Budget Season Underway

January 11, 2010

These days, it seems to be all budget all the time in California. But Friday marked the traditional opening to this year’s budget season, when Governor Arnold Schwarzenegger released his 2010-11 Proposed Budget. In case you missed it, CBP Executive Director Jean Ross responded to his proposal in a statement, saying it will “batter a struggling economy and make life tougher for millions of families already struggling in the face of double-digit unemployment rates.” At a time when the Governor has argued for job creation, she criticized cuts to schools, which help create our future workforce, and programs like CalWORKs, which get people back to work. Instead, she called for a balanced approach that includes new revenues and partnering with other states for more federal aid.

Late Friday, the CBP issued its analysis of the budget. We’ll be updating this document over the next few days as more details become available, so you may wish to check back even if you’ve looked at it once. We also encourage you to visit our website and blog frequently in the upcoming weeks, as we take an in-depth look at other proposals in the budget.

If you haven’t already, consider signing up to receive our email alerts as well. Here at the CBP, we’ve always believed that budget decisions are among the most important decisions made in the state.

– Lisa Gardiner

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Food Stamp Enrollment Surpasses 3 Million

January 11, 2010

Just over 3 million Californians received food stamp benefits in October 2009, according to new data from the Department of Social Services. Enrollment in the program jumped by about 905,000 (43.0 percent) from October 2007, a period when California was sliding into a deep recession. However, as we pointed out in our recent report, California historically has had a low participation rate in the Food Stamp Program, and the state still has many policies in place that impede access. These policies are a key reason why nearly 2.2 million eligible Californians did not receive food stamp benefits as recently as 2007.

Enrolling more eligible Californians in the Food Stamp Program is a win-win scenario: Benefits, which are 100 percent federally funded, help struggling families as well as struggling local economies. According to our estimates, enrolling 100,000 more eligible Californians would bring roughly $177 million in additional food stamp benefits to California each year. Enrolling 10 times that number – 1 million eligible Californians – would bring about $1.8 billion in federally funded food stamp benefits to the state each year. This infusion of federal funding would provide a significant boost to local economies: Economists estimate that every dollar spent on food stamp benefits increases economic activity by $1.73.

– Scott Graves

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How We Got Here: The Revenue Side of the Equation

January 7, 2010

In his State of the State address, the Governor reiterated his endorsement of the recommendations of the Commission on the 21st Century Economy (COTCE) citing the drop in state tax revenues attributable to the downturn in the economy. As we’ve blogged about before, the COTCE recommendations would shift the cost of state services from the wealthiest Californians to middle- and low-income Californians by reducing the state’s reliance on the personal income tax – particularly at the top end of the income distribution – and shifting the state toward consumption-based taxes. Our review of how actual state revenues and expenditures compare to the Legislative Analyst’s 2004 forecast strongly suggests that the Governor is barking up the wrong tree.

As we noted yesterday, the decline in 2009-10 General Fund spending relative to the 2004 forecast is larger than the drop in 2009-10 General Fund revenues. That might lead one to ask why the state faces a budget gap. The answer? Based on 2004 laws and policies, the state was expected to run shortfalls through the end of the forecast period.

Perhaps more interesting is a comparison of how the state’s “big three” revenue sources – the personal income, corporate, and sales taxes – fared relative to the 2004 forecast. Contrary to popular rhetoric, the state’s personal income tax actually performed the best of the state’s three major taxes, with actual collections falling 14.7 percent below the 2004 projection. Now that’s not good, but it is significantly better than the 21.2 percent difference between projected and actual sales tax revenues and 27.8 percent difference between projected and actual corporate income tax collections.

As we’ve noted before, there’s reason to expect that collections from the business net receipts tax (BNRT) proposed by COTCE would track the performance of the sales tax, since both are based on consumers’ purchases. While the BNRT would tax a broader “base” – a broader range of products, including services and groceries – consumer spending has been weak across the economy at large.

The one component of the state’s revenues that increased relative to forecast?: “other revenues and transfers.” This represents a relatively small part of the state’s revenues. Most of the $1.4 billion difference between the 2004 forecast amount and the 2009 forecast is attributable to the assumption that the state will receive $1 billion from the sale of a portion of the State Compensation Insurance Fund, an assumption that most analysts view as dubious, at best.

The bottom line: contrary to popular assertions, the current problem is not attributable to weakness in the state’s personal income tax, but rather to overall weakness in the economy and other factors. In future blog posts, we’ll examine how 2009 spending compares to prior projections, so stay tuned.

– Jean Ross

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How Did We Get Here? The Top Lines

January 6, 2010

The roots of California’s budget crisis are the subject of considerable debate. In order to help understand how the state’s budget problems got so big, we decided to take a look back at where we expected to be five years ago and examined what’s changed. To do that, we looked at the Legislative Analyst’s November 2004 Fiscal Outlook, the first report that included 2009-10 within the forecast horizon, and compared projected revenues and expenditures for 2009-10 in that document to the estimates presented in the Analyst’s November 2009 Outlook report. The results are quite interesting and are not what much of the rhetoric that often surrounds the budget debate might lead you to expect.

First, a note on methodology. The LAO’s Outlook report projects revenues and expenditures on a “current services” basis. That is, they look at the revenues the state’s tax system is expected to bring in based on current law and adjusted based on the Office’s economic forecast and the expenditures required by the laws in effect at the time the report is prepared grown forward based on population, caseload, and inflation where programs are required to be adjusted for inflation or population. This method is consistent with standard budget methodology as used by the Department of Finance’s “baseline” budget and that of the Congressional Budget Office for federal revenues and expenditures.

