HomeMy WebLinkAbout12-09-2013 LaPA Agenda Tuesday, December 9, 2013
a 8:00 A.M.
Orange County Sanitation District Administration Building
Legislative and Public Conference Room A& B
Affairs Special Committee 10844 Ellis Avenue
Fountain Valley, CA
714 593-7130
COMMITTEE MEMBERS:
David Benavides
Keith Curry
Troy Edgar
John Nielsen
Brad Reese
Joe Shaw
John Withers
VACANT
AGENDA
PLEDGE OF ALLEGIANCE:
DECLARATION OF QUORUM:
PUBLIC COMMENTS: If you wish to speak, please complete a Speaker's Form and
give it to the Clerk of the Board. Speakers are requested to limit comments to three
minutes.
REPORTS: The Committee Chair and the General Manager may present verbal
reports on miscellaneous matters of general interest to the Committee Members. These
reports are for information only and require no action by the Committee.
• Outreach Update
CONSENT ITEMS:
1. Approve minutes for the Committee meeting held on November 12, 2013.
12/09/13 Legislative and Public Affairs Special Committee Page 1 of 2
INFORMATIONAL ITEMS:
2. 601h Anniversary - Faviola Miranda
3. State Legislative Affairs
4. Federal Legislative Affairs
OTHER BUSINESS AND COMMUNICATIONS OR SUPPLEMENTAL AGENDA
ITEMS, IF ANY:
ADJOURNMENT:
The next Legislative and Public Affairs Special Committee meeting is scheduled for
Monday, January 13, 2014, at 8:00 a.m.
Accommodations for the Disabled: Meeting Rooms are wheelchair accessible. If you require any special disability
related accommodations, please contact the Orange County Sanitation District Clerk of the Board's office at
(714) 593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability
and the type of accommodation requested.
Aoenda Posting: In accordance with the requirements of California Government Code Section 54954.2,this agenda
has been posted outside the main gate of the Sanitation District's Administration Building located at 10844 Ellis
Avenue, Fountain Valley, California, not less than 72 hours prior to the meeting date and time above. All public
records relating to each agenda item, including any public records distributed less than 72 hours prior to the meeting
to all,or a majority of the Board of Directors,are available for public inspection in the office of the Clerk of the Board.
NOTICE TO DIRECTORS: To place items on the agenda for the Committee Meeting, items must be submitted to the
Clerk of the Board 14 days before the meeting.
Made E.Ayala
Clerk of the Board
(714)593-7130
mavala(a)ocsd.com
For any questions on the agenda,Committee members may contact staff at:
General Manager James D. Herberg (714)593-7110 iherbem(@,ocsd.com
Assistant General Manager Bob Ghirelli (714)593-7400 rohirellita)ocsd.ocm
12/09/13 Legislative and Public Affairs Special Committee Page 2 of
ITEM NO. 1
CORRECTED MINUTES
LEGISLATIVE AND PUBLIC AFFAIRS
SPECIAL COMMITTEE MEETING
Orange County Sanitation District
The Legislative and Public Affairs Special Committee meeting convened on
Tuesday, November 12, 2013, at 8:00 a.m. in the Administration Building of the
Orange County Sanitation District.
A quorum was declared present, as follows:
COMMITTEE MEMBERS STAFF PRESENT
PRESENT: Jim Herberg, General Manager
Troy Edgar, Board Chair Bob Ghirelli, Assistant General
Brad Reese, Administration Committee Manager
Chair Nick Arhontes, Director of Facilities
John Nielsen, Operations Committee Support Services
Vice-Chair Nick Kanetis, Director of Engineering
John Withers, Administration Jeff Reed, Director of Human
Committee Vice-Chair Resources
David Benavides, Director Lorenzo Tyner, Director of Finance &
Joe Shaw, Director Administrative Services
Maria Ayala, Clerk of the Board
Jim Colston
COMMITTEE MEMBERS ABSENT: Faviola Miranda
John Anderson, Board Vice-Chair
OTHERS PRESENT:
Heather Stratman, Townsend Public
Affairs
Eric Sapirstein, ENS Resources (via
teleconference)
PUBLIC COMMENTS:
None.
COMMITTEE REPORTS:
Board Chair Edgar reported that there will be an upcoming meeting with Senator
Huff regarding the Sanitation District's Yorba Linda legislation. Chair Edgar also
reported that draft legislation language was reviewed by various parties prior to
being submitted to the legislature.
Minutes of the Legislative and Public Affairs Special Committee
November 12,2013
Page 2 of 3
General Manager, Jim Herberg, reported on the success of the Huntington Beach
community meeting. He apprised the Committee of the recent presentation on the
status of the Sanitation District administrative buildings. The presentation was
given at both the last Steering Committee and Operations Committee meetings by
Nick Kanetis.
Faviola Miranda, Sr. Public Affairs Specialist, provided an update on recent public
outreach that included information about the Huntington Beach Community
Meeting; the Joint Drug Takeback event with the DEA and Kaiser Permanente; the
5k/10k Run in the City of Huntington Beach to support U.S. Veterans; and
attending the Gift of History event in Anaheim.
CONSENT ITEMS:
1. MOVED, SECONDED, and DULY CARRIED: Approve minutes for the
Committee meeting held on October 17, 2013.
ACTION ITEMS:
2. MOVED, SECONDED, and DULY CARRIED: Receive and file a list of the
membership pricing options for the Orange County Business Council and
Association of California Cities, Orange County.
Ms. Stratman presented information on the various memberships that are
available to the Sanitation District, and which associations the Sanitation
District is currently a member of. After careful consideration and
discussion, the Committee agreed to maintain the current level of
memberships and to join ACC-OC at the lowest membership tier.
INFORMATIONAL ITEMS:
3. Monthly Legislative Update— State Legislative Affairs
Ms. Stratman provided an update on the legislative language submitted
regarding the Yorba Linda seat. She explained the process that the
language would go through in order to be approved.
4. Monthly Legislative Update— Federal Legislative Affairs
Mr. Sapirstein joined the meeting via teleconference. He provided a federal
update on: alternative fuel; HR3080; WRDA; Infrastructure Financing and
Sunshine on Conflicts Acts.
