - Executive Summary


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Budget Briefs
SENATE REPUBLICAN FISCAL OFFICE

Highlights & Analysis of the Governor’s 2012-13 May Revision
May 18, 2012


Executive Summary


In July 2011, the Governor and legislative Democrats claimed that their “honest and balanced” majority‑vote budget closed a $26.6 billion budget gap, and reduced the structural budget gap for fiscal year 2012-13 to $3.1 billion.  Then, in January 2012, the Governor suggested that the budget deficit was really $9.2 billion.  Now, the Governor acknowledges that the budget deficit is at least $15.7 billion. 

The $6.5 billion increase in the size of the deficit is largely attributable to unrealistic revenue assumptions ($4.3 billion) and phony spending reductions ($1.7 billion) that the Governor and legislative Democrats conceived in order to pass their majority-vote budget last year.  The bogus budget solutions were also part of an effort to ensure legislators would get paid despite Proposition 25 (2010) provisions that prohibit the legislature from being paid until a balanced budget is passed.  Republicans did not support the budget last year and have consistently raised concerns that the level of gimmicks included in the budget posed a serious threat to the state’s fiscal stability and credibility in the financial marketplace.

The Governor claims that the May Revision budget plan is balanced with a $1 billion reserve.  He categorizes his solutions as balanced by proposing $8.3 billion of expenditure reductions; $5.9 billion in new tax increases and other revenues; and $2.5 billion of “other” solutions that primarily include special fund loans and transfers.  However, a closer review of these solutions reveals that about $4 billion of expenditure reductions are actually fund shifts and deferrals such as:
1)      $1.4 billion shift of Redevelopment Agency assets,
2)      $544 million fund shift of trial court reserves,
3)      $293 million fund shift of mortgage settlement proceeds,
4)      $663 million deferral of Medi-Cal provider payments, and
5)      $830 million to defer/repeal state mandates,

Also, it is clear that the Governor’s tax increase is expected to generate $8.5 billion of revenue, yet the Governor suggests that it only provides a $5.6 billion of budgetary solution because he spends $2.9 billion for K-14 education programs.  The true solution mix is about $4.3 billion of expenditure reductions, $8.8 billion of tax increases and revenues, and $6.5 billion of “other” fund shifts, loans and deferrals.  Less than a quarter of the solutions are spending reductions while nearly half are new tax increases and revenues.

Clearly, the Governor’s budget math is just as fuzzy as the bogus solutions that were used to “solve” last year’s deficit.  It should come as no surprise that Standard and Poor’s is concerned that the Legislature will “…rely on budget maneuvers that may be politically expedient but fiscally unreliable when devising deficit solutions.”

Key Points:

Robust Revenue Growth.  State revenues are projected to grow by nearly $5 billion from 2011-12 to 2012-13 without the Governor’s proposed sales and income tax increases.  The following chart reflects the baseline revenue projections without the Governor’s tax increase initiative through 2015-16.  The simple story told by this chart is the strength of General Fund revenue growth projected in the out years, even without tax increases.  Average annual revenue growth over the forecast period (6.1 percent) exceeds historic revenue growth over the past 30 years of about 5.1 percent.

Substantial Spending Growth. General Fund expenditures grow by nearly $5 billion (from $86.5 billion to $91.4 billion) in 2012-13 (see detail Expenditures on Page 7).  This equates to a 5.6 percent growth in expenditures at the same time the Governor believes an $8.5 billion tax increase is necessary to balance the state budget. In fact, according to the Governor’s projections, his proposed sales and income tax increase would fund a $24.9 billion (28.8 percent) state spending increase by 2015-16 (see chart below).   Cumulatively, the Governor’s proposed tax increase generates $47 billion of revenue over seven years while state spending increases by $57.4 billion over four years.  Effectively, this budget plan would increase state spending by an amount substantially greater than the tax increase revenues.  Fundamentally, you can’t balance the budget, even with tax increases, if the money is spent faster than it comes in.


