State Budget Update - Nov. 18, 2009
Below is a very informative update from Vice Chancellor Erik Skinner on the Legislative Analyst's Office Fiscal Outlook report released today. The good news is that mid-year cuts for community colleges and schools appear unlikely, but the budget picture for 2010-11 and 2011-12 is quite grim. In case you don't get to the bottom of this update, I don't want you to miss Erik's sobering conclusion:
"Taken in total, LAO’s report offers a sobering assessment of California’s fiscal condition. The choices that state leaders will face in closing the $21 billion budget shortfall will be very difficult—all the low hanging and medium hanging fruit is gone. It will take another year of fierce advocacy in order to fend off additional deep cuts to the community colleges. At the local level, district budget plans should not assume a rapid turn around and must have significant contingency plans built in. It will take tough choices, creativity, and innovation for community college districts to weather the storms ahead."
Vice Chancellor, Student Services and Special Programs
California Community Colleges Chancellor’s Office
Office: (916) 327-5361
From: Skinner, Erik
This morning, the Legislative Analyst’s Office (LAO) released the Fiscal Outlook, its annual report containing a five-year forecast of the state’s financial condition. Each year, the report is viewed as the first credible update on the state’s fiscal status following enactment of the State Budget. As such, the Fiscal Outlook begins to set the expectations that frame the upcoming budget process. While offering some glimmers of hope, particularly in regards to state revenues and economic performance, the report’s central message is that California remains in the throes of a serious budget crisis due to a mammoth structural shortfall. This shortfall is largely due to the inability of state leaders to make the realistic and lasting changes necessary to bring state spending and revenues into alignment.
The Fiscal Outlook does not offer specific forecasts for the California Community Colleges, but rather includes our budget in the overall Proposition 98 forecast. Still, the report offers a useful prediction of the budget environment we are likely to encounter as state leaders begin deliberations on the state budget in the new year.
- California faces a projected $20.7 billion budget shortfall over a two-year period (fiscal years 2009-10 and 2010-11).
- This shortfall results primarily from increases in projected expenditures compared to the enacted State Budget.
- Sluggish State General Fund revenues represent a relatively small part of the problem.
- While still lagging the nation, California’s economy has likely hit bottom and is beginning a recovery. LAO points to slowing job loss and rising home prices as indicators that California’s economy is beginning to turn around.
- LAO states that “Addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier this year.”
- Despite the state’s worsening budget outlook, the 2009-10 Proposition 98 minimum guarantee has increased by $1 billion since the 2009-10 State Budget was enacted. The 2009-10 State Budget provided a total of $50.4 billion for K-12 schools and community colleges. Due to changes in the factors used in the Proposition 98 calculation, the state’s constitutional funding obligation is now $51.4 billion and, as a consequence, the state owes community colleges and K-12 schools $1 billion more than provided in the 2009-10 State Budget.
- This counterintuitive increase in the Proposition 98 minimum guarantee is the result of a downward adjustment in 2008-09 State General Fund revenues. Because the Proposition 98 calculation drives off the year-to-year change, a downward adjustment to the 2008-09 revenue figures made the funding guarantee increase.
- LAO recommends that the Legislature wait until May to decide how to address the $1 billion increased obligation. LAO justifies that recommendation on the grounds that the Proposition 98 calculation will likely change again once revenue estimates are update in April. If the $1 billion obligation is still in effect at that time, LAO suggests that the Legislature could suspend Proposition 98, negotiate a multi-year payment plan for the funds, or simply provide the funds in the current year.
- Given the magnitude of the state’s fiscal woes, it seems unlikely that the $1 billion would be paid to schools and colleges this year. Perhaps the biggest benefit of this increased obligation is that, with the state already spending less on Proposition 98 than required by the State Constitution, it will be politically more difficult for the Legislature or Governor to propose mid-year cuts to community colleges and K-12 schools.
- LAO estimates that the Proposition 98 funding guarantee will remain relatively flat into 2010-11, dropping $334 million or 0.7 percent.
- In its out-year forecast, LAO estimates that Proposition 98 guarantee will decline in 2011-12 (down $2 billion or 3.9 percent) and then begin to rise again in 2012-13 through 2014-15 (an average annual increase of 6.8 percent). Given volatility in the Proposition 98 funding calculations, these out-year forecasts are subject to greater error.
Current-Year Budget (2009-10)
- California faces a projected current-year deficit of $6.3 billion. This estimated budget shortfall is due to the following factors:
- $1.4 billion due to the failure of the California Department of Corrections to achieve planned expenditure reductions.
- $1 billion due to an increase in the Proposition 98 funding obligation (described above)
- $1 billion due to state’s failure to sell the State Compensation Insurance Fund
- $900 million due to failure to achieve planned savings in Medi-Cal
- $800 million due to courts blocking redirection of Public Transportation Account funds to generate state savings
- $451 million due to General Fund revenues trailing below estimates
- California faces a $14.4 billion operating shortfall for 2010-11. Major factors include:
- $7.4 billion in one-time solutions that were used to balance the 2009-10 State Budget. These solutions included borrowing, deferring payments, accelerating revenue collections, and temporary tax increases. Because these solution will no longer be available, the result is a hole in the 2010-11 state budget.
- $3.5 billion due to updated revenue estimates.
- Continuation of many of the new liabilities identified in the current year (see above).
2011-12 through 2014-15
LAO forecasts that, absent state action, operating shortfalls will increase in 2011-12 and persist into 2014-15. Projected shortfalls are as follows:
- 2011-12 $21.3 billion
- 2012-13 $23 billion
- 2013-14 $20 billion
- 2014-15 $18.4 billion
The large increase in operating shortfalls beginning in 2011-12 is due to the expiration of $12.5 in temporary tax increases adopted as part of the February budget deal (some of the tax increases begin triggering off at the end of the 2009 tax year).
Taken in total, LAO’s report offers a sobering assessment of California’s fiscal condition. The choices that state leaders will face in closing the $21 billion budget shortfall will be very difficult—all the low hanging and medium hanging fruit is gone. It will take another year of fierce advocacy in order to fend off additional deep cuts to the community colleges. At the local level, district budget plans should not assume a rapid turn around and must have significant contingency plans built in. It will take tough choices, creativity, and innovation for community college districts to weather the storms ahead.
More updates will follow.
Vice Chancellor for Fiscal Policy
California Community Colleges,
1102 Q Street
Sacramento, CA 95811-6549
direct line: 916-323-7007
You can access the LAO report, in full, at the following web link: