Transcript: LAO press conference on the 2012-13 California budget

Legislative Analyst’s Office’s press conference on the 2012-13 California budget held on Nov. 16, 2011

Transcript of opening statement by Mac Taylor, California Legislative Analyst:

“Good afternoon, everybody. I’m Mac Taylor, legislative analyst.

“A short while ago, we released our overview of the May revision. This is a document that we put out every year shortly after the governor has presented his updated plan to the legislature.

“Before I provide some summary comments, let me just take this time to thank my colleagues in the office for their work in putting out this document. It’s not an easy job to kind of tackle all the numbers that have come out and, in a very compressed time frame, put together the documents. I just want to thank them for their efforts.

“Let me start with just a couple of comments about the economy and revenues.

“As many of you know, we do a grounds up original forecast on revenues and the economy. While we’re still forecasting a relatively modest recovery, clearly we’ve picked up a little steam in recent months.

“Let me just give an example of two really important variables that have improved, and that’s California personal income and job growth.

“In February, we were projecting personal income growth of 5%. We are now projecting 5.4%. It may not seem like a lot but that’s a very important improvement in our economic forecast.

“Similarly, jobs we had forecasted to grow in 2011 by 1.1% over the prior year. We’re now forecasting 1.6%, again which is a good bump. It’s just reflective of the kind of improved economic activity that we’re seeing. That, of course, translates into higher revenues.

“What we have found out in our forecast is that we are surprisingly similar to the governor’s numbers. Over the two-year period, we’re $59 million higher, which is fundamentally the same as the administration’s forecast.

“But we do have some differences on the major taxes. We’re a little higher on sales tax and a little lower on personal income tax and corporate.

“But combined, our number is basically the same as the administration’s. In fact, this is the closest that I can remember of us coming out of a number compared to the administration’s.

“The governor’s approach on the May revision overall, I think, is he maintains the framework that he had in January. With the additional revenues, he basically does three things:

  • He increases spending on Proposition 98;
  • He buys down some debt;
  • And he modifies a few of his tax proposals.

“Let me just comment briefly on Proposition 98. Because of both of the added revenues and increased property tax revenues, the minimum guarantee under the governor’s program would go up by $3 billion over where he was in January. We think that the governor wisely uses those added funds to pay off deferrals. That is, he would rescind the deferral for 2012 for schools worth $2 billion that we’re scheduled to do. He also uses a small chunk of money to pay off previous deferrals. So we think that’s a wise use of the funds, and we would commend him for that proposal.

“In that section on Proposition 98, we tried to describe where the districts are with this new proposal.

“Now clearly they’re better off with the sense that with the added revenues, they probably don’t have to worry about their worst case scenarios that they were considering prior to the May revision.

“However, there are still a lot of uncertainty with schools. Because of the governor’s approach to have the election on the tax proposals, they’re not going to know for sure the amount of money that they’re going to have in 2011-2012.

“So we just tried to walk through what it is the districts are facing as a result of the governor’s May revision proposal.

“We also talk a little bit about the notion of re-benching. This is somewhat a technical issue, but it’s also responsible for part of that $3 billion increase in the Proposition 98 guarantee. And it involves two different types of re-benching. This is where you make adjustments in either the amount of the Test 1 requirements of Proposition 98 or also under Test 2 because you’re either shifting programs from outside of schools into schools’ responsibility or you’re making fundamental changes in your revenue structure. So we do discuss that in a box within the Proposition 98 section.

“Just briefly, our overall assessment of the plan. We think it has many positives, just as we had commented on the governor’s January proposal. We don’t have concerns about their estimates, their definition of the problem – as we’ve talked about – their revenue estimates, their case load estimates. We don’t think we need to be squabbling over the numbers.

“We think the governor still deserves credit for forwarding a plan that achieves balance, that solves or certainly addresses the operating shortfalls that we’ve been struggling with for several years.

“Finally, we think the governor should be commended for his attention to this issue of budgetary debt – this kind of overhang of obligations that we’ve had and we’ll have for quite some time. He proposes both to pay off deferrals, to pay back sooner than scheduled some special funds loans, and to have some sort of mechanism working with the legislature to address these budgetary obligations. We think that’s very wise.

“The concerns though that we have with the plan – I think though the biggest one – still involves the notion of the election and so much of our budgeting contention on what voters might do.

