Transcript: LAO Mac Taylor’s remarks on California’s 2012-13 revised state budget

Transcript of remarks by Mac Taylor, California Legislative Analyst, on Governor Jerry Brown’s May revision of the 2012-13 state budget (May 18, 2012):

Mac Taylor, California Legislative Analyst. SOURCE:

Mac Taylor, California Legislative Analyst:

“We do two basic things in this overview. We update our economic and revenue forecast, and then we provide comments on the Governor’s major proposals that came out in the May revision.

“So it’s a chance to give the legislature our initial reactions and sort of big picture comments on the budget proposal.

“Let me just make a few comments and we’ll throw it open to questions.

“First of all, on revenues the administration came down significantly in both the current year and the budget year. Our office in our forecast, we also made changes to our individual taxes. For example, we came down significantly on the corporate tax. We’re actually slightly above the administration however. We came up on personal income taxes on the budget year 2012-13 primarily because we had new information about capital gains and losses that we just received from the Franchise Tax Board a few weeks ago.

“However, on net, because the administration brought their baseline number down so significantly, we are very close to the administration in both the current year, the fiscal year we are now in and that ends this June 30, and for the budget year.

“The actual numbers are for 2011-12 we’re $158 million below the administration and for 2012-13 we’re $392 million below. Those, for revenue forecasting purposes, is almost rounding error. So we’re very, very similar now to the administration.

“Now, the fact that we’re similar in our estimates does not mean, however, that there isn’t still huge variability around both of our sets of numbers. And we spend quite a bit of time in the document talking about what some of those factors are and why revenues could vary up or down by billions of dollars.

“And particularly this year when we have so much uncertainty at the federal level, on what’s going to happen with tax cuts, what’s going to happen with sequestration. But on top of that, we’ve got Facebook, we’ve got capital gains issues. Just in general, there’s a lot going on and so there’s a lot of uncertainties surrounding both sets of our numbers.

“And the fact that we’re similar does not mean that that variability has any way diminished or gone away.

“As far as the problem definition, the Governor had identified a $15.7 billion problem and then he adds another billion in solutions in order to fund the reserve.

“For the most part, we think that the Governor’s calculation and description of the budget problem is reasonable. We had one significant exception and that relates to redevelopment.

“The administration had brought down its estimates of what we were going to get in so-called tax increment revenues in both the current and budget year. He brought it down from $2.1 billion for both years in January down to $1.8 billion.

“Unfortunately, we think that that those amounts could actually be considerably less than even $1.8 billion.

“Our best estimates – and again, you all know what’s happening with redevelopment – numbers are still being reported as we close out these agencies. So there’s a lot of uncertainty around the numbers. Our best guess is that we would get about $900 million in the 2-year period or roughly half of what the administration is estimating.

“So if that were true, that would increase the budget problem by a comparable amount.

“Now, also related to redevelopment – on the solution side for the Governor he assumes that we will get $1.5 billion in redevelopment assets that we would be able to score in 2012-13. This again there’s a lot of uncertainty around this number because this information is now being reported by the counties to the state, and we have to do audits and checks and call-backs and all sorts of things. So it is possible that we could get that amount in 2012-13 – the $1.5 billion – or a net of $100 million that schools get to keep, so $1.4 billion in benefit to the state. We could get that amount.

“The problem is with the uncertainty around it, even though we could get a little more, we think it’s probably more likely that we will get less in 2012-13. So that we would view is – in his solution – it’s a risk, certainly associated with those monies.

“As I said in the document, we comment on all the major proposals that the Governor has made in the May revision and we provide, in some cases, alternatives. A couple days ago, we put out a document on the May revision’s proposal regarding corrections where we offered alternatives for the legislature. And we do that throughout the document but I really want to highlight what we talked about with regard to Prop 98.

“As always, 98 is very complex, with different revenue numbers floating around, with the tax initiative, with various re-benchings. There’s legal issues. So it’s always very complicated and this year is no exception.

