Copyright© 2005 by School Services of California, Inc.
Volume 18 For Publication Date: December 2, 2005 No. 24
Questions Regarding the
LAO Report
[Editor’s Note: In the wake
of the
Q1.
Now that the LAO projects a statutory COLA of 5.2% for 2005-06, should we
use that COLA for our planning for 2006-07?
A1.
No, for three reasons. First, as the LAO report notes, the jump in the
statutory COLA is largely the result of the spike in energy prices. With the
recent moderation of gas prices, we wouldn’t be surprised to see the statutory
COLA come in at less than 5.2%. Remember that the index used for the statutory
COLA reflects price changes for the
12-month period ending March 31, 2006 (ref. Education Code Section 42238.1), so
there are still several months to see changes to this index.
Second, the LAO notes that the statutory COLA is based on a national
measure of price changes for state and local government—and this year, that
index may overstate government price changes in California. (We sure hope the
Third, even if the final COLA is 5.2%, it may not be fully funded, given
the LAO’s forecast that the growth in Proposition 98 funding for 2006-07 would
be insufficient to fund COLA and growth.
So, our suggestion is to hold tight for now at the 4.4% COLA we’ve
predicted on our Dartboard, but to keep an eye peeled for the number floated in
the Governor’s Budget on January 10—less than two months from now.
Q2.
Assuming that the LAO forecast of both Proposition 98 funding and the
statutory COLA are accurate, will this lead to the 5.2% COLA applying—but
being offset in part by a bigger deficit?
A2.
Not necessarily. The LAO forecast indicates that the growth in
Proposition 98 funding, starting in 2007-08, will be more than sufficient to
fund COLA and growth. As a result, the LAO reports that it may make sense to use
one-time monies to fund the COLA in 2005-06 even though that is an ongoing cost.
Among the options that the LAO lists are:
·
Using Proposition 98 settle-up dollars from prior years—that is,
funds owed under the Proposition 98 minimum funding level for 2003-04 and
several prior years. This is money the state must appropriate anyway. A major
advantage to using this approach from the state’s perspective is that it would
not increase Proposition 98 funding for 2006-07 that is carried into the
future. In total, more than $1 billion is owed to schools for prior years.
·
Using Reversion Account funds—that is, funds appropriated under
Proposition 98 in a prior year that were not used. Typically, several hundred
million dollars per year in Reversion Account funds are available.
Q3.
In a
recent Update article, you wrote that schools probably wouldn’t get more
in 2005-06, even though state tax revenues were up $1.8 billion over prior
budget estimates. Now that the Legislative Analyst’s Office forecasts a jump
in state taxes of almost $4 billion, won’t schools get more in 2005-06?
A3.
As
described in our prior article “Ask SSC
. . . Will the $1.8 Billion in New State Revenue Trigger Higher Funding for
Schools” (see the November 10, 2005, Update,
page 295), we noted that the critical factor for determining new funding
for schools is the growth in state tax revenues from one year to the next.
According to the LAO’s forecast, while total state tax revenues are now
projected to be up about $3.8 billion over earlier budget estimates, the LAO
attributes $1.0 billion to 2004-05 and $2.8 billion to 2005-06. This allocation
between fiscal years is important, since more than $1.0 billion of the new money
from 2005-06 is needed to “keep pace” with the increased revenue for
2004-05.
Taking the projection of $3.8 billion in new revenues into account, the
LAO estimates that the 2005 Budget Act appropriation for K-14 school
agencies—which was calculated to be $741 million more than the Proposition 98
minimum funding level when the 2005-06 State Budget was adopted—is now only
$65 million more than the minimum But the LAO also acknowledged that if as
little as $200 million of the $1 billion in additional state revenue
assumed to apply to 2004-05 is recorded, instead, as 2005-06 state income, then
the Proposition 98 minimum funding level would be higher than the amount already
appropriated, and “the state would face a large Proposition 98 settle-up
obligation in the current year and added base spending for future years.”
While the LAO report did not specify an amount, we estimate that, under the
scenario of a $200 million shift in taxes between 2004-05 and 2005-06, the
settle-up obligation would be between $100 million and $150 million.
Q4.
Why is the LAO now projecting no State Budget shortfall for 2006-07, but
a return to shortfalls starting in 2007-08?
A4.
It is important to recognize that the LAO is still projecting a State
Budget structural unbalance of about $4.0 billion in 2006-07—that is, 2006-07
state expenditures are projected to exceed 2006-07 state revenues by $4.0
billion. But the LAO also forecasts a carryover balance of $5.2 billion from
2005-06, which is enough to cover this shortfall. Thus, the LAO continues to
forecast operating shortfalls for 2006-07 and subsequent years.
The burst in revenue in the current year, however, requires some
explanation. There are many factors that seem to be in play, but two of the main
factors are:
·
Much of the recent increase in state tax revenues over prior
budget estimates appears to be one-time in nature, and are the result of rapid
appreciation in home prices, taxes on oil companies, and capital gains from the
stock market, none of which are likely to continue into the future. One press
report quoted Ted Gibson, a former chief economist for the state Department of
Finance, referring to the “Google Effect,” meaning that the capital gains
from the stock of that one company alone accounted for a large portion of the
unexpected state tax revenue.
·
The recent state tax amnesty program has generated some $3.8
billion in receipts, but only about $380 million of that amount represents a net
increase in state taxes. The other $3.4 billion will either be refunded or,
alternatively, only represents early payments of taxes that would have been paid
anyway at a later date. Thus, the tax amnesty resulted in big increases in tax
revenues now—but fewer revenues later.
In short,
thanks to these one-time effects, we have a lot of cash on hand, but still have
a structural imbalance. As
—Paul Goldfinger