Highlights and Analysis of the 2013-14 Final Budget - Updated

Tuesday, October 29, 2013

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Executive Summary

Conservative Revenue Forecast Saves The Day. The final 2013-14 state budget compromise generally reflects Governor Brown’s more conservative revenue estimates and his desire to calm the legislative Democrats’ exuberance for more government spending.  It is significantly better than the ruling party’s alternative budget proposal that relied on the Legislative Analyst’s Office’s (LAO) optimistic revenue forecast to provide an additional $3.2 billion in tax revenues to fund their planned spending binge.

Spending Increases Lead To Tax Increases.  Despite the improvements negotiated by the Governor, this budget plan still includes major spending increases for new programs and expansions of existing state programs that will grow larger in future years, thus imposing pressure to continue the Proposition 30 (November 2012) tax increases permanently, and undoubtedly other tax increases as well.

Record High Spending Levels. In fact, total state spending from all fund sources will hit a new record high at over $233 billion, while true General Fund program spending will surpass the pre-recession high ($103 billion) by about $5 billion - hitting around $108 billion.

Debt Repayment Clearly Not A Priority. While this budget plan includes many supportable elements, such as the additional funding for education programs and $2 billion of budgetary debt repayments, it fails to adequately prioritize reducing the $27 billion of existing budgetary debts and the state's $180 billion of unfunded retirement liabilities.

More Taxes and Borrowing. Revenue growth from an improving economy and the voter approved tax increases from Proposition 30 provided more than $18 billion of additional tax revenue for the budget this year.  It doesn’t take a fiscal genius to balance the budget with that kind of new tax revenue growth, yet the Governor and legislative Democrats have chosen to go even further, by imposing an additional $645 million sales tax increase on Medi-Cal managed care plans and borrowing $500 million from AB 32 cap-and-trade tax revenues to bolster spending further and grow our state’s debt load.

Budget Risks Everywhere.  While the official state budget reserve is $1.1 billion, the Governor has acknowledged that the budget is only precariously balanced at best. The following is the short list of large-ticket items that could swing the state budget back into deficit mode:

  • A recent judgment against the state in the Gilbert Hyatt v. Franchise Tax Board case will cost about $500 million if it stands.  A Nevada Supreme Court decision is pending - oral arguments were heard on June 18, 2012 and the matter is now under submission.
  • No funding is provided to address the recent federal court order to reduce the prison population, which could easily cost hundreds of millions of dollars for recidivism reduction programs, community supervision and additional secure facilities.  UPDATE:  Subsequent to passing the State Budget, SB 105 (Huff/Steinberg) Appropriated $315 million to prevent the early release of dangerous criminals.   (See Public Safety, Page 27)
  • Pending federal regulations could increase In-Home Supportive Services (IHSS) overtime costs by at least $200 million to $300 million, according to the Administration. Currently, the budget contains no funding or plan to deal with this issue.
  • The budget assumes $1.5 billion from the dissolution of Redevelopment Agencies, despite at least 70 lawsuits pending on this issue.
  • Both the Governor and LAO have expressed concern over volatility in the capital gains revenue forecast, which could swing revenues by billions of dollars.
  • Rising health care costs could strain the budget since Medi-Cal will cover nearly 25 percent of the state’s population, and state employee/retiree health care already costs billions of dollars. A change in the inflation rate could cost hundreds of millions more.

California Needs A Common Sense Rainy Day Reserve Fund.  Governor Brown succeeded in slowing down legislative Democrats’ government spending desires for now, but he fails to set an example by following the State Constitutional requirement to put money into a budget reserve fund.  In addition, the Governor should support the Republican effort to allow a vote of the people on a true rainy day reserve pursuant to the bipartisan plan enacted in ACA 4 (2010) that would help ensure budget stability and avoid future budget crises.

The Bottom Line.  This budget prioritizes new spending over a more fiscally conservative approach that favors paying off accumulated state budgetary debts and unfunded retirement liabilities. Absent any changes, structural spending increases will grow in future years, and the interaction of that growth with the increased dependence on high income earners caused by the recently approved Proposition 30 temporary tax increases will inevitably lead California back into the "boom-and-bust" cycle that has caused a decade of fiscal crises.

Read Complete Analysis (pdf)