Minutes of the Legislative and Public Affairs Special Committee
November 12,2013
Page 3 of 3
OTHER BUSINESS AND COMMUNICATIONS OR SUPPLEMENTAL AGENDA
ITEMS, IF ANY:
None.
ADJOURNMENT:
The Chair declared the meeting adjourned at 8:43 a.m.
Submitted by:
Maria E. Ayala
Clerk of the Board
LEGISLATIVE AND PUBLIC AFFAIRS SPECIAL COMMITTEE Meeting Date
12109/2013
AGENDA REPORT Item" �'
2
Orange County Sanitation District
FROM: James D. Herberg, General Manager
Originator: Faviola Miranda, Senior Public Affairs Specialist
SUBJECT: OCSD 60TM ANNIVERSARY
GENERAL MANAGER'S RECOMMENDATION
Information Only.
SUMMARY
OCSD will be celebrating its 60th anniversary in 2014. Staff prepared a communications
plan and events calendar highlighting the District's 601" Anniversary. The 60'
anniversary events will complement OCSD's planned community outreach events.
Staff will present the plan and ask for feedback from the committee.
PRIOR COMMITTEE/BOARD ACTIONS
None.
Page 1 of 1
LEGISLATIVE AND PUBLIC AFFAIRS SPECIAL COMMITTEE u v%miiAGENDA REPORT [IMI,
tem Number
s
Orange County Sanitation District
FROM: James D. Herberg, General Manager
Originator: Heather Dion Stratman, Townsend Public Affairs
SUBJECT: STATE LEGISLATIVE AFFAIRS
GENERAL MANAGER'S RECOMMENDATION
Information Only.
SUMMARY
State Legislative and Political Update
Looking ahead to 2014, one of the most discussed topics around the Capitol will be
regarding the transition of legislative leadership, as three of the four legislative leaders
(Speaker Perez, Pro Tem Steinberg, and Assembly Minority Leader Connie Conway)
will all be termed out of office in 2014. As of now, none of the three leaders has
provided any timeline for a transition to a new leader, nor has a clear favorite emerged
for any of the positions.
Many eyes are on the Assembly, as the transition of leadership in the Lower House will
likely pit freshman members against their more senior colleagues. The issue in the
Assembly is that there is one line of thinking that the new Speaker (and Republican
leader) should be more experienced members who have already been through several
election and budget cycles (the two top priorities for leadership) and will be in the best
position to succeed in the upcoming election year. However, this transition could cause
major problems for the current freshman class, who were elected under the new term
limits and will be in the Assembly for the next 10 years. If a Speaker is elected that will
term out in 2016, then the current freshman class will need to work to prevent the next
freshman class from electing a Speaker from their class. In practical terms, many
people see this scenario shaping up to be a race between Assembly Member Toni
Atkins (San Diego) against Assembly Member Jimmy Gomez (Los Angeles) for the
Speakership. Assembly Member Atkins is well respected and been through many
policy fights; however, Assembly Member Gomez is seen as an up-and-coming
politician that could lead the Lower House for the next decade. It is unlikely that the
new Speaker, whoever it may be, will take over prior to the June primary elections, so
there is still plenty of time for political speculation.
Page 1 of 4
In the Senate, the race for the next Pro Tem has been less of a topic of
conversation. Many people around Sacramento believe that Pro Tem Steinberg will try
to keep his position through the entire legislative session and only transfer leadership
after the session concludes in August 2014. One of the frontrunners for the next Pro
Tem is Senator Kevin De Leon (Los Angeles), who is the current chair of the powerful
Senate Appropriations committee. Senator De Leon would likely secure support from
members of the Latino caucus, and would also have the backing of many influential
political supporters; however, there are some factors working against Senator De
Leon. Traditionally, the Houses of the legislature, when controlled by the same party,
are represented by a member from Southern California and a member from Northern
California, in order to maintain geographic balance. As mentioned above, the Assembly
is likely to transition to a new leader before the Senate and the two likely candidates are
both from Southern California. This may place pressure on the Senate to choose a
leader that represents a district in Northern California, potentially Senator Mark
DeSaulnier (Concord). Additionally, while not accused of any wrong-doing, Senator De
Leon's name recently surfaced in the leaked FBI affidavit detailing allegations against
Senator Ron Calderon. Again, Senator De Leon was only mentioned in passing, and
not as a subject of the affidavit, but it remains to be seen what collateral damage may
occur as Senator Calderon's corruption scandal continues to develop.
Given all of the various dynamics in the Legislature, it is likely that the transition to new
legislative leadership will not effectively be in place until the Legislature returns in 2015.
At that time, the Capitol will have a new set of freshman legislators, new committee
membership, and will have gone through a statewide election in which all of the
constitutional offices will have been voted upon. All of this guarantees that 2014 is likely
to be a year of transition in Sacramento.
Legislative Analyst Fiscal Outlook
The Legislative Analyst's Office (LAO) released their annual document on California's
Fiscal Outlook (attached). This document is typically viewed as the document that
starts the upcoming budget cycle; in this case the 2014-2015 state budget. The purpose
of the Fiscal Outlook document is to provide the LAO's perspective on the State
economy, as well as the current budget condition. The Outlook is based on the LAO's
budget forecast projections, revenue projections, as well as the current budget.
The primary takeaway from the LAO's Fiscal Outlook is that under the current budget,
the State is on pace to have a significant reserve at the end of the 2014-15 budget
year. The LAO estimates that this reserve will be approximately $5.6 billion.
Additionally, the LAO projects that the State will continue to see multi-billion budget
surpluses for the foreseeable future, culminating in a $9.6 billion surplus in FY 2017-18.
After which the surpluses will trend downward due to the expiration of the temporary
taxes put into place by Proposition 30.
Page 2 of 4
The large budget surpluses projected by the LAO are due in large part to an ongoing
improved economy; one in which the housing market continues to recover, there is little
or no fiscal contraction by the federal government, and the job market continues to
improve, thereby lowering the state's unemployment rate. Additional revenues will be
realized as increasing home values result in higher property tax collection and the
dissolution of redevelopment continues.
