May Revision Budget Update - May 18, 2011

Colleagues,

Below is my budget update addressing the May Revision. I hope you find it helpful.

Thanks,

2011-12 Budget Update – May Revision

The Big Picture – On Monday May 16^th 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 in March
• -$0.6 Billion in erosions of March package (due to implementation delays)
• -$1.0 Billion due to Proposition 10 litigation
• +$6.6 Billion in GF revenues identified in May Revision
• -$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 apportionments.

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 the spring.

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 ground. 

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 23^rd, 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.

Sincerely,

Dan Troy

Vice Chancellor for Fiscal Policy

Chancellor’s Office of the California Community Colleges

dtroy@cccco.edu

(916) 445‐0540