It's Time to Prepare for Mid-Year Cuts - August 10, 2011
August 10, 2011
I hope that you've had a great summer and deserved break from budget news. It has been a bit crazy in Sacramento, as we remodel our O Street office to accommodate a consolidation of the League's two offices. Nevertheless, it has been very nice to have a "real" legislative summer recess.
The Legislature returns on Monday for a four-week sprint to the end of session. While we don't anticipate budget will be a serious subject of the session, members will certainly be talking about the bad news that came out yesterday--July revenues were $539 million below forecast. And, that was before the stock market turmoil that we have all been watching.
For this reason, we advise community college districts to prepare for mid-year cuts totalling $127 million, which is a deficit to the general apportionment of about 2.3%.
This accounts for the Tier 1 cuts ($30m), the Tier 2 cuts ($72m) and the anticipated structural apportionment shortfall of ($25m). While the former two are specified in the budget trailer bill, the latter could vary up or down, although is highly likely to be at least $25 million. This also assumes that we are successful in our efforts to change the student fee increase to summer 2012 to minimize enrollment disruptions and administrative burdens on the districts.
Now, into the weeds...
In July, the state's corporate taxes came in $69 million (-19.3%) below forecast, sales taxes came in $139.4 million (-12.5%) below forecast. While personal income taxes came in $89 million (2.9%) above forcast. The bulk of the "miss" in July's numbers was in "other revenues," mostly from city's delaying the forfeiture or "ransom payment" of redevelopment funds. Thus, the headline number of July is illusory, although the underlying economics call the state's anticipated revenue into serious question.
Personal income tax (PIT), even with the January 1 sunset of the temporary tax surcharge, outperformed collections in July 2010. However, non-agriculature employment was only up 1.1% between June 2010 and June 2011, which is not enough to explain the surge in PIT revenues. Rather, the revenues are largely a function of large wealth generation in the stock market and the high-tech sector. With the latest market roller coaster, this may not be sustainable, and we might actually have to "give back" some of that money if people decide to swap out capital gains for capital losses taken over the last week. As of right now, the market is off 14.8% from its spring highs.
While the market will bounce around, it is the uncertainty of the roller coaster that will likely hit California and will cause the budget triggers to be pulled when the $4 billion in new revenue doesn't come in. Most of that $4 billion was speculative revenue that assumed that Facebook, Twitter, Zynga and a handful of other California-based high tech companies would go public this fall. However, in a market like this, all of these companies are reconsidering their plans and will push off the IPO to the spring or even next fiscal year. The later in the state's fiscal year an IPO occurs, the less likely the state is to receive PIT revenues from the IPO. (Insiders and venture firms are often prohibited from selling as part of the IPO contract with underwriters.)
Meanwhile, the non-tech economy and regional economies away from the Bay Area are in bad shape. The housing market continues to be abysmal with all three major indicators--median home price, sales, and new units--all down from a year ago. We are in a modest recovery, although the uncertainty of the stock market is shaking consumer confidence and is causing economists to bring up the most feared phrase--"double-dip recession."
In community colleges, it's painful to prepare for another round of cuts. However, if we plan early for the 2.3% cuts that we know about, it'll be much easier than a January surprise.
Community College League of California