7-20-07 State Revenues Fall Short in June

Volume 20 For Publication Date: July 20, 2007 No. 16

State Revenues Fall Short in June

As if we needed anything to add confusion to the Budget process, we now have differing revenue forecasts to deal with. Both the State Controller’s Office (SCO) and the Department of Finance (DOF) offer their views and forecasts.

The Department of Finance Report

The Department of Finance just issued a report that shows further weakness in the state’s revenue collections. For the month of June, the state took in $306 million less than what was anticipated in the May Revision. When combined with the May shortfall, revenues for 2006-07 came in $829 million below the May Revision, about 0.9% off the mark.

Sales Tax Down: The Finance Bulletin revealed unexpected weakness in the sales tax, resulting in a shortfall of $315 million from the monthly projection, or 10.6%. The report did not offer any reason for the shortfall, but noted that a more complete picture will be available in mid-August when all of the second quarter sales tax receipts are processed.

Income Tax Up: In contrast to May, income tax receipts for June came in above estimate by $151 million, or 2.8%. (May saw a shortfall of 15% related largely to higher-than-expected refunds and weakness in estimated payments.) All other General Fund revenues came in a net $142 million below projections for the month. In total, this report provided further evidence that the state’s economy may be slowing.

Job Growth Slows: The state’s employment market continued to underperform compared to 2006. For May, the state added 10,800 payroll jobs, about two-thirds of the monthly average gain during 2006. In addition, the report noted that the April job gain was revised downward from 7,400 to 4,800, an increase that falls below the level needed to absorb new job entrants to the labor market based on demographics alone. In addition, the unemployment rate for May was 5.2%; one year ago the rate was 4.9%.

Real Estate Lags: Real estate continues to act as a drag on the state economy. Permits for new home construction are down 30% from year-ago levels, and sales of existing single-family homes are 25% lower than the same period last year. The median price of an existing single-family home was $591,200 in May, roughly the same as last month.

The State Controller’s Office Report

Revenues Up: Last week, the State Controller’s Office reported that state revenues for the month of June were $125 million above the May Revision estimate, leading some to believe that the Budget outlook was improving (Statement of General Fund Cash Receipts and Disbursements, Volume 1, Issue 5). Unfortunately, this report has lead to more confusion than understanding. Which report—the DOF’s or the SCO’s—is the more accurate report?

The SSC Opinion

The bottom line is that the DOF Finance Bulletin is the more accurate of the two reports on state revenues. According to Brad Williams, the former chief economist of the Legislative Analyst’s Office, the Bulletin reports on cash received by the two tax collection agencies—the Board of Equalization (BOE) and Franchise Tax Board (FTB). This “agency cash” is a more accurate indicator of current revenue trends. This is because the SCO report suffers from inherent time lags that occur between when the SCO receives information from the BOE and FTB and when the Office is able to post these revenues to their appropriate accounts. This time lag, which could be from four to seven days, makes the SCO reporting less accurate than the DOF Bulletin.

In addition, the SCO reports are less reliable because the SCO attributes the revenue collections to the month in which the revenues are posted by the Office, rather than to the month in which it was collected by the state tax agencies. Again, for purposes of measuring the performance of tax revenue against projections, posting to the month the taxes are received is the more accurate of the two practices.

—Robert Miyashiro