True General Fund ProgramSpending.  Legislative Democrats frequently claim that state spending has been slashed by $40 billion. This claim is based upon an old projection from the 2008-09 Governor’s Budget that suggested spending, unchecked, would grow to about $124.5 billion by 2011‑12.  Since current year General Fund spending is now $86.5 billion, they calculate that spending is almost $40 billion lower than it should have been if it had continued growing at a record pace.  However, their logic is faulty at best.  The reality is that state General Fund spending peaked in 2007‑08 at $103 billion and various accounting gimmicks, borrowing and fund shifts have effectively allowed the state to maintain General Fund program spending at around the $100 billion level each year since the spending peak 2007-08 fiscal year.  The 2012‑13 budget plan includes a $5.9 billion shift of funds associated with Governor’s Realignment scheme, $2.4 billion from Redevelopment Agency funds, plus about $4 billion of other fund shifts that backfill General Fund programs such AB 32 fees, trial court reserve fund, federal funds, and transportation weight fees.  Once these General Fund-like program expenditures are added to the other $91.4 billion in 2012-13 expenditures it becomes clear that state General Fund program spending hasn’t been reduced much at all.

As noted in the chart below, the “true” underlying General Fund expenditure level (red bar), which recognizes the “offsets” discussed above, shows that actual General Fund-like spending is still hovering near the $100 billion mark and is slightly greater than population and inflation growth.


Total State Spending.  Under the Governor’s May Revision total state spending will have increased by nearly $31 billion since the “great recession” began after 2007-08.  General Fund spending tends to be the focus of state budget conversations, but it can be misleading because of all the fund shifts and “budgetary backfills” that have occurred but are not reflected in General Fund spending totals.  As the chart below demonstrates, total state spending from all fund sources continues to far outpace population and inflation.  Even with the recent recession, the proposed 2012-13 spending level still exceeds population and inflation growth by $42.7 billion ($182.1 billion vs. $224.8 billion).  The Governor and legislative Democrats argue that state spending has been drastically reduced in the wake of the “great recession,” but the truth is that California continues to spend significantly more than it did before the recent economic downturn ($194 billion in 2007-08 compared to $225 billion proposed for 2012-13).

Source: Department of Finance Schedule 9

No Credibility on Trigger Cuts.  Last year’s budget included $2.5 billion of trigger reductions that were supposed to occur if revenues fell $4 billion short.  Well, revenues have fallen short of projections by more than $5 billion since July, yet less than $1 billion of trigger cuts have actually occurred.  Now, the Governor is using California students as hostages to force voters to support his seven-year, $46.8 billion tax increase.  Of the proposed $6.1 billion of new trigger cuts, about 99 percent of those reductions are targeted at K-14 and Higher Education (see Trigger reductions on Page 49).  However, it is difficult to believe that the Governor will not find a new “trap door” to avoid those reductions.  More notable is that legislative Democrats have refused to adopt the Governor’s reductions in welfare programs, but have not acted to protect California students.  In March 2012, Republicans proposed over $4 billion in alternative budget solutions to avoid reductions to vital education programs and stop college tuition/fee increases.

Governor’s Tax Increase Provides No Help for Schools.  Under the Governor’s budget plan, state programmatic funding for K-12 education would remain roughly flat from 2011-12 ($44.6 billion) to 2012-13 ($44.8 billion) despite raising taxes by $8.5 billion.  This is because only one-third ($2.9 billion) of the new tax revenue are used for school funding while the tax initiative also shifts about $2.4 billion of existing funds (sales tax revenue) that would have gone to education to instead support his public safety realignment scheme.  Thus, the tax initiative appears to provide little benefit to school funding. Of course, the Governor threatens to cut K-12 school funding by $5.5 billion if voters don’t approve his sales and income tax increases.

Spending Not at 1970’s Levels.  The Governor and legislative Democrats have been throwing around statistics to fool Californians into believing state spending per $100 of personal income is at the lowest level since the 1970’s.  The truth is that for all state fund sources, at nearly $8 per $100 of personal income, it is higher than it was in 2008-09 and is entirely in line with historic norms.

Legislative Democrats’ Failure Increased Need for Cuts.  According to the Department of Finance, an additional $400 million of spending reductions were necessitated by the Democrats’ failure to adopt the welfare-to-work reforms and current year spending reductions proposed by the Governor in his January budget plan.  If their excuse or intent was to reduce the level of “harm,” it is clear that they actually made the situation worse and inflicted additional damage on a fragile state budget

Conclusion
The Governor’s May Revision plan does include some real programmatic spending reductions, but General Fund program spending has not been significantly reduced and total state spending is proposed to reach a new record high.  In addition, his $47 billion seven-year tax increase plan fuels a $57.4 billion fou- year spending increase, which demonstrates that the Governor and legislative Democrats plan to spend money faster than they can raise taxes.

