|Budget Issue:||LAO multiyear budget outlook|
|Finding or Recommendation:||This post discusses our current outlook for the future condition of the state General Fund.|
For all of our office's responses to the Governor's May Revision, see our May Revision page here.
This post presents our multiyear main scenario outlook for California's General Fund through 2017-18. Our multiyear outlook is one year shorter than the administration’s multiyear forecast. (Because the state’s complex budgetary formulas depend heavily on variables that cannot be reliably modeled into the future, we have shortened our outlook by one year for this May Revision exercise. We discussed the increasing difficulty of producing multiyear outlooks under “LAO Comments” in our initial comments on the Governor’s May Revision.)
Estimates Based on LAO “Main Scenario.” The LAO's main scenario outlook assumes continued moderate economic growth and slow growth in stock prices over the next few years. We base our budget outlook on our main scenario economic outlook. Many other scenarios are possible, which would improve or hurt the budget’s bottom line.
Estimates Assume No Budget Commitments Beyond Governor’s May Revision Proposals. This outlook attempts to estimate the future condition of the state budget based on current law, as modified by the Governor’s May Revision proposals. We assume no additional program commitments beyond those proposed in the Governor’s May Revision. If the Legislature and Governor agree to additional spending in the 2015-16 budget, for example, the amount of budget reserves reflected in our estimates at the end of 2015-16 generally would be reduced, all other things being equal.
$1.2 Billion Higher Estimate of Resources Available in Key Reserve. Figure 1 summarizes the administration’s May Revision multiyear forecast for the condition of the General Fund, while Figure 2 displays our office’s May 2015 main scenario General Fund outlook. Under the LAO outlook, the balance in the Special Fund for Economic Uncertainties (SFEU), the state's traditional reserve account, is $2.265 billion at the end of 2015-16 under the Governor's policies, compared to the $1.113 billion under the administration's estimates. This means that, under the LAO estimates, there would be $1.2 billion more of discretionary resources available for the 2015-16 state budget than indicated under the May Revision estimates.
Below, we describe the key factors explaining the differences between our office’s estimates and those of the administration for 2013-14, 2014-15, and 2015-16 combined (referred to as the “budget window"). Those key factors include:
LAO “Big Three” Revenues $3.2 Billion Higher. On May 16, our office released our May 2015 revenue outlook. As discussed in that post, we now estimate that the state’s big three General Fund revenues—the personal income tax, corporation tax, and sales and use tax—will be $3.2 billion above the administration’s May Revision estimates for three fiscal years combined (2013-14 through 2015-16).
$1.5 Billion Higher Proposition 2 Requirements. Our higher estimates of Proposition 2 budget reserve and debt payment requirements are almost entirely explained by our higher estimates of capital gains taxes in 2015-16. See Figure 3 below.
$658 Million Higher General Fund Spending on Proposition 98. Over the budget window, our higher revenue estimates result in $658 million higher General Fund spending on the Proposition 98 minimum guarantee for schools and community colleges. (Please see our analysis of the May Revision Proposition 98 proposals for more detail.)
After accounting for other differences in other estimates, we estimate that the state would end 2015-16 with $6.5 billion in total budget reserves. This consists of $2.3 billion in the Special Fund for Economic Uncertainties (SFEU)—the state’s traditional budget reserve—and $4.2 billion in the Budget Stabilization Account, the rainy day fund recently modified by Proposition 2. The SFEU balance would be $1.2 billion higher than under the administration’s May Revision estimates. These estimates assume that no budget commitments are made beyond those proposed in the May Revision.
Figure 4 displays key numbers in our office’s and the administration’s May 2015 multiyear budget outlooks through 2017-18.
LAO Outlook Suggests Better Budget Condition. Through 2017-18, our revenue estimates are modestly higher than the administration’s. Because (1) our higher revenues are not fully offset by higher Proposition 98 and Proposition 2 requirements and (2) our estimates of non-Proposition 98 spending are lower than the administration’s, on net, we reflect larger “operating surpluses.” At the end of 2017-18—assuming no additional budget commitments beyond the Governor’s May Revision proposals—our outlook suggests a possibility that the state could build over $16 billion in total reserves. These total reserves would be over $10 billion higher than the total level of reserves reflected in the administration’s multiyear forecast.
