The Legislative Analyst on California’s New Budget

In the Legislative Analyst’s initial eight-page summary of the budget approved by lawmakers in the early hours of the 100th day of the fiscal year it’s supposed to dictate spending for, the conclusion is that the package is unlikely to balance and certainly won’t improve the state’s chronic gap between spending commitments and revenue.

“We estimate that well over two-thirds of the Legislature’s 2010-11 budget solutions are one-time or temporary in nature,” the analyst says in the top right-hand corner of Page 2.

“This means that California will continue to face sizable annual budget problems in 2011-12 and beyond.”

In its 45-page November 2009 California Fiscal Outlook published several months before lawmakers and Gov. Arnold Schwarzenegger began negotiations on the budget finally passed early October 8, the analyst warns of the magnitude of the problem they face and tells the state’s policy makers how they got there.

At the time, the analyst predicted a $20.7 billion shortfall. It ended up being $17.9 billion.

“Addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier this year.”

Apparently, according to the analyst’s initial assessment of the newly passed budget, those choices weren’t made.

Irrespective of the actions taken in this year’s budget, the analyst predicted in November that the fiscal year beginning July 1, 2011 – the first budget facing either Meg Whitman or Jerry Brown — will have a shortfall of $21.3 billion, fueled in part by the expiration of more than $7.5 billion in temporary tax increases enacted in the February 2009 budget.

Having more than two-thirds of the current budget be temporary fixes or one-time savings, exacerbates next year’s problem because it means less than one-third of any savings in this budget carries over into the next fiscal year.

And those savings are further reduced by 25 percent by waiting more than a quarter into the fiscal year to enact them.

October 8, 2010

Major Features of the Legislature’s 2010-11 Budget

http://www.lao.ca.gov/reports/2010/bud/major_features/major_features_100810.aspx

Overview

Addressing an $18 Billion Budget Problem. The 2010–11 Budget Bill was passed by the Legislature on October 8, 2010. The Legislature’s plan attempts to address one of the most vexing state budget shortfalls in California’s history—the product of a continuing structural imbalance between state revenues and expenditures and a slow recovery from a severe recession that began in 2007 and ended in 2009.

In May 2010, the administration estimated that there would be a gap of $17.9 billion between General Fund resources and expenditures in 2010–11 under then–existing laws and policies. To address this projected gap, the Legislature opted for a package of budget actions summarized in Figure 1. That package (prior to vetoes) includes the following actions (based on our office’s categorization):

$6.8 billion of expenditure–related solutions (including ongoing and temporary cost or service reductions).
$5.4 billion of new federal funding (most of it not yet approved by Congress).
$3.3 billion of revenue actions (including $1.4 billion in higher assumed baseline state revenues consistent with our May 2010 state revenue forecast).
$2.7 billion of largely one–time loans, transfers, and funding shifts.

Figure 1	.
General Fund Budget Solutions in the Legislature’s 2010–11 Budget Plan	.
(In Billions)	.
.	Reduced Costs or Increased Revenues
Expenditure–Related Solutions
Reduce Proposition 98 costs	$3.10
Reflect savings in state employee payroll, benefit, and related costs	1.6
Reduce budget for prison medical care	0.8
Achieve IHSS savings through various actions	0.3
Defer or suspend local government mandates	0.2
Reflect reductions in adult prison population	0.2
Offset UC and CSU General Fund costs with federal economic stimulus funding	0.2
Require managed care enrollment for certain Medi–Cal recipients	0.2
Adjust other spending (net reduction)	0.1
Subtotal	($6.80)

Federal Funding and Flexibility Solutions
Assume enhanced federal funding and/or additional cost flexibility	$4.10
Score savings from recent congressional action to extend FMAP support	1.3
Subtotal	($5.40)

Revenue–Related Solutions
Adopt LAO’s May 2010 revenue forecast	$1.40
Suspend for two years the ability of businesses to deduct net operating losses	1.2
Score additional revenues from previously auth'd sale leaseback of state office bldgs	0.9
Adopt other compliance actions and reductions in business taxes (net reduction)	-0.1
Subtotal	($3.30)

Loans, Loan Extensions, Transfers, and Funding Shifts
Borrow from special funds	$1.30
Extend due dates for repayment of existing loans from the General Fund to special funds	0.5
Fund courts from previously authorized shift from redevelopment agencies	0.4
Use hospital fees to support Medi–Cal children’s coverage	0.2
Transfer special fund monies to the General Fund	0.1
Use Student Loan Operating Fund monies for Cal Grant costs	0.1
Adopt other funding shifts	0.1
Subtotal	($2.70)

Total, All Budget Solutions	$18.30

IHSS = In–Home Supportive Services; FMAP = Federal Medical Assistance Percentage;	.
LAO = Legislative Analyst’s Office.

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