During the current 2013-14 fiscal year, the State has seen a significant increase in
revenue over what was originally projected in the budget. This has principally been due
to stronger than assumed personal income tax (PIT). The LAO anticipates that the PIT
will continue to grow and there will be moderate increases in revenue to the State from
the sales and use tax, as well as the corporate tax.
As is the case with any long term forecasting, the LAO's projections are not set in stone
and will fluctuate based on the actual performance of the economy, actions taken by the
Legislature, and by unforeseen events, which will require additional budget resources.
One of the first questions that people will ask is who will be the beneficiary from the
increased revenue to the State. The first to benefit will be K-12 education and
community colleges through Proposition 98, as the State Constitution requires a portion
of any new general fund revenue to go to these entities. Based on the LAO's revised
revenue projections for the current budget year and the prior two fiscal years, the
State's revenues will be approximately $6.4 billion higher than was anticipated in the
2013-14 budget, which will result in additional $4.8 billion in Prop 98 spending.
After the required Prop 98 spending, the LAO does provide recommendations as to how
the Legislature may want to utilize any upcoming budget surpluses. The LAO suggests
that the Legislature should strategically utilize future surpluses in three key areas:
building a strong reserve, paying off budget liabilities accrued over the past several
years, and to begin setting aside funds to address long term unfunded retirement
liabilities. All three of these recommendations are meant to put the State in the best
position possible in the event of another economic downturn. It should also be noted,
that the LAO acknowledges that there will be significant pressure to fund additional
programs and that the Legislature will need to make difficult decisions on how to
responsibly utilize any new revenue. The LAO suggests that it may be appropriate to
take a portion of the State's revenue and consider providing inflationary increases to
existing programs, creating new commitments, providing tax reductions, or investing in
additional infrastructure.
As with any economic projection, the LAO will continue to refine and adjust their
economic outlook as actual expenditures are made, revenue is received, and policy is
changed; however, the LAO's current outlook shows that the State's economy is
recovering and will likely continue to grow through the end of the decade.
Page 3 of 4
Additional Items of Interest
• OCSD's state and federal lobbying Team, along with staff, will be meeting with
County of Orange Legislative staff on Friday, December 61" to discuss
coordination efforts.
• OCSD's proposed legislative language to amend the District Act to amend
representation from the City of Yorba Linda to the Yorba Linda Water District is
before Legislative Counsel for consideration.
• OCSD Board Chairman and General Manager met with Senator Huff on
November 19•' to brief the Senator on the District's activities and ask for his
support as the OCSD District Act legislation moves forward.
ATTACHMENTS
The Executive Summary of the following attachment is available in hard copy, the complete document
may be viewed on-line at the OCSD website(mmocsd.coml with the complete agenda package:
• The 2014-15 Budget: California's Fiscal Outlook - Legislative Analyst's Office
Page 4 of 4
The 1Budget:
California'sOutlook
s
MAC
TAYLOR LEGISLATIVE ANALYST NOVEMBER ,
•
-LaDle of Contents
Chapter 1
The Budget Outlook.................................................. 1
Chapter 2
The Economy and Revenues .................................. 11
Chapter 3
Spending Projections.............................................. 29
Legislative Analyst's Office www.lao.ca.gov
California's Fiscal Outlook
Legislative Analyst's Office
Legislative Analyst
Mac Taylor
State and Local Finance Education
Jason Sisney Jennifer Kuhn
Marianne O'Malley
Edgar Cabral
Chas Alamo Carolyn Chu
Justin Garosi Natasha Collins
Seth Kerstein Rachel Ehlers
Ryan Millers Paul Golaszewski
Nick Schroeder Judy Heiman
Brian Uhler Kenneth Kapphahn
Brian Weatherford Jameel Naqvi
Paul Steenhausen
Corrections,Transportation,and Environment
Anthony Simbol Health and Human Services
Brian Brown
ewton
Drew Soderborg Mark C.Shawn Martin
Ashley Ames Ross Brown
Aaron Edwards Amber Didier
Anton Favorini-Csorba Rashi Kesarwani
Jeremy Fraysse Lourdes Morales
Helen Kerstein
Sarah Larson Felix
Bella-Navarre
Fe
Anita Lee Felix Lia Moore Ryan Woolsey
Jessica Digiambattista Peters
Tiffany Roberts
Administration and Information Services Support
Larry Castro Izet Arriaga
Sarah Klemberg Anthony Lucero
Karry Dennis-Fowler Tina McGee
Sarah Scanlon
Michael Greer Mi Jim Stahley
Vu Chu
Jim Will
Douglas Dixon
Sandi Harvey
Forecast coordinator.
www.lao.ca.gov Legislative Analyst's Office
Executive Summary
Forecast Reflects Continued Improvement in California's Finances. In November 2012,
we projected that with continued growth in the economy and restraint in new program
commitments,the state budget could see multibillion-dollar operating surpluses within a few
years. In 2013,the Legislature and the Governor agreed to a restrained state budget for 2013-14,
and our forecast of state tax revenue collections has increased since last year.Accordingly,we
now find that California's state budget situation is even more promising than we projected one
year ago.
The Budget Outlook
Under Current Policies, $5.6 Billion Projected Reserve at End of 2014-15.The state's 2013-14
budget plan assumed a year-end reserve of$1.1 billion. Our revenue forecast now anticipates
$6.4 billion in higher revenues for 2012-13 and 2013-14 combined.'these higher revenues are
offset by$5 billion in increased expenditures,almost entirely due to greater required spending
for schools and community colleges.Combined with a projected$3.2 billion operating surplus
for the state in 2014-15,these factors lead us to project that,absent any changes to current laws
and policies,the state would end 2014-15 with a$5.6 billion reserve.
Future Operating Surpluses Projected.We assume continued economic growth in future
years. In such a scenario,we project that,under current laws and policies,state General Fund
revenues will grow faster than expenditures through 2017-18,when the state's projected
operating surpluses reach$9.6 billion.The state's temporary personal income tax rate increases
under Proposition 30(2012)expire at the end of 2018,resulting in a more gradual ramping down
of these revenues over the last two fiscal years of our forecast. This helps prevent a"cliff effect"in
our forecast,as our projected operating surpluses remain stable at just under$10 billion per year
in 2018-19 and 2019-20.