Higher Revenues. Much of our relatively better budget outlook is due to our office’s revenue estimates. For revenues from the three largest ("Big Three") state taxes, our main scenario revenue outlook reflects $2 billion net higher revenues in 2016-17 and $2.2 billion net higher revenues in 2017-18. (See our revenue outlook for more detail.)
Relatively Little Revenue Growth Directed to Proposition 98. In each of 2016-17 and 2017-18, we estimate that the Proposition 98 minimum guarantee is about $500 million higher. Our higher estimates of local property tax revenues cover the majority of that increase, such that state General Fund spending necessary to meet the guarantee is only above the administration’s estimates by $162 million in 2016-17 and $231 million in 2017-18.
Proposition 2 Uncertain. As shown in Figure 4, our estimates of Proposition 2 requirements (Proposition 2 debt payments and annual deposits to the BSA) are hundreds of millions of dollars higher than the administration's estimates in 2016-17 and 2017-18. Because Proposition 2 requirements depend on the economy, stock market, and complex interactions with Proposition 98, future Proposition 2 requirements will likely deviate substantially from the estimates reflected in both our office’s and the administrations multiyear outlooks.
Lower Net Non-Proposition 98 Spending. Our multiyear outlook for non-Proposition 98 spending is $1.1 billion lower than the administration’s in 2016-17 and over $3 billion lower in 2017-18. One key difference concerns the state’s contribution to CalSTRS. Beginning in 2017-18—the first fiscal year in which the state’s payment can fluctuate—we assume that a recent interpretation of the CalSTRS funding plan results in a $1.2 billion decrease in the state contribution from what it would have been if the rate did not change. This savings is not reflected in the administration’s multiyear forecast. We note that slower investment growth than CalSTRS assumes in its actuarial valuation could reduce or eliminate the state savings now assumed in our budget outlook.
Administration Forecast Shows Deficit in 2018-19. The administration’s multiyear displays a $2.6 billion negative balance in the SFEU for the end of 2018-19. This means that budget actions equal to a like amount would be necessary to address a budget problem in that year. It is important to note that the state could perhaps cover all or part of such a deficit with the $6 billion balance accumulated in the BSA by 2018-19 under the administration’s estimates. In addition, changing two key assumptions would result in a much different budget condition. First, the administration does not assume suspension of the 2018-19 BSA transfer, which could perhaps address $1 billion of the $2.6 billion budget problem. Second, almost all of the remaining budget problem would be addressed if the administration’s multiyear estimates reflected the possible CalSTRS savings discussed above.
While it is important to consider the administration’s and our office’s multiyear outlooks, the state’s revenue volatility and complex budgetary formulas limit the usefulness of this exercise. The administration’s multiyear forecast and our main scenario outlook are just two of many possible scenarios. Revenues by 2018-19 could easily be $10 billion above or below the numbers reflected in either of these multiyear outlooks, depending mainly upon future economic and stock market trends. Expenditures also could be billions of dollars higher or lower. The uncertainty resulting from our volatile revenue structure and complex budgetary formulas underscore the need to build a healthy budget reserve during strong economic times in order to limit damage to the budget during downturns.
Updated on May 21, 2015: (1) to reduce 2016-17 and 2017-18 LAO main scenario non-Proposition 98 spending, thereby correcting the prior omission of General Fund recoveries of statewide general administrative costs, (2) to make changes discussed in footnote a of Figure 4, and (3) to make various minor and technical adjustments. Prior to these updates, the LAO main scenario "operating surplus" was $3.5 billion for 2016-17 and $4.7 billion for 2017-18.
Updated on May 26, 2015: (1) to update our 2016-17 Proposition 2 estimates, which increase by about $440 million each for required debt payments and deposits to the BSA, and (2) to make various minor adjustments. Prior to these updates, the LAO main scenario "operating surplus" was $4.4 billion for 2016-17.
LAO Contacts: Ryan Miller and Jason Sisney. This multiyear budget outlook is produced with contributions from most LAO analytical and support staff members. For other LAO staff contacts, go to www.lao.ca.gov/Staff.