“You do get this situation that probably most of you have already heard about where you have revenues falling dramatically and yet the guarantee goes up. And part of that is due, as the Governor noted, because of the year-to-year changes. It does trigger increasing amounts of what we call maintenance factor.

“But it’s also due to the administration’s way of paying back what’s called maintenance factor. And I want to spend just a minute on this. Hopefully, it won’t put you to sleep here.

“But under Test 2, which is just year-to-year growth in the Proposition 98 amount, if you go below a Test 2 amount in a year, you owe what is called – not owe, but you set up what is called a maintenance factor. And the purpose behind this is to simply get you back up, overtime, to the point you would have been had you not gone below the Test 2 amount – it’s a catch-up amount.

“Now, the administration is, in their calculations, are assuming that the maintenance factor amount is $2.9 billion, where there is no dispute about, would be made on top of the Test 1 calculation.

“We believe it’s more appropriate and reasonable to put it on top of the Test 2. Now, the difference is, the Test 1 amount is considerably higher than the Test 2 amount and so they get a much larger increase in overall Proposition 98 spending.

“If you were to put it on a Test 2 amount, kind of this alternative approach which again we think is historically the way that we’ve always thought about it and the way that makes the most sense in the context of Proposition 98, you would have a $1.7 billion difference. That is instead of going up by $1.2 billion, you would actually go down by $500 million. Now, that’s a very large change but again at that point though it’s a little more intuitive, right? Revenues drop considerably, guarantee falls by a little bit from where you were in January.”

Question: “Who makes that decision? The legislature?”

Mac Taylor: “The legislature can certainly make that decision.”

Question: “So they have the option of picking basically either one of those methodologies?”

Mac Taylor: “I believe they do. And again, I think we can make a good case that this is the most consistent way in the way we treat the creation of the maintenance factor and the way we treat the paying off of the maintenance factor.

“Now, even under our approach, schools get a very large year-to-year increase. They would grow about $4.3 billion. That’s less, though, than what the Governor’s calculation of just over $6 billion.

“Now, if the legislature were to take this approach in the calculation of the 98 total, we’ve developed in effect an alternative package for their spending, and what we’ve done is by not paying down as many deferrals and using some one-time monies, we end up with the same amount of programmatic spending for schools in 2012-13 as the Governor’s package. So that is, in the near-term, for the coming budget year, schools would end up in almost exactly the same place as under the Governor’s.

“But the important thing is you would have freed up this $1.9 billion that could be used on other parts – all of the non-98 parts of the budget so they wouldn’t have to take the same level of cuts that the Governor is proposing in those areas of the budget.

Question: “So under this calculation of Prop 98 the Governor is saying there will be a $6 billion increase.”

Mac Taylor: “Yes.”

Question: “But under this other calculation that could be used, there could be some $4.3 billion increase but classroom spending could remain even throughout the whole things?”

Mac Taylor: “They would be roughly the same, yes.”

Question: “Because the extra money will be used for things like deferrals and -”

Mac Taylor: “In other words… it’s not like it has no effects on the out-years. The Governor would have paid down more of the deferrals, and that’s a good thing. We’re not saying it isn’t. We would still pay down deferrals, just not as much as under the Governor but that doesn’t affect programmatic spending.”

Question: “In your earlier analysis, you had – which also included the Governor’s first take on his tax plan – you had per pupil spending, programmatic spending, essentially flat, actually down a couple of dollars.”

Mac Taylor: “Right. Roughly, yes.”

Question: “Where are you now on that spending?”

Mac Taylor: “I think it’s about the same place. Jan, help me out?”

LAO staff off-camera response: “Yes, it’s virtually flat because it does – most of the increase in the guarantee to additional deferral pay-downs, which helps districts from a cash perspective but not a program perspective in general.”

Question: “Let me make sure I understand this. Under your proposal, approximately $4 billion or so, the schools would still get $4 billion more..?”