Healthy Local Property Tax Growth Important for State Finances. Proposition 98 funding
for schools and community colleges is provided by a combination of state General Fund
spending and local property tax revenues.Throughout our forecast,healthy property tax
growth—a byproduct of the recovering housing market—helps moderate the growth of required
Legislative Analyst's Office www.lao.ca.gov
California's Fiscal Outlook
state General Fund spending on schools and community colleges.In addition to normal
property tax growth,the state's fiscal situation is helped by additional increases in school
property taxes due to the dissolution of redevelopment agencies and the expiration of the"triple
flip"Both of these factors play a significant role in keeping annual state expenditure growth
below revenue growth for much of our forecast period.
LAO Comments
Continued Caution Needed. Despite the large surplus that we project over the forecast
period,the state's continued fiscal recovery is dependent on a number of assumptions that may
not come to pass.For example,our forecast assumes continuing economic growth and slow,
but steady,growth in stock prices.As we discuss in this forecast,an economic downturn within
the next few years could quickly result in a return to operating deficits. Further,the normal
volatility of capital gains could depress(or boost) annual revenues by billions of dollars.In
addition,our forecast assumes that the state repays liabilities with payment schedules set in
current law. Other liabilities,including some items on the Governor's wall of debt and the state's
huge retirement liabilities (particularly those related to the California State Teachers'Retirement
System),remain unpaid under our forecast.If additional payments are made in the future
to repay these liabilities or to provide inflation adjustments to universities,the courts,state
employees,and other programs,the operating surpluses in our forecast would fall significantly
below our projections.
A Strategic Approach to Allocating Operating Surpluses.The state's budgetary condition is
stronger than at any point in the past decade.The state's structural deficit—in which ongoing
spending commitments were greater than projected revenues—is no more.We forecast
that schools and community colleges will receive billions of dollars of new funding under
Proposition 98.Across the rest of the budget,the Legislature and the Governor now face choices
for how to allocate projected multibillion-dollar operating surpluses.We believe the Legislature
should be strategic in how to make such allocations,taking into account the inherent volatility
of the state's revenue structure and uncertainty about the future course of the economy.We offer
one possible approach. In it,we suggest giving high priority to building a strong reserve and
paying off the budgetary liabilities accrued over recent years.We also believe the state should
begin setting aside funds to address the growing unfunded retirement liabilities noted above.
Finally,we also allocate amounts each year for the state to provide inflationary increases for
existing programs and to create new commitments—whether they be for program restorations
or expansions,tax reductions,or added infrastructure spending.Such an approach would
well position the state for the next economic downturn,while at the same time allowing for
incremental commitments to meet other priorities.
www.lao.ca.gov Legislative Analyst's Office
Chapter 1
The Budget • •
This publication summarizes our office's Protection Account created by Proposition 30.
independent projections of California's Our forecast is based on current state law and
economy and budget condition. Specifically, policies,as discussed in the box on the next
our budget forecast projects tax revenues page. This is our first state budget forecast to
and expenditures from the General Fund consider 2019-20,the first full fiscal year after
through 2019-20,including the Education expiration of Proposition 30.
THE BUDGET FORECAST
The Legislature will make decisions about surplus for 2014-15. (Operating surpluses equal
the state's 2014-15 budget in the coming a fiscal year's revenues less that fiscal year's
months.As shown in Figure 1,assuming no expenditures.)
change to current law and policy,we project
that the state would have a$5.6 billion General Higher 2012-13 Revenues...
Fund reserve at the end of the 2014-15 fiscal Higher School Spending Required
year.This is the sum of a$234 million ending Projected to End With a Small Reserve. The
reserve for 2012-13, a$2.2 billion operating 2013-14 budget assumed that 2012-13 would
surplus in 2013-14,and a$3.2 billion operating end with a$254 million reserve. Our General
Fund revenue forecast
for 2012-13 now projects
Figure 1 $1.65 billion in higher
LAO Projections of General Fund Condition revenues for 2012-13,
General Fund and Education Protection Account Gornbined (In Millions) compared to the budget
2014-1 act's assumptions.
2012-13 2013-14
Revenues for 2012-13
Prior-year fund balances -$1,637 $852 $3,061 ended stronger than was
Revenues and transfers 99,841 101,847 107,617 assumed,principally due
Expenditures 97,352 99,639 104,436 to personal income tax
Ending fund balance $852 $3,061 $6,242
Encumbrances 618 618 618 (PIT) collections.Our
higher revenue forecast
results in$1.75 billion
Legislative Analyst's Office www.lao.ca.gov
California's Fiscal Outlook
in additional General Fund expenditures Projected 2013-14 Operating Surplus of
under the Proposition 98 minimum guarantee. $2.2 Billion
That is,for every$1.00 of extra revenue, state The 2013-14 budget assumed the state would
spending for schools and community colleges end the fiscal year with a reserve of$1.1 billion.
on average is projected to grow by$1.07.This We now estimate that the reserve will more than
is due to the manner in which the budget plan double—to$2.4 billion—primarily as the net
makes so called"maintenance factor payments' result of the following factors:
to schools and community colleges.Assuming
only minor changes in the entering fund • $4.7 Billion in Higher Revenues. Largely
balance,we estimate that 2012-13 ended with a due to a higher forecast of capital gains
$234 million reserve.While this small reserve and stronger-than-expected stock price
equals only 0.2 percent of 2012-13 spending,it growth,our forecast of PIT revenues for
nevertheless would be the first positive year-end 2013-14 is about$5.2 billion higher than
reserve since 2007-08. was assumed in the 2013-14 budget.That
increase in revenues is partially offset
Basis for Our Projections
Purpose of Our Forecast. This forecast does not attempt to predict the budgetary decisions
that will be made by the state's elected leaders. Rather,it is our office's best estimate of the
state's fiscal condition if current law and current policies remain unchanged through 2019-20.
