May Revision Budget Update - May 18, 2011
Below is my budget update addressing the May Revision. I hope you find it helpful.
2011-12 Budget Update – May Revision
The Big Picture – On
Monday May 16th the Governor released his annual May Revision. Relative to the budget proposal issued
in January, the news is largely positive.
The Department of Finance has identified an increase in revenue of $6.6
billion covering the 2010-11 and 2011-12 years. Combined with the significant legislative actions taken in
March, the scope of the budget gap identified by the Governor has been reduced
from $26.6 billion to $10.8 billion.
The following summarizes how we’ve gotten to this point:
- -$26.6 Billion gap identified in January
- +$14 Billion in cuts and other solutions approved
- -$0.6 Billion in erosions of March package (due to
- -$1.0 Billion due to Proposition 10 litigation
- +$6.6 Billion in GF revenues identified in May
- -$2 Billion in new costs
- -$1.2 Billion for a budget reserve
- = $10.8 Billion
The new revenue allows the Governor to increase funding for
Proposition 98 and modify his tax proposals. Proposition 98 funding increases by about $3 billion (to a
total of $52.4 Billion), though these expenditures largely consist of a buyback
of inter-year deferrals rather than new programmatic spending. The big changes to his tax proposals
include a delay on extending the personal income tax surcharge until 2012. Also, the Governor would back away from
eliminating enterprise zone tax credits to a reform of the program that would
provide credit only for new hires.
As it is too late for a ballot vote for the 2011-12 fiscal year, the
Governor suggests that taxes would be extended by a direct vote of the
Legislature and would later be ratified by the voters, though he does not
propose a specific time frame.
Perhaps revealing some concerns that the increase in revenue
may make the push for tax extensions more politically difficult, the May
Revision summary focuses a great deal of attention on what the Governor refers
to as a “wall of debt.” The
Governor identifies approximately $35 billion in state borrowing from
deferrals, bond debt, special fund borrowing, Proposition 98 maintenance factor
costs and other obligations. The
Governor endorses a 5-year plan to reduce the debt starting with the buying
back of $3 billion in education deferrals and a reduction in special fund
borrowing of about $750 million in 2011-12. The Governor further suggests that any new revenues that
materialize over the next few years should go toward retiring obligations prior
to funding new program costs.
Community Colleges – The
May Revision proposes to keep the most of the actions taken on the CCC budget
earlier in the year intact (a $400 million base reduction plus an increase of
fees of $10 per unit) while using the new revenues to buy back $350 million in
inter-year deferrals. This
proposal would reduce CCC deferrals from $961 million to $611 million. Effectively, the workload reduction of
approximately 4.9% identified earlier in the year does not change under the
Governor’s May proposal.
The May Revision also identifies $57 million in increased
current year property tax revenues without making a corresponding reduction in
our General Fund appropriation, which should help mitigate a deficit in 2010-11
Other notable changes include the suspension of the Health
Fees, Sexual Assault Response Procedures, Reporting Improper Governmental
Activities, Student Records, and Prevailing Wage Rate mandates, with intent to
eliminate them or make them optional.
Additionally, the May Revise proposes to offset mandate costs for the
Enrollment Fee Collections and Waivers and the Tuition Fee Waivers mandates be
offset by existing local assistance funding.
Notably, there is no proposal for census reform or for
any other significant policy change.
Doomsday? – In
the event tax extensions are not approved, the May Revision summary speaks in
broad terms about reductions to education (additional $500 million in cuts to
each of UC and CSU and a $5 billion cut to Proposition 98), though the Governor
chose not to specify how these reductions would be taken. Given the $6.6 billion in new revenues,
though, it seems unlikely that the CCCs would be subject to the worst case
scenario spelled out in February by the LAO. In an all-cuts budget, we would expect that the first cuts
to the CCC budget would be to eliminate the $350 million in deferral restoration. While reductions could potentially go beyond that level, it
appears unlikely that total reductions would exceed $100 million to $150 million
beyond what the system received in March. Potentially, some of this reduction
would be mitigated by an increase in fees beyond the $36 per unit level. In short, while risks remain, the
increase in revenues has somewhat mitigated the doomsday scenarios feared in
Assessment - Our
initial assessment is that, on the whole, the May Revision represents a
balanced approach to filling the estimated budget gap. While some other budget proposals, such
as the plan recently released by the Assembly Republican caucus, have suggested that education funding
could be protected without tax extensions, it would seem to be politically
infeasible to have such a budget approved by the Legislature and Governor given
the level of reduction to social service programs such an approach would
require. There’s little doubt that
tax extensions provide much more security to the budget picture for the CCCs
and for the state as a whole.
As noted earlier, the May revision appears to reveal some
concern on the part of the Governor that the argument to extend taxes is
weakened by the unexpected increase in revenues. This would help explain the focus on existing budgetary debt
and future obligations. The
proposal to use new revenues to buy back CCC deferrals rather than cuts is
consistent with this approach. The
Governor has taken many actions (e.g., restrictions on state travel and cell
phones, the proposed elimination of many boards and commissions) meant to show
that he is frugal and will not ask the voters for tax extensions without first
reducing what he perceives as low-priority or unnecessary expenditures. Reducing existing debt before restoring
programs is in line with this approach and may make sense politically.
Further, it was comforting to see that the Governor does not
propose any new policy reforms for the CCCs in this late stage of the
game. We hope this reflects a
belief that large institutions need time to implement changes and that any
reforms are best made with input from those who must make them happen on the
While the Governor’s May Revision does little to harm the
CCCs relative to actions taken earlier in the year, many potential pitfalls and
questions still remain:
- Will tax
extensions be approved? This is the $10 billion question. If legislators could not agree to a
deal when there was a $15 billion problem, does it get any easier when the
problem is $10 billion? Difficult negotiations remain and the outcome could
seriously impact the CCC budget.
- How solid
are the revenue estimates? The
Department of Finance has been unable to thoroughly explain why the revenues
have improved so significantly since the January estimate. If those figures slip, that could
result in downward revisions to the CCCs.
- Try and
try again – The Governor continues his push for eliminating redevelopment
agencies and for realignment. Will
those proposals be more successful now than they were in March?
- What will
the Legislature do? The May Revision represents the Governor’s plan, but
the Legislature will also have their say. They may have a different set of programmatic
priorities. Would they favor
social programs over meeting the Proposition 98 guarantee? They may also show more interest in
restoring programmatic reductions than in addressing debt. While the Governor has not proposed any
policy changes for the CCCs, will the Legislature take the same approach? Legislative hearings are not slated to
begin until the week of May 23rd, so we will learn more about any
differing approaches at that time.
We’ll do our best to monitor the budget situation and keep you
posted on any new developments. In
addition to email, I also provide updates on state budget activities through
twitter (@cccbudgetnews). I hope
you’ll join us there, and I hope you feel free to contact me with your
questions or concerns.
Chancellor for Fiscal Policy
Office of the California Community Colleges