Mac Taylor: “The guarantee would go up by $4.3 billion.”

Question: “So if voters don’t pass the tax increases, and the trigger is in effect by some $4 billion or so, still school funding – Prop 98 funding – remains the same? Schools will get the same amount of money?”

Mac Taylor: “Well, no. We also offer an alternative trigger proposal.”

Question: “Oh. Okay…”

Mac Taylor: “You’re under the trigger now, right?”

Question: “Yeah, I’m under the trigger.”

Mac Taylor: “I haven’t – I was going to finish up with that…

“So let me just briefly talk about that.

“We also offer what would happen – a package that the legislature could adopt for the trigger purposes and this also differs from the Governor. We think it has several advantages. You would not have to do the whole shifting debt services into the guarantee, which I think is problematic at best, legally suspect. So you would not have to do that.

“The schools under our alternative trigger plan would end up with $1.3 billion more – or $1.3 billion in less in cuts however you want to look at it. But they would be better off under our alternative trigger plan. Now, the downside, however, is that you would have to find $1.3 billion in the rest of the budget in order to still get the total amount of savings under the Governor’s trigger proposal.

“So we trade off slightly higher spending for schools but without having to do the debt service shift and you get fewer deferral pay-downs again, but you would have to make other cuts in other parts of the budget.”

Question: [inaudible]

Mac Taylor: “Well, these are large amounts that we’re dealing with.”

Question: “So the plan would still have to require some spending cuts, the $1.3 billion. However if the triggers are pulled, schools would not be hurt as badly.”

Mac Taylor: “Yes, that’s true.”

Question: [overlapping audio]

Mac Taylor: “Exactly.

“Now, I guess you could take it that since you would have this money available from our sort of base program where you wouldn’t be cutting as much – you had this $1.9 billion not to take reductions there – you could argue then maybe those programs that were spared cuts under the base budget might have to be exposed to the trigger. But that is a difficult trade-off.

“We offer this alternative both kind of base education budget and the trigger as just something for the legislature to consider. I mean, they’re facing some really tough choices.

“Even with the assumption about the passage of the revenues under the Governor’s tax proposal, they’re still having some – to make some very tough programmatic reductions in other parts of the budget.

“So we offer this to them as – first of all, because we think this is the way we think you shouldn’t interpret the maintenance factor. We think it’s more logical, consistent with the historical way that we’ve viewed it, and so we would recommend this regardless. But it does have the benefit of making their job a little bit easier in tackling their complete budget package.”

Question: “Do you make recommendations on what cuts would go on the [inaudible] back to spare schools from the triggers so much?”

Mac Taylor: “No, and again, I think the reason is what I just mentioned since we don’t know what the legislature might otherwise do with the savings in effect from the budget, it’s kind of hard for us to say, ‘Well, then here’s where you should focus the cuts under the trigger to the non-98 parts of the budget.'”

Question: “Mac, are you convinced that you have to do triggers now?”

Mac Taylor: “Well, we’ve always said you don’t have to do. You could just pass a budget that’s assuming that the revenues aren’t there and then plan for them if they come in.”

Question: “Or could you plan for them – could you assume they’ll be there and not do the triggers until afterwards?”

Mac Taylor: “Well, I think that would be the worst possible situation. Then you might have problems with your cash, selling your [incomprehensible].”

Question: “You mentioned there are some one-time problems that are okay to use one-time solutions. What are some of those one-time problems that…?”

Mac Taylor: “Well, I think what we try to link up is that you have at the end of this year, the administration’s estimating you’re going to end the year with a $7.6 billion deficit. And that’s kind of what you carry into the next year. And you have to solve that too though because you have to end the next year having addressed both your operating shortfall in 2012-13 plus any carrying deficit. That’s why it’s $15 billion – $16 billion. But that is a one-time problem, right? The carrying deficit. If you solve it, you’ve taken care of it. It doesn’t come back in the next year. So it’s a one-time problem and it is appropriate to use one-time solutions to address that one-time problem.