In the near term,therefore,the purpose of this forecast is to provide the Legislature with our
best estimate of the resources that will be available in next year's budget deliberations. Beyond
2014-15,the forecast aims to provide lawmakers with a general sense of the future health of the
General Fund budget.
Uses Standard Economic Forecasting Practices.Economic conditions affect not only
tax revenues that the state collects,but also state spending levels. For example,the state's
Proposition 98 minimum guarantee for schools and community colleges is determined based on
changes in state revenues and economic factors.Further,state spending for health and human
services tends to change along with factors such as unemployment,age,and income. Consistent
with other mainstream economic forecasts,our forecast assumes that the economy will grow
throughout the forecast period.We do not presume that we can predict the timing of recessions.
Forecast Generally Based on Current Laws.Our estimates generally are based on current
laws,including those in the State Constitution (such as the Proposition 98 minimum guarantee
for schools and community colleges),state statutes,and federal law. In general,this means
that we assume taxes and programs operate throughout the forecast period consistent with
current law. For example,if state law authorizes a certain tax or program through only part
of our forecast period,we generally assume that the law is allowed to play out and that the tax
or program expires.For instance,our forecast assumes that the temporary taxes approved by
voters in Proposition 30 will expire during the forecast period because it would take a future
action either by the Legislature or by voters to extend those taxes.
2 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
by lower projections of sales and use tax • $0.3 Billion in Other Spending. We
(SUT) and corporation tax(CT)revenues estimate that other General Fund
of about$200 million for each of these spending will be nearly$300 million
two tax sources. higher than assumed in the 2013-14
budget. For example,in September 2013
• $3.1 Billion in Higher General Fund the Legislature passed Chapter 310,
Proposition 98 Spending. Most of the Statutes of 2013 (SB 105,Steinberg),
increased spending in our forecast for which appropriated additional funding
2013-14 is for schools and community to address a federal court order requiring
colleges.Specifically,we estimate that the the state to reduce the prison population.
Proposition 98 General Fund spending We estimate that the California
will be$3.1 billion higher than the Department of Corrections and
amount provided in the budget due to Rehabilitation will have net additional
our forecast of higher state revenues. spending of nearly$250 million in
2013-14.
Forecast Also Considers Certain Recent State Practices. In some cases,we have relied
on what has been recent state practice in forecasting revenues and spending.For example,
although the state's hospital quality assurance fee—which offsets General Fund Medi-Cal
costs—expires in 2016,the Legislature has extended the fee three times since its initial adoption.
In this case,we assume that the current state practice is to continue reauthorizing that fee.
Similarly,transfers to the Budget Stabilization Account,the state's rainy-day fund created by
Proposition 58 (2004),have been suspended each year since 2008-09.We assume those suspen-
sions continue throughout the forecast period.Later in this chapter,we discuss how the state
might build a comparable reserve under an alternate scenario.
COLAs and Inflation Adjustments Generally Omitted. Consistent with the state laws
adopted in 2009 that eliminated automatic cost-of-living adjustments(COLAs) and price
increases for most state programs,our forecast generally omits such inflation-related cost
increases.This means,for example,that budgets for the universities have not been adjusted
for general price increases throughout the forecast period.We include inflation-related cost
increases when they are required under federal or state law,as is common in health programs.
Many State Liabilities Remain Unpaid Under Current Law.In the case of state liabilities
with repayment dates in state law,we generally assume those liabilities to be repaid according
to schedule. For example,our forecast assumes that the deficit-financing bonds authorized
by Proposition 57 (2004) continue to be repaid under their established financing mechanism.
Other liabilities,however,are not required to be repaid by the state General Fund on any specific
timeline under today's laws and policies.These include some of the items on the Governor's
"wall of debt"(a collection of various budgetary liabilities),along with unfunded liabilities of
the California State Teachers'Retirement System.If the state were to make additional payments
toward repaying these liabilities,the operating surpluses projected in our forecast would be
reduced by like amounts.
Legislative Analyst's Office www.lao.ca.gov 3
California's Fiscal Outlook
These changes have the effect of increasing the the CT and SUT to be 6.9 percent and
2013-14 operating surplus from the$817 million 3.3 percent,respectively.
assumed in the budget to$2.2 billion.
• $3.3 Billion in Higher General
Projected 2014-15 Operating Surplus of
Fund Proposition 98 Spending. Our
$3.2 Billion forecast of healthy revenue growth in
We project that the General Fund operating 2014-15 produces additional growth in
surplus in 2014-15 will be$3.2 billion,an Proposition 98 spending.We estimate
increase of about$1 billion from our forecast that General Fund spending needed to
of the 2013-14 operating surplus. Generally, satisfy the Proposition 98 guarantee will
the larger operating surplus is the result of our increase$3.3 billion over our revised
forecast of revenues growing faster than our projection of 2013-14 spending levels.
forecast of expenditures.In 2014-15,we project
that General Fund revenues and transfers will • $1.5 Billion in Higher Spending in
grow 5.7 percent and that spending will grow Other Parts of the Budget.Outside of
4.8 percent.Specifically,our forecast reflects the Proposition 98,we forecast that spending
following: will increase by$1.5 billion in 2014-15.
Most notably,this includes increases of
• $5.8 Billion in Higher Revenues. $630 million in debt service on infra-
While revenue growth is expected to be structure bonds and about$600 million
somewhat depressed in 2013-14—due in health and human services (excluding
mainly to higher income taxpayers California Work Opportunity and
accelerating 2013 income into 2012—we Responsibility to Kids [CalWORKS]).The
expect revenues to bounce back in higher spending is offset by increased
2014-15,principally related to PIT savings of$650 million related to a
growth. Specifically,we forecast PIT decision in the 2013-14 budget to redirect
growth in 2014-15 to be 8.1 percent for certain realignment funds to help pay for
a year-over-year increase of$5.4 billion. what otherwise would be state costs for
Further,we forecast 2014-15 growth in CaIWORKs.
