Revenue and the Governor’s Proposed 2015-16 Budget: The Administration Has Underestimated State Revenues by Billions of Dollars in Each of the Past Three Years

January 21, 2015

The debate around the 2015-16 state budget is just gearing up, and — as always — the question of how much money is available will be critical to decisions about funding crucial public services and systems. For each of the three prior years, the Governor’s May revenue projections, which have been similar to his initial projections in January, underestimated revenues by several billion dollars compared to the final figures for the fiscal year. Meanwhile, as we noted a couple weeks ago, many of the public services that help working families climb the economic ladder remain undersupported even as the state’s revenues have surpassed their pre-recession levels and at a time when many Californians are still struggling to get by.

As the chart below shows, the Governor’s May projections were $4.2 billion below actual General Fund revenues for 2012-13 and $5.4 billion below the mark for 2013-14, according to data from the Department of Finance (DOF). Now halfway through 2014-15, the Governor’s projections from last May are $2.7 billion below the DOF’s latest revenue estimate for the current budget year.
Revenue Projections - DOF vs LAO

Of course, it’s reasonable to be cautious in projecting available resources, in case we hit a sudden economic downturn. However, being overly cautious when the economy is growing means potentially hobbling our own recovery by failing to commit sufficient resources to invest in California’s people and communities. This is like sitting on extra cash when you could be using it to learn new skills or pay for a much needed visit to the doctor’s office.

The Legislative Analyst’s Office (LAO), which makes its own revenue projections each May, similarly has erred on the side of caution. Yet, over the past three years, the LAO has gotten progressively closer to the mark while the Administration’s projections have remained more pessimistic. By the end of 2014-15, the Administration’s May 2014 projection may be even further off the mark than it appears to be now. As the LAO pointed out in its response to the Governor’s proposed 2015-16 budget, tax revenues for 2014-15 will likely be higher than the Administration’s January 2015 estimate by $1 billion to $2 billion, and possibly even more, thanks to a strengthening economic recovery and a surge in revenue collections in December.

To put these revenue figures in context, the University of California, which is in an open dispute with the Governor about its level of funding, asserts that state funding for educating students is still $460 million below its 2007-08 level despite increasing enrollment. In addition, annual funding for subsidized child care and preschool is more than $600 million lower — with nearly 97,000 fewer “slots” — than in 2007-08.

Both the LAO and the Administration note that for 2014-15, higher-than-expected revenues would go to schools and community colleges under Proposition 98, the state’s constitutional minimum funding guarantee for K-14 education. However, given the complexity of Proposition 98 and how it interacts with changing economic circumstances, 2015-16 could well bring a different outcome, with General Fund revenues in the coming budget year freed up for other state priorities. For example, the amount of money coming from higher local property tax collections would make a difference for the state’s General Fund Proposition 98 spending in 2015-16.

It’s not expected that state agencies nail their projections on the head. As Neils Bohr purportedly said, “Prediction is difficult, especially about the future.” But if there is reason to believe that state policymakers have room to do more to help Californians who the economic recovery has yet to reach, they should be doing that now.

— William Chen

Key Facts About the Governor’s Proposed Budget, Part 3: Spending Per Student Rises Due to New Revenues, But Still Faces a Long Climb Back

January 28, 2013

This is the latest in a CBP chart series highlighting some of the most important aspects of Governor Brown’s 2013-14 budget proposal and the context for it.

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State spending per K-12 student will rise in the current (2012-13) fiscal year and in 2013-14 due to voter approval of two revenue measures – Proposition 30 and Proposition 39 – last November, according to the Governor’s proposed 2013-14 budget. Yet even with this increase, per student state support for public schools will remain much lower than the 2007-08 level, after adjusting for inflation.

Why is last November’s voter approval of major revenue measures – while crucial in reversing years of declining support for public schools – not enough to return state spending per student to the level it was when the Great Recession began? As we blogged about recently, state finance officials project that Propositions 30 and 39 together will increase state General Fund revenues by nearly $6 billion in 2012-13 and by $7.2 billion in 2013-14. Because increases in General Fund revenues tend to boost the state’s minimum funding guarantee for K-12 schools and community colleges – required by Proposition 98 of 1988 – California voters’ actions in November increased state support for schools in the proposed 2013-14 budget. The Governor’s proposal estimates that state spending will go up by $1,000 per student between 2011-12 and 2013-14, after adjusting for inflation. However, even with the increased taxes from Propositions 30 and 39, General Fund revenues are projected to be $2.8 billion lower in 2013-14 than in 2007-08, without adjusting for inflation. The drop in revenues compared with six years ago, which is partially due to declining incomes during the Great Recession and several corporate tax cuts passed in recent years, helps explain why state spending per student in 2013-14 will remain so far below the 2007-08 level.

The substantial new revenues approved by voters last November help stabilize the budget and allow the state to begin reinvesting in education. Still, state K-12 spending per student is unlikely to return to pre-recession levels until General Fund revenues fully recover lost ground.

— Jonathan Kaplan

Protestors Wise to the Governor’s Claims on Education Spending

March 4, 2010

Why are students, parents, and educators across the state protesting cuts to education when Governor Schwarzenegger claims that his Proposed Budget protects classroom spending? Part of the answer lies in the complex formula used to calculate the Proposition 98 guarantee, the provision in the state’s constitution that guarantees a minimum level of funding for California’s schools and community colleges.

Under the assumptions presented in the Governor’s 2010-11 Proposed Budget, Proposition 98 spending on K-12 education would drop from $50.3 billion in 2007-08 to an estimated $44.1 billion in 2009-10 – a decline of 12.4 percent. The drop in the Proposition 98 guarantee is due in large part to falling state revenues resulting from the continued economic downturn. The Governor claims he is “protecting education.” However, this claim is based on several assumptions that would reduce the minimum funding level required by the Proposition 98 guarantee in 2008-09, 2009-10, and 2010-11 relative to the funding level required under the assumptions used to develop the budget agreement signed by the Governor in July 2009. In fact, the Legislative Analyst reported recently that under current law, the Proposition 98 guarantee would be $2.2 billion higher in 2009-10 and $3.2 billion higher in 2010-11 than the level provided by the Governor’s 2010-11 Proposed Budget. Under the Governor’s proposal, schools would receive $7,418 per student in 2010-11, nearly $1,500 less than they did in 2007-08, after adjusting for inflation. Maybe that’s why students, parents, and educators protesting today are skeptical about the Governor’s claims.

— Jonathan Kaplan

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