Transcript: Press briefing remarks by LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Nov. 30, 2013

Partial transcript remarks by Legislative Analyst Mac Taylor on California’s fiscal outlook for 2014-15. The press conference was held on Nov. 30, 2013:

Just a few minutes ago, my office released the 19th edition of our California fiscal outlook report. This provided updated economic revenue and expenditure projections for the state, and it serves as the kick-off for the 14-15 fiscal year.

…I think the main message of our fiscal outlook this year is it reflects continued improvement in the state’s fiscal condition.

Most of you may remember back in May we were considerably higher in revenues than the administration. The legislature cited and used the administration’s forecast. We were about $3.2 billion higher for both the 12-13 fiscal year that ended last June 30th and the current fiscal year 13-14 fiscal year that we’re in the middle of.

Since that time, the financial markets have been much better. It’s about 8.5% higher than what we had assumed back in May. So as a result, we had considerably higher estimates of capital gains now and other business-related income.

So, we’re now forecasting that for those two years combined, the state will have $6.4 billion more than what the budget assumed.

Now, most of this money does not flow through to the bottom line because Proposition 98 requires that we spend about 3/4 of it on schools. Those will primarily be for one-time purposes we assume, since the 12-13 year is already over and the 13-14 year is halfway through. It’s very difficult to make additional ongoing commitments. So those monies will be available to pay off further amounts of deferrals, other one-time expenses, and really help pay out some of our so-called “wall of debt” obligations.

Some of the money though does flow through, and we now that we’ll forecast that we’ll end this current year with a reserve – instead of the $1 billion that was assumed in the budget – $2.4 billion, assuming when the legislature comes back it doesn’t make additional spending commitments or revenue reductions.

If you have your report and go to page 5, you’ll see our forecast of the operating surpluses – that is just taking revenues that we forecast each year less our spending commitment that we forecast for those years. And you can see that the surpluses grow from $3.2 billion in the budget year – the 13-14 fiscal year – up to just under $10 billion in the last three years of our forecast.

There’s really three main reasons why those surpluses – those operating surpluses grow.

Number one, we have fairly healthy growth in our general fund revenues that outpace our general fund expenditures by a little bit.

Secondly, if you look in 16-17, you notice how it jumps up quite a bit in that year. That’s the year we pay off the deficit financing bonds of Proposition 57 through the triple flip mechanism – so-called triple flip. And so this operating surplus jumps up by about $1.6 billion.

The third reason is a really important one. We forecast property tax revenue growth at a very healthy level over the period. Roughly, underlying property tax revenue growth of about 7%. Now, the importance of that is if you think about Proposition 98, it’s funded from both property taxes and the general fund. But if property taxes are growing much faster than the growth in the guarantee, it means the share borne by the general fund is dampen down. And if you look at our general fund numbers for Proposition 98 over the period, you’ll see that they’re relatively flat. And if you have a very large piece of your budget not growing very rapidly, the money that’s coming in is available for other purposes. That has the effect of growing those operating surpluses over time.

Now, one reason why we added a year to this forecast – we go out, in effect six years; we added 2019-20 – because that’s the first full year after Proposition 30 is completely off. All of the tax rate increases have gone away. And one might have expected to see what some have referred to as a fiscal cliff in those out years because of the drop-off of the revenues. That doesn’t occur primarily for two reasons.

First of all, the tax rate increases of Proposition 30 phase down. They sort of ramp down over a four-year period. The sales taxes ramp down after two fiscal years. The PIT [personal income tax] taxes rate increases then ramp down over the subsequent two years. So you don’t have one really dramatic year in which revenues fall off. You taper off. And if you look at our revenue growth, it’s very small. The growth in the last two years is relatively small.

The second reason, though, why in effect there are flat is that property tax effect. The general fund does not have to contribute a lot of money in those last two years so it has the effect of offsetting what otherwise would have been a decline in those operating surpluses.

Despite the good new, I think, of the report that our situation continues to improve – those operating surpluses though not dramatically different from what we’ve forecast in May, they are a little bit higher and we go out a few more year on it – we do caution the legislature that things can change quickly.