SURPLUSES PROJECTED TO GROW STEADILY
As shown in Figure 2,we project that In the Near and Medium Term, Strong
operating surpluses will grow at a rate of between Revenue Growth.Proposition 30 increased
about$1 billion and$3 billion each year between PIT rates on high-income taxpayers from 2012
2014-15 and 2017-18,at which point we estimate through 2018,and SUT rates from 2013 through
that they will reach$9.6 billion under current laws 2016.Under our forecast,Proposition 30 greatly
and policies.As the temporary taxes authorized by influences revenue growth,particularly in the
Proposition 30 phase out over several fiscal years case of the PIT. Because taxable income has
near the end of our forecast period,we project that been growing faster for high-income taxpayers,
operating surpluses will remain stable as revenues by increasing the marginal PIT rates on those
and expenditures grow at similar rates.All this individuals,Proposition 30 has the effect of
is premised upon our assumption of continuing boosting PIT growth higher than it would be
economic growth through 2020. otherwise.In 2014-15 and 2015-16,we forecast
4 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
Figure 2
Operating Surpluses Projected Throughout Forecast Period
General Fund and Education Protection Account Combined (In Billions)
$12
Carry-In Balance From 2013-14
Annual Operating Surplus
10
8
8
4
2
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
total General Fund revenues and transfers to operating surpluses in 2018-19 and 2019-20,were
grow 5.7 percent in each year.We project revenue it not for projected property tax growth and the
growth to slow thereafter to 4.6 percent in end of the"triple flip,"as described below.
2016-17 and 4.3 percent in 2017-18,due largely
to the phase out of the''/a-cent sales tax increase General Fund Benefits From Property
authorized by Proposition 30. Taxes,End of Triple Flip in Our Forecast.The
Proposition 98 minimum guarantee is funded
As Proposition 30 PIT Increases Phase by two revenue streams—state General Fund
Out—Much Slower Revenue Growth Forecasted. support and local property tax revenue distributed
Under Proposition 30,the increase in PIT rates to schools.In most years,this local property
for high-income taxpayers generates a much tax revenue offsets the amount that the state
greater proportion of revenue than the sales tax must spend on schools and community colleges,
increase.As a result,the phase out of the higher resulting in dollar-for-dollar savings for the
rates in 2018-19 and 2019-20 has a much more General Fund.We project that in the later years
significant impact on revenue growth. Over of our forecast increases in the Proposition 98
these two fiscal years,we project that General minimum guarantee will largely be paid from
Fund revenues grow at an average annual rate school property tax growth.Specifically,while
of only 1.9 percent.As shown in Figure 2,this we project that General Fund Proposition 98
has the effect of stabilizing the projected trend spending will increase by 78 percent in 2014-15
of annual operating surpluses,as revenues and and 4.4 percent in 2015-16,we forecast it to
expenditures grow at similar rates in those two slow thereafter to an average annual rate of just
years.In fact,the phase out of Proposition 30 0.9 percent for the remainder of the forecast
would have had the effect of reducing those period.The property tax-related factors include:
Legislative Analyst's Office www.lao.ca.gov 5
California's Fiscal Outlook
• Healthy Local Property Tax Growth. (RDA)will increase from$763 million in
As described in Chapter 3,over the next 2013-14 to$1.9 billion in 2019-20. These
several years,we project underlying local state savings will be offset somewhat
property taxes to grow,on average,about by decreases in the revenues from RDA
7 percent each year.This is consistent assets over the period.
with average historical growth,but above
levels seen in recent years. • End of Triple Flip. Finally,we project
that the triple flip—a complex financing
• Increased Property Taxes Due to mechanism created to repay the state's
Redevelopment Dissolution. We project deficit-financing bonds of the 2000s—
that school property taxes related to the will turn off in 2016-17,resulting in an
dissolution of redevelopment agencies annual General Fund benefit of about
$1.6 billion beginning in 2016-17.
LAO COMMENTS
2013-14 Budget Restraint Commendable • Continued Economic Growth. Our
Forecast Reflects Continued Improvement forecast assumes steady,moderate
in State's Finances. In our November 2012 economic growth,typical of that seen
Fiscal Outlook report,we projected that with during a mature economic expansion.
continued growth in the economy and restraint This growth drives the increase in
in new program commitments,the state budget revenues and contributes to lower
could experience multibillion-dollar operating General Fund spending in some areas
surpluses within a few years. Since that time, of the budget(such as CalWORKs grant
our forecast of General Fund revenues and payments).This assumed economic
transfers has increased by a few billion dollars for growth also informs our forecast of local
2013-14 and 2014-15,and by between$2 billion property tax growth,which as mentioned
and$3 billion for each of 2015-16 through earlier offsets General Fund spending
2017-18.In the June budget package for 2013-14, required to meet the Proposition 98
the Legislature and the Governor limited new minimum guarantee.Economic growth,
commitments to a small handful of areas.These therefore,is probably the most important
factors produce a budgetary situation for 2014-15 assumption in our forecast.
that is even more promising than we projected
last year. • Many Budgetary and Retirement
Liabilities Remain Unpaid. As described
Still,Continued Caution Needed earlier,our forecast assumes that some
Surpluses Dependent on Several Key of the state's budgetary and retirement
Assumptions. Despite the large reserve that we liabilities are repaid.For example,we
are projecting for the 2014-15 budget process,the assume that the state increases payments
state's continued fiscal recovery is dependent on to the California Public Employees'
a number of assumptions that may not come to Retirement System (CalPERS) as required
pass. Specifically,our forecast assumes: by the Ca1PERS board,which will
reduce the state's unfunded liabilities
for state employee pension benefits over
6 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
time. Other liabilities,however,are not in the economy or an actual recession.The
required to be repaid from the state severity of the most recent recession may result
General Fund on specific timelines under in a longer-than-average economic expansion.
today's laws and policies.These include However,it is possible that a recession will occur
some of the items on the Governor's wall before 2020.In fact,the current U.S.economic
of debt,along with massive retirement expansion is already over four years old.Since
liabilities related to the California World War II,the average expansion has been
State Teachers'Retirement System.If just under five years.
additional payments are made in the
future to repay these various liabilities, Sketch of Hypothetical Recession. To
the operating surpluses in our forecast demonstrate the budgetary effects of a possible
would be reduced by a like amount. recession,we have produced one hypothetical
(Besides support from the General Fund, recession scenario,as displayed in Figure 3.