So what did we find? First, the November 2009 estimates of both revenues and expenditures are significantly lower than was projected five years ago. Interestingly, however, spending has fallen more than revenues, both in absolute dollar and percentage terms. Estimated 2009-10 General Fund revenues and transfers were $16.9 billion (16.1 percent) lower than was forecast in 2004 and estimated General Fund expenditures were $21.5 billion (19.4 percent) lower than projected in 2004. The difference reflects significant spending reductions made as part of repeated attempts to balance the budget, as well as $8.5 billion in federal economy recovery funds used to help close the 2009-10 gap. Absent the availability of federal funds, additional spending reductions or larger tax increases would have been needed to bring the budget into balance. The LAO’s forecast for 2009-10 anticipated a $5.8 billion budget shortfall. As a result of the budget-balancing measures enacted between 2004 and 2009, the estimated shortfall for 2009-10 declined to $1.2 billion largely due to the state’s failure to achieve savings anticipated in the 2009-10 budget agreement.

The drop in revenues would have been even larger – reflecting the magnitude of the impact of the downturn in the economy on state tax collections – were it not for the $10.3 billion in additional 2009-10 revenues expected as a result of the temporary tax increases enacted as part of the February 2009 budget agreement.

Over the next several days, we’ll look more closely at how the state’s various revenue sources have performed and how spending has changed over the past five years as we prepare for the Governor to release his 2010-11 Proposed Budget on Friday and gear up for another tough year of budget negotiations.

– Jean Ross

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Ten New Year’s Resolutions for a Fiscally Responsible California

January 4, 2010

I’m a big believer in New Year’s resolutions. I have one list for home, one for work, and a separate list for my favorite hobby. In honor of the new decade, here’s another list: one aimed at setting the state on a fiscally responsible path for the year ahead.

  1. Don’t vote for any ballot measure that creates an unfunded obligation on the state budget or “locks in” more of the budget. Constitutional provisions that limit the use of certain tax revenues or impose spending requirements on the budget without providing the resources to fulfill those obligations exacerbate California’s fiscal problems. These provisions range from dedication of sales taxes collected on gasoline to transportation to the “Three Strikes” law establishing minimum sentencing requirements.
  2. Don’t vote for bonds that impose an obligation on the General Fund where there’s a good alternative. The Legislature missed a great opportunity when it placed a water bond on the ballot that will further burden the General Fund instead of asking water users to pay the cost of system improvements. State Treasurer Bill Lockyer recently reported that debt service costs will exceed 10 percent of General Fund spending in 2012-13. That’s more than the state spends on all of Higher Education or Corrections and Rehabilitation. Debt service costs have more than tripled as a share of the budget since the mid-1980s.
  3. If you vote for an unfunded bond or budget “lock in,” don’t complain about the state’s budget problems. This one should be self-explanatory. If you help create the problem, don’t be surprised when it is hard to find a solution.
  4. Don’t promise to cut taxes and balance the budget. I have the cover of an old New Yorker magazine on the wall of my office. It is a take-off of Dante’s Inferno. At the center ring of hell? Politicians that promise to cut taxes and balance the budget. It’s a good reminder that the impossible is, well, impossible.
  5. Use more facts, less rhetoric. Here at the CBP, we like to think of ourselves as being in the business of providing facts. That’s because, to paraphrase our friends at the Oregon Center for Public Policy, “facts matter.” Let’s all resolve to make 2010 the year that budget and policy debates are based on hard facts and solid, evidence-based research. And remember that the plural of anecdote is not data.
  6. Hold candidates for public office accountable for realistic solutions to California’s budget problems. If a candidate for governor proposes to layoff tens of thousands of state workers, make them tell you exactly which workers she or he thinks are expendable: college professors or prison guards? The upcoming gubernatorial campaign offers an opportunity for those who seek to lead California to initiate an honest conversation with voters about the difficult choices needed to balance the state’s budget and what Californians want and need from government to make our state one we can all be proud of.
  7. Have compassion for the less fortunate among us and those who continue to suffer from a weak economy. Double-digit unemployment rates and the prospects of a jobless recovery will increase demands on state and local safety nets. Recent budget cuts have asked families and service providers to do more with fewer resources in the face of rising demands. Budgets are about values and choices and we remain convinced that compassion is a value Californians share.
  8. Get involved. Lobby your legislators or the Governor. Better yet, do it as part of the PTA, your union or professional association, or a local community organization. Don’t have one? Start one. Any elected official worth her or his salt does listen and your opinions do matter. Remember that you are the expert for your community.
  9. Vote. My guess is that Budget Bites readers are high-propensity voters. Take the next step. Encourage your family, friends, co-workers, and clients to register and vote. This year, Californians will elect a new governor, vote for 80 assemblymembers, 20 state senators, Congressional representatives, and weigh in on countless ballot measures. My motto: if you don’t vote, you don’t get to complain if things don’t turn out how you’d hope.
  10. Contribute. Hopefully, to support the work of the California Budget Project, but also to the shelter, clinic, food bank, or school of your choice. Tough economic times make for tough fundraising times. Many nonprofits that receive state or local government funds have experienced deep cuts in funding while demand for their services soars. Even a small donation, if that’s all you can afford, tells staff and volunteers that you value the work that they do.

And with that, best wishes for a happy new year. We know that it will be tough. And it probably won’t be pretty.

On behalf of all of us here at the CBP, we look forward to working with you to build a better future for Californians.

– Jean Ross

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