“And briefly looking at the solutions from the Governor, he’s probably got something that’s comparable to that carrying deficit and one-time things, like special fund borrowing or a deferral of Medi-Cal – things that only get you one-time savings. But that’s appropriate. I think that sometimes people say that using one-time solutions is somehow a gimmick. Well, it’s not a gimmick at all if you can achieve the solutions.

“Now, there can be consequences down the road if your one-time solution is, for example, special fund borrowing. You have to pay that back in subsequent years and so that will make your problems worse in those years.

“If it’s simply just a one-time you take money from a special fund because you can and use it on a one-time basis it doesn’t hurt you in the out-years, those are the kind of one-time solutions that are best.”

Question: “Do you see any bricks out of the wall in the Governor’s budget?”

Mac Taylor: “You know, that’s something that we will look at more next week when we look at the out-years, Michael. So it’s kind of hard to say right now.”

Question: “Can you talk a little bit about the furloughs…? I’m sorry, not furloughs, but the…? Are they furloughs?”

Mac Taylor: “The language suggests they could be but the administration’s made it clear that that’s not their preferred course of action.

“We do talk a little bit about that in the back of the document on the employee comp, and we acknowledge that it’s very difficult to get savings – you don’t have easy saving solutions in the employee comp because typically you need to bargain those. And so that if you get savings in the short-term, you typically have to give up something and maybe it costs you more in the longer-run. So it is difficult.

“The work week proposal was shortened – 4 [days of] 9.5 [hours] proposal that the Governor has put on the table is an interesting one, but he’s acknowledged that it would have to be bargained. So we would have to see what would come out of that.”

Question: “What kind of options [inaudible] on the 24-7 institutions and [inaudible]?”

Mac Taylor: “Not a lot of good ones. I guess, personal leave programs as we’ve done. Not a lot of good options for them.”

Question: “Given that you have a lower estimate for the RDA and talking about the very volatile projections for the coming year, should either the cuts for the triggers be even larger than what the Governor has?”

Mac Taylor: “Well, I mean, that’s a really tough one. And this comes up when people ask about how big the reserve should be. The reserve is for when it’s raining, and it’s pouring out there. So it’s not the time when you want to build up the reserve. But we’ve always talked about it in terms of if you have realistic budgetary solutions, if you have confidence that they can be achieved and they can get the amount of savings that you’ve projected, then we don’t see the need to have a huge reserve. This is not the time when you build it up.

“If, on the other hand, you have a lot of risk assumptions, clearly the bigger the reserve, the better because that helps offset the potential downside risk of many of those solutions not coming to pass.”

Question: “So you would address it in reserve as opposed to…?”

Mac Taylor: “That’s one way. I think we would say you don’t need to have a large reserve if your solution are reasonable, you have confidence that you can get the solutions that you’ve identified.”

Question: “Right. So do you think that his cuts or triggers should be larger?”

Mac Taylor: “Well, that’s a tough one. We have identified areas like the redevelopment where we think there is risk. So our advice is really to the legislature: When you put together the budget, take those things into account. And you can do one of two things: You can either adopt a different estimate of what you think your solution is on redevelopment. If you don’t, it would necessarily speak towards having a larger reserve than otherwise.”

Question: “Facebook. I know there’s a little bit of difference between your and the Governor’s…”

Mac Taylor: “Not much.”

Question: “Not much. But how did you arrive at your budget, etc.?”

Mac Taylor: “Well, you know when they had announced a range earlier that was between $28 – $35 as we had made our assumptions. Jason and his team did an amazing job. They had picked $38, and it turns out that’s what it went out as. Whether they were good or lucky, I don’t know. I’ll have to figure that out later.

“But these are assumptions. We weren’t really trying to predict so much as to just – what is reasonable for us in trying to determine how much revenue that might come in.