other sources of funding—from school We developed this scenario to simulate how a
districts and teachers,for example—and moderate recession could affect state finances,
other policy decisions maybe needed but this is merely an illustration of one possible
to address some of these liabilities over scenario—the severity of an actual recession
time.) sometime during the future could be stronger
or weaker than that portrayed in Figure 3. In
Planning for a Possible Recession the scenario displayed in Figure 3,revenues
Recession Possible During Forecast Period. fall 10 percent below what our forecast would
Like other economic forecasters,we are unable otherwise be for 2015-16,and then 15 percent
to predict the timing of either a major slowdown below forecasted levels for 2016-17.The revenue
Figure 3
Operating Deficits Return Under Hypothetical Recession Scenario
General Fund and Education Protection Account Gornbined(In Billions)
$4
3
2
1
0
1
-2
-3
2013-14 2014-15 2015-16 2016-17
Legislative Analyst's Office www.lao.ca.gov
California's Fiscal Outlook
losses would be offset somewhat by lower Caution,therefore,is appropriate in weighing
Proposition 98 minimum requirements,and we new spending both within Proposition 98—as
assume that the state would reduce spending to total funding for schools and community
the lower allowed spending levels. Specifically, colleges would decline under this scenario—and
the Proposition 98 minimum guarantee would on the non-Proposition 98 side of the budget.
decline 8 percent below what our forecast would Absent a prudent reserve,the Legislature could
otherwise be in 2015-16,and then 12 percent well face during the next economic downturn
below for 2016-17 some of the same difficult decisions that it was
required to make during the past decade.
Hypothetical Moderate Recession Would
Produce Operating Deficits. In 2013-14 Allocating Operating Surpluses
and 2014-15,Figure 3 starts with the same The state's budgetary condition is stronger
$2.4 billion`carry-in balance"from 2013-14 than at any time in the past decade.The state's
and the same$3.2 billion operating surplus for structural deficit—in which ongoing spending
2014-15 as under our standard forecast.Aside commitments were greater than projected
from the factors mentioned above,we assume revenues—is no more.Furthermore,assuming
the same set of current laws and policies as under continued economic growth,the Legislature
our standard forecast.As such,we assume that and the Governor will have choices for how
no additional ongoing commitments are made to allocate multibillion dollar surpluses. Our
in either 2013-14 or 2014-15 and that the entire forecast indicates that there is room in the budget
$5.6 billion is effectively held in reserve.Under for new ongoing spending commitments. (In
this scenario,the state would face a roughly fact,Proposition 98 will require major additional
$900 million operating deficit in 2015-16,which spending for schools.)But as discussed earlier,
would then grow to about$2.4 billion in 2016-17. committing too much too soon could create
budget shortfalls in the event of an economic
A$5.6 Billion Reserve Could Absorb Deficits downturn. Further,the state has commitments
Under Hypothetical Scenario.As we mentioned that were made in the past—principally
earlier,this is merely a sketch of one hypothetical retirement liabilities and,to a lesser extent,
recession.The severity of an actual recession budgetary liabilities—that have yet to be funded.
during our forecast period could be stronger And the state in recent years has not provided
or weaker.Nevertheless,absent additional many of our existing programs with inflation
ongoing commitments,the$5.6 billion reserve adjustments.As inflation increases—as may
that we project for the state budget by the end of occur in the next few years—it will be harder
2014-15 could more than absorb the combined to ignore its limiting effects on purchasing
$3.3 billion in operating deficits over the power for state programs.Figure 4 displays
two-year period of this hypothetical recession. one rough approach for using potential
On the other hand,if the entire$5.6 billion were surpluses that prepares for the next economic
committed to ongoing spending prior to 2015-16, downturn while paying for past commitments,
under this scenario the operating deficits would maintaining existing programs,and making new
grow by a similar amount(to perhaps$6.5 billion commitments.
in 2015-16 and$8 billion in 2016-17),requiring
the Legislature and the Governor to address large Preparingfor the Next Economic Downturn.
budget shortfalls.This illustration demonstrates In our view,this is the most important category
the importance of building a sizable reserve in in Figure 4 during the early years of our forecast.
preparation for the next economic downturn. Building a strong reserve and repaying some
8 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
of our budgetary liabilities would enhance the could begin to pay down the non-Proposition 98
state's fiscal condition in preparation for the next items in the wall of debt not already assumed
economic downturn. In Figure 4,we suggest to be repaid under our forecast,including
the state aim for an$8 billion reserve in the settle-up payments to schools and community
state's Special Fund for Economic Uncertainties colleges.this approach satisfies the dual goals of
by 2016-17. (We chose a target of$8 billion (1)building a strong reserve and(2) eliminating
based on the size of the reserve envisioned the budgetary liabilities before the temporary
by Proposition 58 [2004].)We suggest that taxes authorized by Proposition 30 expire at the
the Legislature begin building this reserve by end of 2018.
maintaining the entire$2.4 billion carry-in
reserve from 2013-14 that we forecast. Given Paying for Past Commitments.While our
that we are nearly halfway through 2013-14,the recent fiscal forecasts have indicated a sharp
strategy for other categories in Figure 4 would turnaround in the state's budgetary condition,we
begin with the 2014-15 fiscal year.As discussed have continued to highlight various retirement
in Chapter 3,if the Legislature used all of the obligations that remain unaddressed.Most
additional funds that would be provided to notably,these include the$71 billion unfunded
Proposition 98 in our forecast for 2012-13 and liability for pension benefits already earned
2013-14,along with half of the growth in 2014-15, by the state's teachers and administrators.The
the state could retire at least three-quarters of University of California%(UC's) pension plan
the Proposition 98 obligations in the Governor's also must continue addressing a significant
wall of debt. In 2015-16,we show how the state funding issue,and state and California State
Figure 4
An Approach to Using Possible Surpluses
General Fund and Education Protection Account Combined(In Billions)
0i 2m4-05 2015d6 2016.17 201748a 201849a 2019.21
LAO Operating Surpluses $2.4b $3.2 $5.6 $8.3 $9.6 $9.6 $9.8
Prepare for Next Downturn
Build$8 billion reserve by 2016d7 2.4 1.9 1.9 1.9 - - -
Payoffremainderof'wallofdeaf¢ - - 1.2 2.3 3.1 - -
Pay for Past Commitments
Pay down unfunded retirement liabilities(CalSTf16, - 0.5 1.0 1.5 2.0 2.5 30
retiree health,and UC pensions)
Maintain Existing Programs
Inflation increases for various state programs' - 0.4 0.6 1.2 1.8 2.5 3.2
Create New Commitments
Program expansions,tax reductions,and infrastructure - 0.5 1.0 15 2.0 2.5 3.0
a Operating operate no erNrely allocated In these years.
