Copyright© 2001 by School Services of California, Inc.

Volume 14                   For Publication Date: December 21, 2001             No. 26

Addressing The State’s Fiscal Problem

The Legislative Analyst’s Office (LAO) on December 19, 2001 released a report "Addressing the State’s Fiscal Problem." This report identifies several key budget-balancing principles to assist the Legislature in addressing the budget shortfall in 2002-03 estimated at $12.4 billion. The report addresses the importance of taking actions in the current year and considering a wide range of budget solutions. It then discusses basic budget-balancing strategies and specific spending and revenue options for implementing them.

Due to rising unemployment, mounting job losses, slowing personal income growth, and a sharp falloff in capital gains and stock options, revenues are falling well short of expectations. Cash collections are currently $1.3 billion below the 2001-02 Budget Act forecast, and the LAO estimates that combined 2000-01 and 2001-02 revenues will be $7.1 billion below the budget forecast. Their projected 12.1% revenue decline for the current year is a postwar record, and revenues are not projected to recover to last year’s level until 2003-04.

The LAO reports that the General Fund will conclude the current year with a deficit of $4.5 billion. This dwarfs to the estimated $2.6 billion reserve that was included in the 2001-02 Budget Act. In the budget year, an operating deficit (expenditures in excess of revenues) of about $8 billion will be incurred. When combined with this year’s $4.5 billion deficit, this will leave the state with a cumulative year-end budget shortfall of $12.4 billion.

The magnitude of the current budget problem and the speed with which it emerged are in striking contrast to the booming economy and good times that the state has enjoyed for a number of years. There are several factors that contribute to the budget shortfall—they are:

§ Spending has grown significantly. Overall, between 1993-94 when the economic recovery began and 2001-02, total spending more than doubled—from $39 billion to $79 billion.

§ Workload/Inflation. About $15 billion (39%) of the increase is due to workload such as increased caseloads and school enrollments.

§ New/Expanded Programs. $17 billion (43%) is related to new or expanded programs, mostly in education.

§ Tax Relief. About $2.5 billion (6%) is related to the portion of tax relief funded through the budget and showing as an expenditure.

§ Local government and other programs contribute to about $4.6 billion (12%).

The LAO identifies four basic budget-balancing principles that can guide the Legislature in approaching its decisions:

§ Wide range of budget solutions should be considered. The LAO points out that contrary to popular views, most of the budget is controllable in that it can be modified through statutory changes. For example, Proposition 98 can be suspended by a two-thirds vote. Thus, the Legislature should cast its net wide when looking for budget solutions.

§ Out-year repercussions should be assessed. Depending on their nature, the solutions used to solve one year’s budget problem may help or hinder future budgets.

§ Budget solutions should make sense. Budget solutions that eliminate or reduce low-priority, ineffective, or inefficient programs make economic sense and can even strengthen future budgets. To the extent possible, these should be given preference.

§ Current-year solutions should play a key role. Quickly implementing budget-balancing options tends to increase their potential overall impact, by lengthening the period over which they generate savings. Conversely, delays in acting compress the time frame available to realize savings, and can thereby necessitate deeper programmatic reductions than would otherwise be needed.

In addition to those current-year reductions proposed by the Governor, various additional options exist that the Legislature may wish to consider—either as additions to or in lieu of the Governor’s. The following is a list of options directly impacting community colleges that the LAO has identified which the Legislature may wish to consider:

§ Reduce funding for part-time faculty salaries—$57 million.

§ Reduce additional funding for energy costs—$26 million.

§ Reduce funding for part-time faculty office hours—$10.4 million.

§ Revert prior year funds for Teacher and Reading Development Partnership—$10 million.

§ Revert appropriation for Canada College for joint baccalaureate program—$1 million.

The LAO’s suggested reductions total approximately $104 million. Most of these funds have already been allocated to local districts. However, the Legislature could consider these options in their "special session" schedules to start January 3, 2002.

To request a copy of the LAO’s report you may call (916) 445-4656 or log on to its website at www.lao.ca.gov.