And if you see the chart on page 7, we showed the effect of just what a relatively moderate economic downturn would be if it hit in 15-16 and 16-17. And you can see from the last two years, those blue surpluses that we showed in the prior chart have turned to small operating deficits under what we would consider a relatively moderate economic downturn.

And it’s just a caution that while we don’t – we’re not predicting that sort of downturn in the very near future, it is possible, and the last thing that we would want the legislature to do is to be in the same shape it was in 2008 when we went into the Great Recession when we had no reserves and we had an underlying budgetary problem.

So as a result, we’ve taken a sort of an approach of how can the legislature strategically think about how they should approach those operating surpluses that we showed on figure 2.

And if you look on page 9 in figure 4, we offered just one such approach. There’s nothing magical about the numbers that are in this chart. We wanted the legislature to just think strategically about these dollars that are available and what are the main pressures and sorts of commitments that they may want to make against those operating surpluses.

We start with a category we called “preparing for the next downturn”. And that’s number one, building up a reserve relatively quickly. We’ve selected $8 billion just because that’s an amount that’s mentioned in Proposition 58 as one of the targets for building your reserve up to. There’s nothing magical about it. You could pick a higher number, slightly lower number. We tried to have the reserve up to that amount by the year 16-17. You could pick another year to get that reserve up to it, either sooner or later. It’s just an example of trying to get that reserve up as protection against that next downturn.

In the same category, we have paying off the remainder of the wall of the debt – the governor’s term he uses for various budgetary liabilities that the state has incurred over time.

I just want to note that these are the residual of payments for the wall of debt. If you think about it, some of the biggest payments in that category are for school deferrals, which we don’t show here because they could be paid off within Proposition 98 – the amounts that are sort of implicit in our operating surpluses. So we have proposed that they pay off huge amounts of deferrals with those one-time monies that are going to be available from 12-13 and 13-14 and even in amounts in 13-15. So, those aren’t reflected in the charts, but we actually are paying – we would propose that they pay off huge amounts of those school deferrals – a big piece of the wall of debt.

So that would be high priority for us of doing these two categories and doing them relatively soon in the first half of the forecast period.

And then we have three other categories that we know the legislature will face some pressures regarding.

The first is paying for our past commitments. These are our various retirement obligations, whether it’s CalSTRS, retiree health benefits, the UCRS – the University of California Retirement System. Just lump them all in there. We think you should – the legislature should seriously consider starting to allocate some monies to pay off some of those unfunded liabilities.

We also have maintaining existing programs. This is just providing inflation increases to those who aren’t taken care of in our operating surplus calculations – University of California, CSU [California State University], SSP [State Supplementary Payment] grants for the aged, and things like that.

And finally, we realize the legislature’s going to want to create some new commitments, whether it’s restoring somethings that they’ve cut during the last five years, expanding certain programs, adding to infrastructure spending, giving some targeted tax reductions or whatever they want to do. And so we tried to build in for those last three categories.

You see that they all incrementally grow over time because we thought it was important to take care of your one-time things or preparing for that next downturn first. As you take care of those, you free up room in later years to where if you incrementally grow those last three categories, you can commit quite a bit of monies to them by the end of the period.

And also if our forecast proves to be wrong – either if revenues don’t grow as rapidly or if expenditures increase more rapidly – you can more easily make adjustments and you haven’t committed to ongoing programs where it’s much tougher to kind of backtrack from those.

So, it’s just a general approach. The legislature obviously needs to place its own priorities in those categories and change those numbers. But we just think that they should think very carefully so that they much better position themselves for the next time that revenues turn down.

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3 Comments on “Transcript: Press briefing remarks by LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Nov. 30, 2013

  1. Pingback: Transcript: Press briefing Q&A w/ LAO Mac Taylor on California's fiscal outlook for 2014-15 - Part V | What The Folly?!

  2. Pingback: Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part II | What The Folly?!

  3. Pingback: Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part I | What The Folly?!

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