Furthermore, the Governor’s tax increase proposal does not really provide additional funding for K-14 education programs, but he does use school children as hostages by making education programs the target for 99 percent his trigger cuts.  Voters will see through this “hostage taking” approach because the money is really being used to fund future government growth, not reduce college fees or protect classroom funding.

The real question is whether the Governor can get his fellow legislative Democrats to make meaningful spending reductions and adopt the pension, education, and welfare-to-work reforms that Republicans and the Governor agree on.  Legislative Democrats blame the voters (initiatives), federal courts, and Republicans for their failure to fix the state budget.  But it’s clear that they have said “NO” to the Governor’s bi-partisan pension and welfare-to-work reforms, which would have saved billions of dollars.  Democrats also rejected the Governor’s call for early spending reductions, and have defeated all efforts to improve California’s hostile business climate and job creation measures.  Unfortunately, the Governor now seems afraid or unwilling to fight for the necessary reforms and spending reductions that he proposed.  Republicans stepped up to support him, and he turned his back and walked away from his own proposals.

Friday, May 11, 2012

BOND DEBT SERVICE AND STATE CONSTITUTION


In California State government, general obligation debt service is constitutionally designated a higher priority than any other general fund liability after education. However, it has not been tested in the Federal Courts. In fact, in every RAN, RAW and GO Bond Official statement, the state lays out the priorities using the ear marked criteria of debt service second only to education. That being said, in the 19990’s the federal courts in ordering payments in the absence of a budget have held that federal law is supreme and takes precedence over State law. Accordingly, even though the Attorney General, State Controller and State Treasurer all treat Cal. Const. art. XVI, s1 as a designation higher than all else besides education, it is possible the Feds could come in and find differently as to whether the federally required payments leap to the head of the line pushing education and debt service down a couple of notches. This has never been tested so it is unknown case law.

However, the state constitution and statues are quite clear on this point: education funding first, then general obligations (bonds, rans, raws, etc.) then all other GF liabilities.

Thursday, May 10, 2012

Politics On Tap: AB 32, Capital Gains and California's Budget

This "Politics On Tap" episode discusses AB 32 implementation, the state budget and capital gains among other issues. The panel includes representatives from the Natural Resources Defense Council and the Consumer Specialty Products Association as well as your truly and Greg Lucas.

http://www.youtube.com/watch?v=A3RqCd0_CwQ

Tuesday, May 8, 2012

CALIFORNIA STATE GOVERNMENT WILL NOT DEFAULT ON IT'S DEBT.

CALIFORNIA STATE GOVERNMENT WILL NOT DEFAULT ON IT'S DEBT. The state Constitution holds that bond debt service has second call on general fund dollars, behind education. That means that every dollar that comes into the state treasury goes first to schools and then to bond holders - BEFORE ANYTHING ELSE. Under the current California budget, general fund revenues are estimated at approximately $89 billion. Proposition 98 education spending is appropriated at about $36 billion. That leaves about $53 billion available to pay debt service on bonds coverage of roughly eight times the necessary $6.5 billion the state needs.

WHY IS CALIFORNIA'S BUDGET CONTINUOUSLY IN DEFICIT?

WHY IS CALIFORNIA'S BUDGET CONTINUOUSLY IN DEFICIT? In California, the state constitution requires the Governor to introduce a budget bill for the support of state government operations each year by January 10th. The constitution also requires that the budget presented by the Governor be "balanced" - that is to say that all appropriations and estimated expenditures not exceed available resources for any given fiscal year. Also, the state constitution requires the Legislature to pass a "balanced budget" and send it to the Governor by June 15th each year. So Why all the deficits?
First, the legislature has made the June 15th deadline only a handful of times in the last 20 years. Second, budgets can be "balanced" by making assumptions about expenditures and revenues that are unrealistic. For example, if the economic forecast is overly aggressive and the state GDP estimate is too high, the revenue estimate will be off - sometimes considerably. Also, if enrollment, caseload, and population estimates are too low, then expenditures can be significantly higher than estimated for budget purposes. Prisoners have to be fed, children educated and health and many welfare programs are entitlements so you pay what the case load demands. Finally, you make assumptions about pending court cases and if you loose, the results can, and in numerous cases have been, multi-billion holes created in the state spending plan when the courts "unwind" certain "solutions". The cumulative effect of these types of challenges is that a "balanced budget" with a two or three percent reserve can quickly turn into a multi-billion deficit spending plan and that is exactly what has happened in California many times.

We Must Live Within Our Means