“And as we said in our post that we did earlier this week, the more important number probably is the Facebook stock price in mid-November, when you have a lot of other people who will be cashing out or realizing gains on it. So for example at that time if it’s a $45, what we estimated – our revenue estimation – should be pretty close. Should it skyrocket, should it go up to $60 or $65, there’s a big upside with more big revenues that could come in. And the converse is true also. If the price is less than $45, we would expect somewhat less money in that situation.

“So it’s just another one of those big unknowns of trying to do our revenue forecast.”

Question: “What do you apply it to? How does that work with the state budget and is it a one-time…?”

Mac Taylor: “It’s for the most part it’s one-time. I mean, it’s realized over a few years for the most part. So we have most of the money. We have about $500 million in the current year. We have $1.6 billion in the budget year, and about $640 [million] in the 2013-14. That’s the bulk of what we would have expect to realize in capital gains and in other income associated with the Facebook IPO. Clearly, you’ll have other gains in the future that would just be built into our normal forecasts.”

Question: “Are you convinced that the people who achieve those gains are going to take [inaudible] to taxable income?”

Mac Taylor: “Well, that’s – again, we’ve always identified that. They have to be Californians. We don’t know what their tax strategy, tax minimization, taxable income strategy are, whether they set up foundations, they delay the sales, they have other, you know, strategies. So that’s just another unknown.”

Question: “Is it at least conceivable that with the Governor’s tax package pass in early November, they would be less willing to take those gains?”

Mac Taylor: “Well, we have two, maybe, contrary things at work. With higher rates and especially with the federal rates that could go up in January, there’s more incentives to take them before the end of the year. ”

Question: “[inaudible] If they in fact go up…”

Mac Taylor: “We don’t know that for sure. But at some point, they’re just going to act. It hasn’t happen. They’re going to have to act perhaps as they will go up so there will be a greater incentive to take those…”

Question: “Is this kind of a business of putting a guess on top of an assumption and adding it to a supposition?”

Mac Taylor: “Well, I don’t know if it’s quite that bad yet.”

Question: “Well, the Governor referred to them as guesstimates…He’s making guesstimates.”

Mac Taylor: “Sure, we would acknowledge there’s large variability around it. We’ve done our best in trying to make assumptions both about the stock price and about how these would be realized. But yes, there’s a huge variability both on the upside and on the downside.”

LAO staff off-camera: “I would add the vast majority of the transactions build into both estimates are disclosed as going to occur on a specific date. In other words, there’s not really that much in the estimates that are dependent upon individual investor decisions. But it still leaves estimates about what the stock price will be, what percentage are Californians. But most of the income related to Facebook in both estimates, it’s disclosed in the documents that they will occur on a specific date. Restricted stock units as well as certain transactions that occur today.”

Question: “In comparison with the last budget proposal, how do see this? Are we finally going in the right direction to balance our fiscal situation?”

Mac Taylor: “I think certainly if the legislature adopts ongoing solutions that are comparable to what the Governor proposes, even if they are not exactly what the Governor has put on the table, I think we’ll go a long way towards addressing the remaining problem. Again, we’re going to come out next week because our out-year revenue numbers are somewhat lower than the administration’s, there could still be a small problem. And there’s still some risky assumptions, as we’ve said. It’s not likely that everything, even if you enacted, you’re going to get all of those solutions. You’ve got the federal government, you’ve got court cases – that can always throw a monkey wrench into that. So we’re not sure it completely takes care of it as the administration said, but there’s no question that if they take actions, particularly in – and we stress this – ongoing actions, we could put a major dent into our remaining operating budget problem.”

Question: “The Governor supposes $1 billion in reserves as part of his solutions as you know. There’s a lot of talk in the legislature in the last few days, even among the leadership, about using that reserve to mitigate the spending cuts that otherwise – what’s your view about having that reserve or any reserve…?”

