LAO 2003-04 Budget Perspectives and Issues: Issue-By-Issue TOC Analysis of the 2003-04 Budget Bill
Perspectives and Issues Outline
Part I: State Fiscal Picture

The Budget's Economic and Revenue Outlook

The Budget Proposal

Total State Spending

General Fund Condition

How the Budget Addresses the Shortfall

Programmatic Features

The LAO's Budget Outlook

Budget Plan Would Balance

Many Threats Exist

Governor's Plan Would Also Address State's Structural Imbalance . . .

. . . But Only if Major Actions Are Taken

Considerations for the Legislature

Conclusion

Part II: Perspectives on the Economy and Demographics

The Economic Outlook—Summary

2002 in Retrospect

U.S. Economy

Unbalanced Growth

Jobless Recovery Thus Far

California's Economy

Divergence Among Industries

Divergence Among Regions

Softness Persists Into Early 2003

The Governor's Economic Forecast in Brief

The LAO's Economic Outlook

U.S. Outlook

Consumer Spending

Business Investment

California Outlook

California's Income Growth to Eventually Overtake Nation

Residential Construction to Remain Relatively Strong . . .

. . . But Nonresidential Construction to Lag

Comparison to Other Recent Economic Forecasts

Risks and Uncertainties

The Demographic Outlook

State Population to Approach 37 Million by 2005

Population Growth Components

Growth to Vary by Age Group

Overall Budgetary Implications

Part III: Perspectives on State Revenues

Recent Revenue Deterioration Has Been Unprecedented

Revenue Outlook Is Key Factor in Addressing the Budget Shortfall

The Budget's Forecast for Total State Revenues

The Budget's General Fund Revenue Outlook

Revenue-Related Changes and Proposals

The LAO's General Fund Revenue Outlook

2002-03 Revenues

2003-04 Revenues

2004-05 Revenues

The LAO's Forecast for Major Revenue Sources

Personal Income Tax

Background

PIT Liabilities

PIT Stock Market-Related Bubble Gone

PIT Revenue Forecast

Sales and Use Tax

Background

SUT Rates

Recent Taxable Sales Held in Check by Weak Business Spending

SUT Revenue Forecast

Corporation Tax

Background

Profits Have Bottomed Out

... and Should Accelerate in 2003 and 2004

Corporation Tax Revenue Forecast

Other Revenues and Transfers

The Budget's Forecast for Special Funds Revenues

Key Revenue Risks and Uncertainties

Part IV: Perspectives on State Expenditures

Proposed Total Spending in 2002-03 and 2003-04

General Fund Spending

Special Funds Spending

Spending in Relation to the State's Economy

Spending From Federal Funds and Bond Proceeds

Federal Funds

Spending of Bond Proceeds

State Appropriations Limit

State Spending—An Historical Overview

Spending by Program Area

Total State Spending

Relative Program Area Growth in the Budget Year

Major Expenditure Proposals in the 2003-04 Budget

Proposition 98

Proposal—K-12 Proposition 98

K -12 Education Issues for Legislative Consideration

California Community Colleges (CCC)

Proposal

Issues for Legislative Consideration

Other Higher Education Programs

Proposal

Issues for Legislative Consideration

Health and Social Services

Proposal

Issues for Legislative Consideration

Judiciary and Criminal Justice

Proposal

Issues for Legislative Consideration

Transportation

Proposal

Issues for Legislative Consideration

Resources

Proposal

Issues for Legislative Consideration

Employee Compensation and Retirement

Proposal

Issues for Legislative Consideration

Part V: Approaching the Budget Problem

The Governor's Tax Proposal: Evaluation and Alternatives

What Are the Major Considerations for the Legislature in Assessing the Governor's Proposal to Increase Tax Rates, And What Alternatives Should it Consider?

Introduction

What Is the Tax Proposal?

Revenue Impacts of the Tax Proposal

LAO's Evaluation of the Tax Proposal

SUT Proposal

Overall Performance of the SUT and Its Base—Relatively Steady

The SUT Possesses Some Fundamental Weaknesses

How Would the Increase Affect Taxpayers?

PIT Proposal

Growth In PIT Has Been Strong . . .

. . . But Revenues Can Be Quite Volatile

How Will Taxpayers Be Affected by the Proposal?

Cigarette Excise Tax Proposal

Cigarette Smoking Has Been Trending Down

Why Has Per Capita Smoking Fallen?

Tax Evasion Has Also Played a Role in the Decline

Downside Risks to the Revenue Estimate Exist

How Much Should Cigarettes Be Taxed?

Will a Cigarette Tax Increase Hurt Tobacco Securitization?

Outside Influences on Cigarette Tax Revenues

The Realignment Tax "Portfolio"

Characteristics of the Revenue Portfolio

Characteristics of the Realigned Programs

Other Tax Issues for Consideration

Tax Administration

Federal Interaction

Economic Climate

Other Revenue Options

Various PIT Options

Selected Business Tax Alternatives

Expanding the SUT Base

Conclusion

Realignment and the 2003-04 Budget

What Role Could Realignment Play in Improving Service Delivery and Addressing the State's Budget Difficulties?

Introduction

Overview of Administration Proposal

What Program Changes Are Proposed?

What Taxes Would Support Realignment?

How Would the New Revenues Be Distributed?

Does the Plan Affect Proposition 98?

Overarching Considerations

Realigning Some State-County Programs Makes Sense

Programs, Not Taxes, Should Be the Focus of Realignment

Realignment Plans Are Not Easily Changed

Counties Need Control Over Realigned Programs

Roughly Match Revenues and Expenditure Expectations

Details Matter in Designing Structure of Realignment

Achieving General Consensus Will be Critical

What Factors Should the Legislature Weigh In Assigning Program Responsibilities?

Programs to Realign: An Initial LAO Assessment

Health Programs

Medi-Cal Administration, Not Benefits, Suited for Realignment

Alternative Long-Term Care Proposal Merits Consideration

Realignment of Public Health Programs Generally Sound

Additional Mental Health Programs Merit Realignment

Drug Treatment Realignment Makes Sense, But Faces Major Obstacles

Social Services

Realign Full System of Children's Programs

CalWORKs: Some Costs Appropriate to Realign

Food Stamps Administration—Sharing Costs Makes Sense

Immigrant Programs Are Inappropriate to Realign

In-Home Supportive Services: Partial Realignment Makes Sense

Adult Protective Services Makes Sense to Realign

Automation Projects: Align State and County Interests

Child Care

Program Improvements Possible through Realignment

Criminal Justice

Court Security Fund Swap Is Not Realignment

Realign Adult and Juvenile Offender Programs

Mandates

Realignment Plan Is Well Suited for Funding Mandates

Conclusion

Additional Options for Reducing State Spending

Introduction