Highlights and Analysis of the Governor'€™s 2012-13 May Revision

Tuesday, May 22, 2012

[Read complete analysis, pdf]

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 direct 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:

  • $1.4 billion shift of Redevelopment Agency assets,
  • $544 million fund shift of trial court reserves,
  • $293 million fund shift of mortgage settlement proceeds,
  • $663 million deferral of Medi-Cal provider payments, and
  • $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.”

[Read complete analysis, pdf]