Mac Taylor: “You know, I think what I’ve said in the past is this is not the time you build it up. This is what you use the reserve for – during bad times. But it has to be related as we talked about earlier to your assumptions you make on your various solutions. So if the legislature, in assessing the Governor’s proposal, makes very careful assumptions about the amount of solutions that they’re going to attribute to those proposals and they’re very careful, we wouldn’t have a problem ending up with a lower reserve.”

Question: “Mac, is this a more conservative budget than you’ve seen in recent years? From where I sit, it looks to be very conservative on a lot of, you know, at least this revise. It doesn’t look like something that’s, you know, resting on a lot of hopes and promises…”

Mac Taylor: “You know, I think we can break that down a couple of ways.

“Let’s start with the revenues, which as been a source of a lot of concern by people. And as we said, we’re right in line with the administration, as far as the total amounts. So, at least as of this time, we would say that’s nowhere near the same kind of risk that we had last year when there was this last-minute assumption about the $4 billion on top of what had been forecast by both the Department of Finance and my office. So, you don’t have issues like that and I think that’s a good thing.

“On the expenditure side, I think the Governor’s proposals, again generally speaking, the estimates that he’s assumed are reasonable. But you do have certain areas where we’ve identified some pretty significant risks. We’ve talked about the redevelopment in February or earlier on. We’ve talked about, for example, the assumption on the use of cap and trade revenues to offset general fund. He’s counting on $500 million; we can only find – and the administration’s not really identified – more than about $100 million of what we might be able to actually offset. So there’s risks in things like that.

“So I think it’s pretty good in answer to your question. But certainly some risks remain and this is what we’re trying to call to the legislature’s attention.”

Question: “So can you talk about the overall size of the deficit? My understanding is that with redevelopment, that could be $900 million increase in the deficit.”

Mac Taylor: “Yes, increasing the problem.”

Question: “And then you’re talking about a few hundred million dollars – about $400 million – under the Governor’s revenue estimates for 2012-13.”

Mac Taylor: “If they were to adopt our revenue numbers, it should be about $500 million for both years.”

Question: “So we’re talking about more than $17 billion of [incomprehensible] at this point…”

Mac Taylor: “Yes, if they were to adopt both of those.”

LAO staff off-camera response: “And there were no other changes to expenditures for programs, which we haven’t really looked at completely yet. When there could be lowered expenditure estimates which we have not had time to fully evaluate.”

Question: “So, I mean, roughly we’re talking about maybe more than a $17 billion problem instead of a $15.7 billion problem…”

Mac Taylor: “Under those assumptions that you’ve stated.”

Question: “Right, under these assumptions that you made in the report.”

Mac Taylor: “Well, the legislature picks the revenue estimates. We’ve given our best numbers. If they went with our revenue numbers, if they were to go with our estimates on the redevelopment, yes, we would be around that.”

Question: “Can you talk a little bit more about why you think the redevelopment money is less than the Governor says? I mean, is it that there’s less money in the bank accounts of these redevelopment agencies than the administration thinks or just because of how that money could be distributed?”

Mac Taylor: “It’s primarily because the obligations that are being reported by the local governments, and these are a variety of things. They get to be offset against the amount of tax increment money that’s available. And the numbers of these obligations, these ropes that you may have heard about, is much higher than what I think people may have assumed. And even though Finance is going in to try to make sure that only the appropriate amount of obligations are being reported, we’re concerned that they’re still going to be much larger than expected.”

Question: “What are these obligations? What types of things…?”

Mac Taylor: “They could be – well, Maryann, help me – chime in here. They could be commitments that they’ve made on various projects in the district. They could be loan payments. Other things. Maryann?”

LAO staff off-camera response: “Bond payments.”

Mac Taylor: “Bond payments, obviously, off the top. But obviously other types of contractual arrangements.”

Question: “So basically if a redevelopment agency says we’re going to put X amount of money into this project, that money may still be going there before the administration can go grab the money.”

Mac Taylor: “That’s right. The whole point of this was to try to identify what are appropriate obligations that can be offset versus things that are questionable and could be challenged.”

