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APRIL
7,
2015
2015-16 B U D G E T
2015-16 B U D G E T
EXECUTIVE SUMMARY
State Revenues Appear to Be Surging. In the January 2015 estimates accompanying the 2015-16
Governors Budget, the administration raised its revenue projections by billions of dollars for 2013-14
through 2015-16, 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 Mayparticularly for the current fiscal year (2014-15). History cautions that such
revenue surges prove temporary.
Revenue Surge May Limit Ability to Fund Priorities Other Than Schools. Surprisingly perhaps,
these revenue trends pose a risk for the state budget mainly because higher revenues in 2014-15
boost ongoing spending on schools and community colleges under Proposition98, potentially
making it harder for the state to balance its budget in 2015-16 and beyond. The factors driving
school spending upward now make it more difficult to fund other potential state budget priorities,
such as augmentations for non-school programs, debt payments, and budget reserves.
Hypothetical Budget Scenarios Intended to Help Legislature Plan. This report provides a
preview of possible scenarios that the states elected leaders may face while finalizing the 2015-16
budget package in May and June. Using the Governors 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 budgets 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 estimatesprincipally revenues, the
Proposition98 minimum guarantee for schools and community colleges, and Proposition2, the
debt payment and budget reserve measure passed by voters in November 2014.
Modest Budget Problem Emerges in Various Hypothetical Scenarios. Under four of the five
scenarios, the state would face a budget problemmeaning that spending cuts, revenue increases,
or other actions would be necessary to balance the budget in 2015-16. The emerging budget problem
is principally due to higher assumed 2014-15 revenues that boost Proposition98 spending on an
ongoing basis. Under these five scenarios, the share of the assumed revenue increases across 2013-14
through 2015-16 going to Proposition98 ranges from 86percent to 125percent. In addition, the
higher assumed revenues increase (1)Proposition2 requirements and (2)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 states elected leaders, they would be quite modest
compared to the states 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 $1.6billion rainy-day
deposit made before Proposition2, reduce non-Proposition98 spending, or increase revenues, it
has other options for dealing with its budget situation. These options include (1)exploring changes
in Proposition98 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
2015-16 B U D G E T
Proposition2 that reduce the amount of reserve deposits and/or debt payments, and (3)scrutinizing
the administrations spending estimates and proposals to ensure they reflect expected program costs
for the coming year.
Governor Must Present Balanced Budget Plan.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
administrations choices range from adjusting calculations of arcane budget formulas with minimal
programmatic impact to spending cuts and/or revenue increases. (While the Governor also could
declare a Proposition 2 budget emergency, a budget emergency seems unlikely under the fiscal
calculation specified in the measure.) In ourOverview of the May Revision, weanticipate describing
the ways the administration keeps its budget plan in balance. OurOverviewalso is likely to 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 Proposition2.
2015-16 B U D G E T
INTRODUCTION
Given the positive state tax collections of
recent months, there is a significant potential of
higher-than-projected state revenueparticularly
for the current fiscal year (2014-15). Surprisingly
perhaps, these trends pose a risk for the state
budget because higher revenues in 2014-15 boost
ongoing spending on schools and community
colleges under Proposition98, potentially making it
harder for the state to balance its budget in 2015-16
and beyond. While a great opportunity for schools
and community colleges, higher revenues at this
time could mean that actionssuch as cuts to
non-Proposition98 programsmay be necessary
BACKGROUND
Balanced Budget Requirement
1,606
1,606
The administration
Proposition 2 BSA balance
1,220
proposes a year-end
Total Reserves
$4,130
$2,058
$3,361
balance in the SFEU of
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
2015-16 B U D G E T
2015-16 B U D G E T
2015-16 B U D G E T
2015-16 B U D G E T
Figure 2
Governors Budget
SFEU Reserve
Scenario Impact
on Bottom Line
1
2
3
4
5
$534
534
534
534
534
-$1,844
-1,658
-1,372
-1,072
-144
Resulting SFEU
Reservea
-$1,309
-1,124
-837
-538
391
a If negative, actions equal to this amount would be necessary to balance the 2015-16 budget.
SFEU = Special Fund for Economic Uncertainties.
Figure 3
2014-15
2015-16
1
2
3
4
5
$2,500
4,000
2,500
4,000
2,500
$1,250
2,500
2,500
4,000
4,000
Totala
$3,850
6,600
5,100
8,100
6,600
Proposition 2/
Mandates
Total
Impact on
Bottom Line
$894
1,006
1,561
1,843
1,040
$5,693
8,258
6,471
9,172
6,743
-$1,844
-1,658
-1,372
-1,072
-144
2015-16 B U D G E T
2015-16 B U D G E T
Figure 4
2013-14
$100
$100
2014-15
$2,500
$2,500
2015-16
$250
1,000
$1,250
Total
$250
3,600
$3,850
2014-15
$2,385
115
$2,500
2015-16
$2,359
N/A
735
$3,093
Total
$4,799
159
735
$5,693
2013-14
$56
44
$100
$534
1,606
1,220
$3,361
-$1,309
1,606
1,587
$1,884
Difference
-$1,844
367
-$1,477
a Relevant for Proposition 2 calculations only. Therefore, these are listed separately for 2015-16, the first year when Proposition 2 is in effect. For
2013-14 and 2014-15, increased capital gains taxes are included in other revenues.
b Does not reflect changes to required BSA deposits.
