Highlights and Analysis of the Governor's 2013-14 Budget

Friday, January 18, 2013

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Executive Summary

In November 2012, the Legislative Analyst’s Office (LAO) projected that the Governor and Legislature would need to address a $1.9 billion state budget deficit ($943 million for fiscal year 2012-13 and $936 million for 2013-14) in order to pass a balanced budget by June 2013.  The Governor now claims that the budget is in fact balanced without the need for any changes, but he proposes to build a $1 billion reserve primarily though the imposition of two tax increases (the hospital quality assurance fee provides $310 million and the managed care organization tax provides $364 million of revenue) and by suspending four state mandates ($104 million).  No new spending reductions are proposed to build the reserve.

The Governor’s claim that there is no budget deficit ignores the LAO forecast indicating that state savings from the dissolution of Redevelopment Agencies would fall far short of expectations (the budget proposal assumes about $700 million more than LAO believes achievable), and that General Fund savings from Cap and Trade could only reach $100 million annually (the budget proposal assumes $300 million more than the LAO believes achievable).  In addition to disregarding the LAO forecast, the Governor changes his own schedule for special fund loan repayments, which are now $1 billion lower than they were in his June 2012 “Wall of Debt” repayment schedule (See Wall of Debt Repayments Delayed in Appendix A- Page 30).  Absent the Governor’s accounting changes and optimistic assumptions the budget deficit would be about $2 billion.

Both the Governor and LAO generally credit an improved economic outlook (sustained modest growth) and the Proposition 30 tax increases for stabilizing the state budget, but they also warn that there is considerable uncertainty surrounding the economic recovery and that fiscal discipline and spending restraint are critically important if California is to avoid repeating the mistakes of the past wherein overspending during the “boom” years led to dramatic deficits as revenue growth leveled off or dropped.  The main economic concerns involve potential recession as a result of federal fiscal policies, economic growth in Europe, and improvement in China and other emerging market economies.

The Governor has introduced his 2013-14 state budget and highlighted the elements he wants people to know about, but it is important to look behind the scenes at some of the budget features he failed to fully disclose.

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