Question: “So basically, just to make sure I understand. So even if the administration says I want $1.4 billion in 2012-13…”

Mac Taylor: “That’s a different area. That’s the asset side, kind of liquid assets. We were talking about the tax increment first.

“The redevelopment agency’s got what’s called tax increment property taxes. It’s all the money that came into the area. And then you have to offset these obligations and various pass-throughs and administrative costs. What’s left out at the bottom is what we assume would come to the state. It would go out to all local governments, counties, and special districts and to school districts, but the state in effect would realize savings from that.

“To the extent that these obligations are larger than we thought, there’s less left that will flow through to schools and be realized as state savings.”

Question: “So we’re not subtracting this from the $1.4 billion?”

Mac Taylor: “That’s a different issue.”

Question: “So you’re not questioning the $1.4 billion.”

Mac Taylor: “Well, on the $1.4 billion, the question there is can we get these assets in 2012-13? Are they going to be as large as what finance and the administration are estimating? It’s possible that they could be. But these are more liquid assets. These can be housing funds and other assets that the redevelopment agencies have that are supposed to be reported and in effect turned over to the state. And there’s a lot of legal issues about what’s tied up, what’s properly reported.

“And the main issue here is that we ended redevelopment agencies and we expected to go through this kind of process of determining whose assets are whose in such a compressed time period. We’re still going through that. There’s just a lot of uncertainty in how it’s going to play out.”

Question: “Could we revisit 2006? I think that’s the last time we had a big bump from the Silicon Valley tech firms, like Google.”

Mac Taylor: “I don’t know when Google was… Jason, that sounds about right?”

LAO staff off-camera response: “2006. There was a large amount of money that was paid in April that was not expected.”

Question: “So what does that say about our budget having to depend on, you know, these Silicon Valley companies, people who are rich, up-and-down. You know, it’s…”

Mac Taylor: “Well, it’s certainly adds to our volatility. And so the question is you don’t want to turn down the money, do you? So the question is either you have to live with the volatility of your revenue structure and you have to take actions accordingly.

And the best one is of course in our view to establish a very strong reserve during the good times. When you have these kind of one-time gains, to make sure you don’t have spending or tax reduction commitments that are ongoing. So make sure you have your one-time actions that match with what would be a one-time gain.

“So you can either budget for that volatility. If you don’t think you can, then you need to go into your revenue system and change it to reduce the level of volatility.”

Question: “We talk about the triggers as being a forgone conclusion, but doesn’t the legislature as part of the budget process have to agree to this whole trigger plan?”

Mac Taylor: “Of course, absolutely.”

Question: “That’s – so they can still nix the whole triggers.”

Mac Taylor: “Well, you mean afterward?”

Question: “No, I mean not afterward.”

Mac Taylor: “Oh no. Yes, going into the budget, they can take whatever approach they want. They could do as Dan was asking earlier, they could do a budget assuming that we don’t have the money. Of course, they could do that. They could do the triggers. They could do a whole different set of reductions in what the Governor’s proposed.”

Question: “But if they – once it’s in process, I mean, they approve the budget that set up the guidelines for the triggers, can they change that process after the fact?”

Mac Taylor: “Well, the only issue here is with relations to the [incomprehensible], I don’t – Jason, do you have any comments…?”

Question: “Legally, can they go back into the budget after – let’s say the ballot measure fails, can they go back in and say, ‘No, we’re not going to do the triggers on schools. We’re going to cut this and this and this’?”

Mac Taylor: “Right, can they go back in…

“Jason, you have a take on that one?”

LAO staff off-camera response: “Likely yes. But investors and writing agencies might have a negative opinion based on what happens – you know, what the alternative decisions are. I mean, in theory, yes.”

