Analysis of the 2007-08 Budget Bill: Perspectives and Issues

Perspectives on State Expenditures

Proposed Total Spending in 2006-07 and 2007-08

The Governor’s budget proposes total spending in 2007-08 of $130.8 billion, including $103.1 billion from the state’s General Fund and $27.7 billion from its special funds (see Figure 1). This total budget-year spending is $4.2 billion higher than current-year spending—an increase of 3.3 percent. Of total budget-year spending, General Fund spending accounts for about 80 percent. This proposed spending level translates into $3,430 for every man, woman, and child in California, or $358 million per day.


Figure 1

Governor’s Budget Spending Totals

(Dollars in Millions)










Budget Spending





General Fund





Special fundsa











a  Does not include Local Public Safety Fund expenditures of $2.8 billion in 2006-07 and $3 billion in 2007-08. These amounts are not shown in the Governor's budget.

   Detail may not total due to rounding.


Allocation of Total State Spending

Figure 2 shows the allocation of the proposed $130.8 billion of total state spending in 2007-08 among the state’s major program areas. Both General Fund and special funds expenditures are included in order to provide a meaningful comparison of state support among broad program categories, since special funds provide the bulk of support in some areas (such as transportation).

The figure shows that K-12 education receives the largest share of spending—30 percent of the total. (It also should be noted that K-12 education spending receives additional funding from local sources.) When higher education is included, education’s share rises to 40 percent. Health and social services programs account for 29 percent of proposed total spending, while transportation and criminal justice together account for roughly 19 percent. The “other” category (12 percent) primarily includes general-purpose fiscal assistance provided to local governments in the form of shared revenues.

General Fund Spending

Background. The General Fund is the main source of support for state programs, funding a wide variety of activities. For example, it is the major funding source for K-12 and higher education programs, health and social services programs, criminal justice programs, as well as tax relief provided through the budget.

Proposed Spending. The Governor proposes General Fund spending of $103.1 billion for 2007-08, an increase of 1.0 percent. As has been the case in recent years, the year-to-year changes in many programs are being affected by special factors, such as transfers of programs, funding redirections, and one-time actions. As shown in Figure 3:

Special Funds Spending

Background. Special funds are used to allocate certain tax revenues (such as gasoline and certain cigarette tax receipts) and various other income sources (including many licenses and fees) for specific functions or activities of government designated by law. In this way, they differ from General Fund revenues, which can be allocated by the Legislature among a variety of programs. About 35 percent of special funds revenues come from motor vehicle-related levies, another 22 percent comes from sales taxes, and the remainder comes from numerous sources; including a 1 percent surcharge on personal income taxes, and from tobacco taxes, charges, and fees.

Proposed Spending. In 2007-08, the Governor proposes special funds spending of $27.7 billion (see Figure 4). This is a 13 percent increase from the current-year total. The large increase reflects a variety of funding shifts, some of which were discussed above. The 17.1 percent increase in transportation funding, in part, reflects debt-service payments related to transportation bonds. The large increase in the Department of Mental Health reflects the ramp-up of spending associated with voter approval of Proposition 63 in 2004. The large increase in education is largely related to the use of PTA funds to support General Fund spending in K-12 transportation.


Figure 4

Special Funds Spending by Major Program Area

(Dollars in Millions)




Proposed 2007-08


Actual 2005-06

Estimated 2006-07


Percent Change






Local government subventions





Resources related





Department of Mental Health





Public Utilities Commission





Department of Education





All other











   Detail may not total due to rounding.


Local Public Safety Funds Not Included in Special Funds Total

It should be noted, that the budget’s special funds spending total for 2007-08 excludes expenditures of roughly $3 billion from the Local Public Safety Fund (LPSF). Such spending is also excluded from the current-year and prior-year totals.

Our view is that LPSF revenues are state tax revenues expended for public purposes, and should be counted. This treatment is consistent with how the budget treats other dedicated state funds, such as the Motor Vehicle License Fee Account (which, like the LPSF, is constitutionally dedicated to local governments) and the Cigarette and Tobacco Products Surtax Fund (Proposition 99), both of which the budget does include in its spending totals. However, although we believe that such spending does constitute state spending, we do not include it in our figures in order to facilitate comparisons with the budget.

Spending From Federal Funds and Bond Proceeds

In addition to the $130.8 billion of proposed 2007-08 spending from the General Fund and special funds, the budget also proposes $58 billion in spending from federal funds and another $12.6 billion from bond proceeds. If expenditures from bond proceeds and federal funds are included in total state spending, proposed 2007-08 spending exceeds $201 billion.

Federal Funds

As noted above, about $58 billion in federal funds are proposed to be spent through the state budget in 2007-08. (This is about one-fourth of the $232 billion in total federal funds allocated to California. The remaining three-fourths are allocated directly to local governments, businesses, or individuals within the state.) About $33 billion (57 percent) of the total federal funds in the budget are for various health and social services programs, such as Medi-Cal, CalWORKs, and IHSS. Education receives another $12.4 billion (22 percent) of the total, and transportation is expected to receive $4.2 billion (7 percent). The remaining $8.2 billion (14 percent) is spread across all other program areas.

Bond Proceeds

Budgetary Treatment. Bonds are primarily sold by the state to finance large capital outlay projects, such as school facilities, water projects, and state buildings. From a budgetary perspective, the cost of bond programs is reflected when the actual debt-service payments (comprised of bond-related principal and interest payments) are made. For 2007-08, the budget proposes General Fund debt-service expenditures of $4.7 billion, of which $3.9 billion is for general obligation (GO) bonds and about $780 million is for lease-revenue bonds.

Although this way of treating bonds makes sense from a budgetary standpoint, tracking bond fund expenditures themselves still is useful as an indication of the actual volume of “brick and mortar” activities that is taking place with respect to capital projects.

Spending of GO Bond Proceeds. The January budget proposal estimates that the state will spend $12.6 billion in GO bond proceeds for capital projects in 2007-08. This includes $6.9 billion for education, $2.8 billion for transportation, and $2.9 billion for resources and other areas. This total is up 32 percent from the $9.5 billion in current-year spending. The comparatively larger amount in the budget year reflects $8.7 billion of spending from the $43 billion of bonds authorized by the voters in November 2006. About $3.5 billion (40 percent) of the spending of new bond monies is for education facilities, $2.8 billion (32 percent) is for transportation projects, and the remaining $2.4 billion (28 percent) is for resources, flood control, and housing.

Spending of Lease-Revenue Bond Proceeds. In addition to GO bonds, the state also uses lease-revenue bonds to finance the construction and renovation of capital facilities. Lease-revenue bonds do not require voter approval, and their debt service is paid from annual lease payments made by state agencies using the facilities financed by the bonds (funded primarily through General Fund appropriations). For 2007-08, the budget proposes $258 million in new spending from lease-revenue bond proceeds for such purposes as the construction of forest fire stations.

Budgetary Borrowing

In addition to borrowing for capital outlay purposes, the state has undertaken significant borrowing in recent years to help address budgetary shortfalls. At the peak, the state had more than $25 billion in budget-related debt outstanding from private investors, schools, local governments, transportation, and other special funds. The amount of outstanding borrowing has subsequently fallen, and will continue to decline through the budget year under the Governor’s budget proposal (which includes a total of $1.6 billion in supplemental payments on outstanding deficit-financing bonds). Even after these repayments, however, the state will be left with $18 billion in budget-related debt at the close of 2007-08 (see Figure 5). This consists of: