California’s 2013-14 economic outlook lowered in May revision budget

Despite improved fiscal conditions, Gov. Jerry Brown offered a conservative May revision of the state budget after lowering the state’s economic outlook for 2013.

The Department of Finance projected that personal income growth will be halved for the remainder of this year. The January budget initially forecasted income growth at 4.3% but that projection has lowered to 2.2% due to federal austerity measures, including sequestration and Congress’s decision to not renew the 2% payroll tax cut.

“The people who put this budget together in January didn’t anticipate the sequester and they didn’t anticipate the payroll tax restoration. Both of those have hit our economy. And the austerity pressure coming out of Washington and also coming out of the global economy, particularly in Europe, has lowered our economic projections. And that’s what we’ve based budgets on,” Brown explained. “This is a prudent budget.”

And although the state’s unemployment situation has improved, the number of hours worked is lower than previous years, which affects the employees’ earnings. The reduction in employee wages will have an impact on the state’s tax revenue by “a couple hundred million dollars” between May and July 1st. Furthermore, a closer look into last year’s revenue receipt patterns led administration officials to conclude that the state’s tax revenue will be about $700 million less than initial projections.

“When we’ve taken a closer look in what our pattern was last year, which we think is a more realistic pattern, we see less money coming in in May and June than we initially anticipated at governor’s budget. So we anticipated that revenues based on just timing are going to be about $700 million lower. That’s moving into next year,” said Ana Matosantos, Director of the Department of Finance.

Brown said although his proposed budget is balanced, albeit by a “narrow margin”, the state faces other risks that could increase the budget deficit notwithstanding his cautious approach. Those risks include:

1. Slower economic growth overseas;
2. Rising health care costs, particularly due to the Affordable Care Act’s Medicaid/Medi-Cal expansion; and
3. Pending federal court litigations on the dissolution of redevelopment agencies ($1.5 billion), Medi-Cal provider reimbursement cuts ($450 million), and reforms to the prison health care system – all of which would require California to spend hundreds of millions of dollars more if the state loses those appeals.

Administration officials also warned lawmakers against relying too much on the influx of revenue from Proposition 30, which temporarily increases sales and income taxes through FY 2018-19 to fund the Public Safety Realignment and prevent further cuts to education.

“We have climbed out of a hole with a Proposition 30 tax. That’s good. But this is not the time to break out the champagne,” said Brown. In the budget, Brown noted that the state must “begin to plan now to ensure that the budget will remain balanced after the temporary Proposition 30 tax revenues expire.”

By taking a more conservative approach, Brown’s $96.35 billion May revision budget proposed to reduce the wall of debt to $26.9 billion by the end of this fiscal year (the figure was $34.7 billion in fiscal year 2010-2011) and maintain a $1.1 billion reserve. Brown hopes to reduce the wall of debt to $4.7 billion by 2016-17.

Aside from re-investing in education, which has suffered deep cuts prior to the passage of Prop. 30, Brown said he’s not inclined to restore spending in other areas, such as health and welfare programs, just yet.

“The money’s not there. We have obligations under Prop. 98 and we have incredible responsibilities under the Affordable Care Act and the known unknowns are considerable. So anybody who thinks there’s spare change around has not read the budget,” said Brown. “There’s a reason why this budget was always in deficit: Because there’s a lot of needs out there and there’s very articulate advocates. And I’m trying to find the right balance between spending and holding the line.”

The Legislative Analyst’s Office disagreed with the revised economic outlook in the May budget, calling the administration’s tax revenue forecast “too pessimistic”.

“We do not agree with the administration’s view that there has been a significant dimming of the state’s near-term economic prospects. In addition, we observe that the administration’s new revenue forecast does not seem to reflect sow recent economic improvements – most notably, a sharp increase in stock prices,” according to the LAO’s overview of the May revision.

The LAO’s forecast of tax revenues is about $3.2 billion higher than the administration’s total in the May revision for the 2011-14 period. According to the LAO, personal income tax collections for the month of May are “about $500 million above the administration’s projections” but acknowledged that the personal income tax revenue figures won’t be available until after the June 15th deadline to pass the state budget.

“There is a risk that our outlook will prove wrong in the near term because capital gains are volatile and stock trends are impossible to predict. In that case, the Governor’s cautious approach to budgeting potentially would allow the state to deal with economic downturn with less need for urgent budget cuts,” according to the LAO.

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  1. Pingback: Spotlight: California State Budget 2013-14 | What The Folly?!

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