Legislative Analyst Weighs In on May Revision Budget Levels

May 19th, 2015 | By | Category: Advocacy, News
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Jeff Frost


—In the middle of May, the governor and Department of Finance announce their “May Revision” to the annual budget. This allows the administration to update its revenue forecast and to adjust spending priorities accordingly. In advance of this action, the Legislative Analyst’s Office (LAO) has put out its thoughts on how any additional state revenue could be allocated.

Additional Capital Gains Driving Revenue Increases

In its recent report, the LAO indicated that in the estimates accompanying the January 2015-2016 governor’s budget, the administration raised its revenue projections by billions of dollars for 2013-2014 through 2015-2016, relative to assumptions in the June 2014 budget package. Given the positive state tax collections of recent months, there is a significant potential that these estimates will increase even more in May—particularly for the current fiscal year (2014-2015). The LAO indicates that history cautions that such revenue surges generally prove to be temporary. In this case, it is quite clear that the additional revenues are the result of increased capital gains tax revenue.

Revenue Surge May Limit Ability to Fund Priorities Other Than Schools

The report, once again, raises concerns about the Proposition 98 guarantee and how its formula will limit non-Proposition 98 spending. The LAO goes on to indicate that these one-time revenue increases pose a risk for the state budget mainly because higher revenues in 2014-2015 boost ongoing spending on schools and community colleges under Proposition 98, potentially making it harder for the state to balance its budget in 2015-2016 and beyond. The factors driving school spending upward now make it more difficult to fund other potential state budget priorities, such as augmentations for nonschool programs, debt payments, and budget reserves. While these targeted “concerns” are accurate, they fail to acknowledge that the Proposition 98 guarantee and the Test III reductions that were made to K-14 spending over the last seven years resulted in social services spending significantly outpacing K-14 spending.

LAO Offers Spending Options to Help Legislature Plan

This report provides a preview of possible scenarios that the state’s elected leaders may face while finalizing the 2015-2016 budget package in May and June. Using the governor’s budget proposals as a starting point, we present five hypothetical May Revision scenarios with higher revenues of varying amounts and describe their effects on the budget’s bottom line. Given the number of variables involved, many other outcomes are possible. We do not produce a new revenue or budget outlook in this report. Rather, we consider the key factors that may affect May estimates—principally revenues, the Proposition 98 minimum guarantee for schools and community colleges, and Proposition 2, the debt payment and budget reserve measure passed by voters in November 2014.

Modest Budget Problem Emerges in LAO Hypothetical Scenarios

The LAO lays out five scenarios for the legislature to consider as it reviews the governor’s budget revisions. Under four of the five scenarios, the state would face a budget problem—meaning that spending cuts, revenue increases, or other actions would be necessary to balance the budget in 2015-2016. The LAO indicates that the emerging budget problem is principally due to higher assumed 2014-2015 revenues that boost Proposition 98 spending on an ongoing basis. Under these five scenarios, the share of the assumed revenue increases across 2013-2014 through 2015-2016 going to Proposition 98 ranges from 86% to 125%. In addition, the higher assumed revenues increase (a) Proposition 2 requirements and (b) mandate reimbursements to cities, counties, and special districts under a provision of the June 2014 budget package. While these scenarios present some challenges for the state’s elected leaders, they would be quite modest compared to the state’s budget problems of just a few years ago.

Legislature Has Options to Address Situation

The legislature has various options to address a potential budget problem. While the legislature could draw down part of the $1.6 billion rainy-day deposit made before Proposition 2, reduce non-Proposition 98 spending, or increase revenues, it has other options for dealing with its budget situation. These options include:

  1. Exploring changes in Proposition 98 calculations that would provide somewhat less growth to education programs to minimize the negative effects on the rest of the budget;
  2. Making choices in implementing Proposition 2 that reduce the amount of reserve deposits and/or debt payments; and
  3. Scrutinizing the administration’s spending estimates and proposals to ensure they reflect expected program costs for the coming year.

Governor Must Present Balanced Budget Plan

The LAO emphasizes that the governor will have to present a balanced budget plan to the legislature in May. If actions are needed to keep the budget in balance, the administration’s choices vary from adjusting calculations of arcane budget formulas with minimal programmatic impact to spending cuts and/or revenue increases. The LAO does note that while the governor also could declare a “Proposition 2 budget emergency,” it seems unlikely under the fiscal calculation specified in the measure. The LAO indicated that it anticipates describing the ways the administration keeps its budget plan in balance and will also focus on how the governor proposes to spend a large influx of new school funding and meet the budget reserve and debt payment requirements of Proposition 2.

Education Community Response

The education community, including all of the major statewide education organizations, is prepared to respond to any effort by the legislature to redirect Proposition 98 spending to other noneducation programs and is also concerned that programs such as child care could be included within the Prop 98 part of the budget. Additionally, the education community is working to prioritize the use of new Prop 98 one-time funds on implementing state standards and accountability programs, increasing funding for existing career technical-education and home-to-school transportation programs, and reestablishing funding for professional development.

Jeff Frost is CATESOL’s legislative advocate in California.


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