“This has implications for the state on whether we can issue our revenue anticipation notes if there’s that kind of uncertainty out there. It has implications for the schools that we just talked about. It has implications for counties. What happens on the realignment if it’s voted down? Because remember, under the governor’s proposal realignment is linked with the tax proposals.

“So there is an awful lot of uncertainty about either is there going to be an election, when would it be, and what happens if there isn’t an election or if the voters turn it down.

“We also raised some issues on his tax proposals. For example, he has basically gone back on his proposal to eliminate enterprise free zones. We would have much rather seen him stick with his original January proposal. We just think the evidence is pretty persuasive that these incentives don’t work particularly well.

“Similarly, we have concerns about how you’d implement the hiring credit. These have also had implementation issues, and he’s proposing in effect to expand the use of those credits.

“He also has a proposal on a sales tax exemption for manufacturing credit. Here we think the governor has raised a very legitimate issue about its multiple taxation or tax pyramiding, the way that tax or public finance people talk about it. But it’s because you pay tax if you’re a business on the equipment that you might use and then the subsequent products that are ultimately sold are being taxed on that tax. So he’s raising a very legitimate issue. The way he proposes to deal with it though we have concerns in that he would provide kind of differential assistance for start-up firms as compared with existing firms. We’re not sure why you’d want to do that.

“Finally, we deal with the issue of how should the legislature deal with this remaining problem – this roughly $10 billion problem. We offered them some advice on that. First of all, we say evaluate the whole range of options that are in front of you. In the May revision, the governor said that it came down to a choice between his program or an all-cuts budget, and clearly that’s not the case. The legislature has all sorts of options available to it. Just as the governor has made adjustments to his revenue plan, the legislature may want to use amongst what they think are the best parts of that proposal or to modify those proposals to have them implemented for a shorter period of time or lesser rates or to add additional revenue proposals. You can also consider other expenditure reductions or transfers or all sorts of things. So clearly, it’s not an all or nothing. The legislature has a wide range of options in addressing the remaining roughly $10 billion problem.

“We do think that whatever choices it makes, it’s really helpful to maximize the ongoing – the permanent solutions – that you’d adopt. Because of the actions already taken today and the improved revenues, we’d probably tackled about half of our operating – longer run – operating shortfall. Again, we’ll have some more information on that hopefully early next week. But any more permanent actions that are taken between now and the adoption of a budget can really make significant inroads into what has been a really persistent problem over the last three years.

“We would also suggest in thinking about revenue proposals prioritize them. Some of the revenue proposals, in our view, are better than others. We would start with those tax proposals that the governor put on the table that we think that they’re strong evidence that show they don’t work. I’ve given examples of enterprise zone as being one. We would also suggest that you look at things where it eliminates distortions, and I think the governor’s proposal to have mandatory single sales factor is an example of that, where we think it’s a good tax policy.

“So as you think through all those tax proposals whether they are going in front of the voters or the governor’s plan or not, think about the ones that make the most sense and kind of work your way down. But we do think that those options should be an important part of any ultimate solution.

“It’s obviously helpful to provide as much certainty as you can. This speaks not only to the state but, as I said, to schools and counties. I think everyone would agree that if you do this without going through the voters that’s the best way, because you’d know then at the start of the year the resources that you have available to you.

“Now if there’s going to be an election, obviously in some ways having it in mid-year causes the most problems because people really can’t plan for their fiscal year 2011-12. And in that regard, having election that goes into effect toward the end of the year certainly assists counties, schools in knowing what they have for the fiscal year.

“Finally, I think we would suggest that the legislature take to heart what the governor has suggested on budgetary obligations – ‘the wall of debt,’ I think, is how the governor called it. I think this is an important consideration and either through scheduling the way you’d spending Prop 98 money or the way you’d spend the additional revenues that come into the state in the future years, the way you should deal with your general obligation bonds spending in order to control your debt service payments, all of these things are important. We think that the governor is onto a very important point in the way we incorporate those considerations in our budgetary decision-making.

“Let me just close in a way that I haven’t really done in recent times, and that is on a positive note. We’ve actually made some important progress. As I said, to the extent that the legislature and the governor in their final budget act can adopt the significant number of permanent solutions – no matter what they are – we would have dramatically shrunk our operating deficit – our longer term problem – going forward into the future. So I think at last I can offer some good news at least to my bosses.”


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3 Comments on “Transcript: LAO press conference on the 2012-13 California budget

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