Print this Article

LAO Posts Grim Fiscal Forecast – $20 Billion Budget Deficit, Prop. 98 Owed $1 Billion

By Vernon M. Billy - November 20, 2009

The state’s Legislative Analyst’s Office (LAO) released its Fiscal Outlook for the State from 2009-10 through 2015.  The LAO report confirms that while the national economy appears to be stabilizing, California is facing several more years of budget difficulties due to past budgeting practices and the impact the national recession is having on the state’s revenue picture. 

The LAO’s forecast of California’s General Fund revenues and expenditures shows that state government is facing $20.7 billion budget problem between now and the time the Legislature enacts a 2010-11 state budget plan.  This $20 billion budget problem spans the current fiscal year and the budget year.  In the current fiscal year, the State is facing a projected $6.3 billion deficit and a $14.4 billion budget gap in 2010-11.

The LAO argues that the 2009-10 budget problems are essentially due to the State’s budgeting practices, its inability to enact several of the budget solutions contained in the July 2009 Budget Act and changes in the Proposition 98 guarantee.

Multi-Year Problem

The state’s budget forecast is affected significantly by the expiration at the end of 2010-11 of all of the temporary tax increases approved in February 2009.  These expirations, coupled with increasing program spending, cause the operating shortfall to rise to $21.3 billion in 2011-12.  In 2012-13, the shortfall grows to $23 billion as the State must bear the cost of paying back local governments for borrowing funds pursuant to Proposition 1A (2004).  Thereafter, revenues grow by at least 6.6 percent per year and outpace annual spending growth.

In terms of education, the LAO’s forecast projects an increase in the Proposition 98 minimum guarantee of approximately $1 billion in the current year above the July budget appropriation.  Alternatively, in 2010-11 and 2011-12, the LAO projects consecutive years of decline in the Proposition 98 funding requirement, then increases in the last three years of the forecast period with funding returning to pre-recession levels by 2013-14.

The LAO attributes the $1 billion increase to the change in State general fund revenues from year-to-year.  The LAO explains that while the enacted 2009-10 Budget Actreflected fairly accurate final 2008-09 tax revenues, Proposition 98 calculations used in May estimates did not capture a large fall off of revenues in the year‘s closing months.  Consequently, actual General Fund tax proceeds will be about $2 billion lower than the figures used for the 2008-09 Proposition 98 calculations.

In addition, the LAO’s estimates of tax proceeds in 2009-10 are $400 million lower than budget estimates.  Although these changes reflect a further deterioration of state revenues, they actually increase the Proposition 98 minimum requirement in 2009-10.  This increase is because the Proposition 98 calculation is determined in part by the year-to-yearchange in state revenues.  The larger drop in revenues in 2008-09 compared to 2009-10 results in a higher rate of revenue growth, which results in a $1 billion increase in the Proposition 98 minimum guarantee.

To address this additional billion dollar obligation, the LAO offers the legislature and Governor three recommendations for how best to deal with this unexpected expense.  There options include: 

  1. Paying schools the entire $1 billion in full;
  2. Providing the $1 billion as a settle-up payment over several years; or
  3. Suspend Proposition 98 and avoid payment all together and simultaneously lower the guarantee in the future (Suspension would, however, create a $1 billion Maintenance Factor obligation that would have to be paid back to schools).

In the end, the state’s finances remain in a precarious situation and will require State leaders to focus on truly solving the long-term budget problems that continue to plague the State and hamper economic growth.  Without this focus and any real long-term budget planning, California will continue to wallow in an ongoing budget crisis for the foreseeable future.

Editor's Note:  Vernon Billy is President of Governmental Solutions Group, LLC,a policy consulting and legislative advocacy firm.