Copyright© 1999 by School Services of California, Inc.
LAO Forecasts Robust Economy through 2004-05
The California economy is projected to remain robust, not just through the next budget year of 2000-01, but throughout the entire five-year period included in the latest forecast of the Legislative Analyst's Office (LAO).
In the short term, the LAO reports that the state will close out the 1998-99 fiscal year with $684 million more than previously estimated, due to tax receipts in the early months of the current fiscal year that are accrued back to the prior year. For 1999-00, the LAO's forecast shows increased tax revenues of almost $1.9 billion, offset somewhat by increased expenditures of about $800 million, in large part due to higher-than-expected MediCal expenditures (resulting from a shortfall in federal reimbursement). If this forecast is accurate, and if the state doesn't spend any of the increased revenues, this would leave the state with a 1999-00 year-end reserve of nearly $2.6 billion, up dramatically from the $881 million forecast that was made at the start of the fiscal year when the budget was adopted.
For 2000-01, the LAO projects that state taxes will grow by 4.7%, while maintaining current expenditures will cost the state an additional 4%, leaving a $427 million operating surplus, and raising the state's reserve to over $3 billion at the end of the 2000-01 fiscal year. For the remaining four years of the forecast, the LAO projects that revenues and expenditures will grow in parallel, leaving the $3 billion reserve largely intact.
Of course, projecting the future economy is full of uncertainties. As Legislative Analyst Elizabeth Hill put it in the LAO's press briefing, "There's always downside risk on the economy." But when the LAO makes a forecast like this one, people listen, since the LAO's chief forecaster, Brad Williams, was rated number one in the state by the Wall Street Journal.
The LAO also cautions that any increased expenditures in the short term will compound over the future and drop the state's reserve. For example, a $300 million increase in ongoing expenditures in 2000-01 would cost the state $1.7 billion by 2004-05 (including adjustments for cumulative
COLAs and growth) and cut the state's reserve to only $1.3 billion.
Vehicle Licensing Fee (VLF) Costs Would Jump
This strong growth in state tax revenues would be sufficient to trigger the rate reductions in the VLF that were agreed to as part of the 1998 State Budget negotiations. The state's cost of backfilling the VLF revenue losses to local government will jump from $1.5 billion in 1999-00 to $4.5 billion by 2004-05. (This $3.0 billion increase in state obligations is already part of the LAO's forecast and is included in the LAO's projections of income and expenditures noted above). But this also means that money that could have been used to dramatically increase K-14 school funding would instead be automatically committed to tax relief in the form of VLF rate reductions.
Significant Growth in Proposition 98 Funding
Basing its calculations only on current law and the assumption that the state funds Proposition 98 only at the minimum funding requirement, the LAO still forecasts that even this minimum level of funding will be sufficient to increase funding per ADA/FTES by an average of more than 4% per year through 2004-05.
High Statutory COLA Forecast
The LAO's forecast included the projection that the statutory COLA would be 2.6% for 2000-01 and remain at about that level each year through 2004-05. In fact, the latest forecast data from a national econometrics firm indicates that the statutory COLA for 2000-01 might even be higher than 2.6% - a dramatic change from the forecast just a few months ago that the COLA would be only .8% for 2000-01.
- Paul Goldfinger
Editor's Note: Copies of the LAO's report, "California's Fiscal Outlook: LAO Projections 1999-00 to 2001-02," are available on the LAO's website: www.lao.ca.gov.