The roots of California’s budget crisis are the subject of considerable debate. In order to help understand how the state’s budget problems got so big, we decided to take a look back at where we expected to be five years ago and examined what’s changed. To do that, we looked at the Legislative Analyst’s November 2004 Fiscal Outlook, the first report that included 2009-10 within the forecast horizon, and compared projected revenues and expenditures for 2009-10 in that document to the estimates presented in the Analyst’s November 2009 Outlook report. The results are quite interesting and are not what much of the rhetoric that often surrounds the budget debate might lead you to expect.
First, a note on methodology. The LAO’s Outlook report projects revenues and expenditures on a “current services” basis. That is, they look at the revenues the state’s tax system is expected to bring in based on current law and adjusted based on the Office’s economic forecast and the expenditures required by the laws in effect at the time the report is prepared grown forward based on population, caseload, and inflation where programs are required to be adjusted for inflation or population. This method is consistent with standard budget methodology as used by the Department of Finance’s “baseline” budget and that of the Congressional Budget Office for federal revenues and expenditures.
So what did we find? First, the November 2009 estimates of both revenues and expenditures are significantly lower than was projected five years ago. Interestingly, however, spending has fallen more than revenues, both in absolute dollar and percentage terms. Estimated 2009-10 General Fund revenues and transfers were $16.9 billion (16.1 percent) lower than was forecast in 2004 and estimated General Fund expenditures were $21.5 billion (19.4 percent) lower than projected in 2004. The difference reflects significant spending reductions made as part of repeated attempts to balance the budget, as well as $8.5 billion in federal economy recovery funds used to help close the 2009-10 gap. Absent the availability of federal funds, additional spending reductions or larger tax increases would have been needed to bring the budget into balance. The LAO’s forecast for 2009-10 anticipated a $5.8 billion budget shortfall. As a result of the budget-balancing measures enacted between 2004 and 2009, the estimated shortfall for 2009-10 declined to $1.2 billion largely due to the state’s failure to achieve savings anticipated in the 2009-10 budget agreement.
The drop in revenues would have been even larger – reflecting the magnitude of the impact of the downturn in the economy on state tax collections – were it not for the $10.3 billion in additional 2009-10 revenues expected as a result of the temporary tax increases enacted as part of the February 2009 budget agreement.
Over the next several days, we’ll look more closely at how the state’s various revenue sources have performed and how spending has changed over the past five years as we prepare for the Governor to release his 2010-11 Proposed Budget on Friday and gear up for another tough year of budget negotiations.
— Jean Ross