Mac Taylor: “For example, what if we get to that time and it looks like revenues are doing better? Or some spending is less so that we’re better off and we don’t need to do as much? I think that the investment communities would take those things into account. Or if the legislature went in and said we’re not going to cut this but we’re going to cut something else of a comparable amount, I’m not sure then you would have a concern. But, I mean, it’s an interesting question.

“You do have these that would have been issued with the understanding that you would have taken actions to help ensure that they’re repaid later on in the year. And so what Jason’s speaking to is you wouldn’t want to mess with too much without coming up with something similar to what you would committed to.”

Question: “But that’s a financial question, not a legal question.”

Mac Taylor: “I guess at this point…”

LAO staff off-camera response: “Based on what we’ve – based on what law is today, yes. The legislature has the power of the purse. So unless some law is passed to come up with a different arrangement with the triggers, the legislature does have that authority.”

Question: “Do you agree with the Governor’s assessment of the 3 sources that led to the increase in the deficit? The courts, the federal government and the waivers?”

Mac Taylor: “Well, they were – yeah, I think those are pretty good ones. The revenues is the largest by far, but clearly we did lose solutions because of these different parties that are, you know, outside of our control. The federal government turned us down, in particular, on Medi-Cal reductions and the courts on other things also on Medi-Cal. So I think, yeah, that was a reasonable take on why the problem had worsened since the passage.”

Question: “And the carry-over. What – the original amount. I mean, what is that? I think it probably…?”

Mac Taylor: “You mean the deficit that we expected? I don’t know. I’m not recalling. It’s – certainly when we did our November report, I think we had a $3 billion deficit. So it grew by about $4 billion on the Governor’s take so that would have been his recognition of the revenue situation and then some loss solutions that would have occurred since we get our November report out.”

Question: “Is there anything [inaudible]…In talking to the Governor the other day, he seemed to indicate that he thought that revenues were going to get better towards the end of the year. Maybe not in time for the election but maybe after that. He says it’s going to get better and then he says, ‘Well, I hope it’s going to get better.’ It almost seemed like he knew something that maybe the rest of us didn’t…”

Mac Taylor: “I’m not sure I can help you out there.”

Question: “[incomprehensible] Is there a forecast…?”

Mac Taylor: “In all – our forecast is reflected in our numbers. And the administration’s May revision – their forecast assumes, you know, growth in the economy just as we did. So when he says he expect it to get better, presumably that’s reflected in their forecasts just as it is in ours. So I’m not sure what – if he’s suggesting there may be upside to their forecasts? I’m sorry I didn’t you…”

Question: “Is there upside to your forecast?”

Mac Taylor: “Absolutely. As we’ve said, there’s always – it’s a mean estimate. And what that suggests is that we could be wrong by $2 billion or $3 billion easily on either side. And overtime, you would hope that there’s no bias in your estimates, that you’re wrong on the high side, you’re wrong on the low side, and they tend to offset over time. So obviously, there’s upside and downside in both of our forecasts. And so I don’t know if he suggesting through his comments that he felt there was more upside in their forecast or not. I’m sorry, I didn’t…”

Question: “I was just asking for some sort of comparison to your numbers. You answered the question – it could be wrong either way by $2 billion or $3 billion.”

Question: “Mac, are you planning on doing anything – new numbers on loss solutions by inactions by the legislature to make the cuts that were recommended initially?”

Mac Taylor: “The Governor’s budget already incorporates most of those or all of those in.”

Question: “And you agree with his estimates?”

Mac Taylor: “Again, we’re looking at that and when we come back next week – that might be part of it. But that’s the kind of things we look at – whether he’s taking into account enough of those. But the budget has tried to already work that into their problem definition.”

Question: “And you have no major disagreements…?”

Mac Taylor: “Not at this time, but we’re still – obviously, we’re still looking at a lot of things. We’ve been talking with the administration. He has some caseload savings in Medi-Cal and IHS. There’s certainly some indication that in fact it’s true that they’re down. But we’re still talking with them, so we’re exploring those.

“Anything else? Thank you very much.”



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