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
2015-16 B U D G E T
Figure 5
2013-14
$100
$100
2014-15
$4,000
$4,000
2015-16
$750
1,750
$2,500
Total
$750
5,850
$6,600
2014-15
$3,874
126
$4,000
2015-16
$3,321
N/A
836
$4,158
Total
$7,252
170
836
$8,258
2013-14
$56
44
$100
$534
1,606
1,220
$3,361
-$1,124
1,606
1,638
$2,120
Difference
-$1,658
418
-$1,241
a Relevant for Proposition 2 calculations only. Therefore, these are listed separately for 2015-16, the first year when Proposition 2 is in effect. For
2013-14 and 2014-15, increased capital gains taxes are included in other revenues.
b Does not reflect changes to required BSA deposits.
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
2015-16 B U D G E T
Figure 6
2013-14
$100
$100
2014-15
$2,500
$2,500
2015-16
$750
1,750
$2,500
Total
$750
4,350
$5,100
2014-15
$2,385
115
$2,500
2015-16
$2,469
N/A
1,402
$3,871
Total
$4,910
159
1,402
$6,471
2013-14
$56
44
$100
$534
1,606
1,220
$3,361
-$837
1,606
1,921
$2,690
Difference
-$1,372
701
-$671
a Relevant for Proposition 2 calculations only. Therefore, these are listed separately for 2015-16, the first year when Proposition 2 is in effect. For
2013-14 and 2014-15, increased capital gains taxes are included in other revenues.
b Does not reflect changes to required BSA deposits.
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
2015-16 B U D G E T
2013-14
$100
$100
2014-15
$4,000
$4,000
2015-16
$1,000
3,000
$4,000
Total
$1,000
7,100
$8,100
2014-15
$3,874
126
$4,000
2015-16
$3,398
N/A
1,673
$5,072
Total
$7,329
170
1,673
$9,172
2013-14
$56
44
$100
$534
1,606
1,220
$3,361
-$538
1,606
2,057
$3,125
Difference
-$1,072
837
-$236
a Relevant for Proposition 2 calculations only. Therefore, these are listed separately for 2015-16, the first year when Proposition 2 is in effect. For
2013-14 and 2014-15, increased capital gains taxes are included in other revenues.
b Does not reflect changes to required BSA deposits.
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
2015-16 B U D G E T
Figure 8
$100
$100
2014-15
$2,500
$2,500
2015-16
$1,000
3,000
$4,000
Totals
$1,000
5,600
$6,600
2014-15
$2,385
115
$2,500
2015-16
$3,262
N/A
881
$4,143
Totals
$5,703
159
881
$6,743
$100
Proposition 98 spending
Local government mandates
Proposition 2 requirements
Totals, Increased Spending
What is the Change in 2015-16 Reserve Levels?
End of 2015-16
Governors Budget
Scenario 5
Reserves
SFEU balance
Pre-Proposition 2 BSA balance
Proposition 2 BSA balance
Total Reserves
$534
1,606
1,220
$3,361
$391
1,606
1,661
$3,657
Difference
-$144
441
$296
a Relevant for Proposition 2 calculations only. Therefore, these are listed separately for 2015-16, the first year when Proposition 2 is in effect. For
2013-14 and 2014-15, increased capital gains taxes are included in other revenues.
b Does not reflect changes to required BSA deposits.
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
2015-16 B U D G E T
LAO COMMENTS
Higher Revenues in 2014-15 May Produce
Budget Problem in 2015-16. Under each of our
hypothetical scenarios, the bottom line of the
budget would be worse off. In scenarios 1 through
4, actionssuch as cuts to non-Proposition98
programswould be necessary to address a budget
problem in 2015-16. While noteworthy given
healthy growth in General Fund revenues, these
budget problems would be quite modest compared
to the states budget problems of just a few years
ago. Under scenario 5, the budget is balanced, but
resources available for allocation in the budget are
eroded by about $144million.
The Plus Side to the Scenarios. While the
above scenarios present challenges to the states
bottom line, there are also positive outcomes.
Schools and community colleges would benefit
from an even larger influx of new funding. School
funding increases in 2014-15 would be available
for any one-time purposefrom additional
mandate payoffs to facilities grants (perhaps as
part of reforming the school facilities program).
Higher 2015-16 funding could be used to make
even greater progress in meeting the Local
Control Funding Formula targets. In addition,
all five scenarios result in greater Proposition2
requirements, meaning the state would pay down
more debts and build up the BSA by a greater
amount, which may prove helpful in a future
budget downturn.
Legislature Has Options to Address Situation.
Given the five revenue scenarios presented in
this report, it may seem as though the major
decisions in the budget have already been made
16 Legislative Analysts Office www.lao.ca.gov
2015-16 B U D G E T
2015-16 B U D G E T
2015-16 B U D G E T
2015-16 B U D G E T
LAO Publications
This report was prepared by Ryan Miller, with Proposition 98 analysis by Kenneth Kapphahn, and reviewed by JasonSisney.
The Legislative Analysts Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to
the Legislature.
To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service,
are available on the LAOs website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000,
Sacramento, CA 95814.