b Ramets progxled yearend resew oi$24 hllon.
c Cat of paying off Governors wall of detM in excess of amounts already assumed in our baseline forecast Ircludes consul Me up,deterred MedrCal costs,
Jaipty payroll ordered,and Cdlllornia PUMk Stationary'Retirementt System demonal.Inclludes papal repaymet of treat fund leans and mandate reRLuraemeMs toddies
and aunties,a some N these amourds are assumed to be repaid in our baseline forecast.
d Cost 0providing Intlatlon Increases to Mate programs that are not assumed to reserve such increases In our haseliMe toreeast such as X.CSU,SSP grants,the mudded
branch,and Caliendo Department of Consumers and Rehadholion.Pmuou,in 2014-15 and 201516 are net of recently reported employee compnse400 variants arrive
assumed In am besMlne reserve.
CaISTRS=California State Teachers Retirement System',retiree heats-caer post employment address(health and dental) and SSP=Stater Supplementary Payment.
Legislative Analyst's Office www.lao.ca.gov 9
California's Fiscal Outlook
University(CSU)retiree health benefits are not for new commitments beginning in 2014-15.
being funded as employees earn those benefits. We estimate that the 2014-15 Proposition 98
The approach outlined in Figure 4 would commit minimum guarantee will increase$6.4 billion
an additional$500 million each year to address compared with the 2013-14 spending level.
these liabilities,which would result in$3 billion Outside of Proposition 98,gradual spending
of total new annual funding for these liabilities increases would avoid overcommitting state
by 2019-20.Even if the state provides this added resources,thereby reducing the possibility of
annual funding,additional payments from other future budget imbalances in the event of an
units of government and public employees—or economic downturn.As a rough example,the
other policy changes—would be required to approach in Figure 4 provides$500 million
address these unfunded retirement obligations in new commitments each year above totals
over the next three decades or so. already assumed in our forecast for program
restorations/expansions,tax reductions,and
MaintainingBxistingPrograms. State infrastructure spending(including any future
laws adopted in 2009 ended automatic bond authorizations,such as a water bond).By
inflation adjustments for many state programs. 2019-20,this would result in$3 billion for such
(Some programs are either exempt from this new commitments.
requirement or must provide adjustments by
federal rules.)If a program's budget is held Importance of Balanced Strategy
constant over a given period,public services are Overcommitting Now Could Bring Back
in a sense reduced by inflation for that period. Budget Shortfalls. The state's elected leaders have
This is because as the price of goods and services made very difficult choices in recent years that
increase over time,a fixed dollar amount is able were necessary to eliminate the state's structural
to purchase less goods and services. Over the budget deficit.These choices included reductions
past few years,this has been a minor problem in ongoing spending commitments,as well as
because inflation rates have been very low.Over the temporary taxes authorized by the voters in
the next few years,however,inflation may return Proposition 30.The state's actions,combined
closer to historical norms.When this occurs, with modest economic growth over the past few
there will be more spending pressures on state- years,have put the state budget on the verge of a
funded programs.Figure 4 shows the cost of possible multibillion dollar surplus.Continuing
providing inflation adjustments to programs that to improve the state's fiscal health will require
do not already receive such adjustments in our a balanced strategy of building reserves,
forecast.These programs include UC,CSU,State retiring budgetary liabilities,and paying for
Supplementary Payment(SSP)grants,and the past commitments.Such a strategy would also
judicial branch. (Amounts listed in Figure 4 for allow our current programs to keep up with
2014-15 and 2015-16 are net of costs in recently inflation and provide an opportunity to make
negotiated pay increases for state employees.) new program commitments. If,however,too
many ongoing spending commitments are made
Creating New Commitments.The Legislature too soon,and a prudent reserve is not built up
has implemented billions of dollars in cuts in the next few years,the state budget could be
over the past decade. Clearly,there is pent unprepared for the next economic downturn.In
up demand for restoring some of those cuts, that case the state's elected leaders could be faced
as well as creating new commitments.It is with many of the same difficult choices that they
appropriate for the Legislature to begin debating were forced to make over the past decade.
how to prioritize the use of possible surpluses
10 www.lao.ca.gov Legislative Analyst's Office
Chapter 2
The Economy and Revenues
THE ECONOMY
Figure 1 (see next page) summarizes our All of these forecasts assumed the same three
current forecast assumptions for the U.S.and factors—described above—helped fuel this
California economies between now and 2020. recovery.In general,however,we now forecast
Our forecast assumes continuation of the somewhat weaker economic growth for the
current economic recovery,but at a somewhat nation and California in 2013 and 2014,as
faster pace than recent years. The recovery is compared to our last forecast in May. Federal
projected to be driven by the following key fiscal and tax policies—and,to a minor extent,
factors: the uncertainty resulting from last month's
shutdown and debt ceiling debate—seem to
• The recovery of housing markets be slowing economic growth somewhat in
(discussed later in this section). 2013. (Significant methodological changes
affecting the calculation of personal income
• Little or no additional fiscal contraction and various other national and state economic
by the federal government over the next data—especially changes to state personal
few years and a gradual tightening of income calculations implemented by federal
monetary policy by the Federal Reserve data agencies in late September 2013—make
(also discussed in this section). it difficult to compare our current personal
• Improving job markets, accompanied income forecast to prior forecasts.)
by a decline in national and state While several key economic variables
unemployment rates. are weaker than assumed in our most recent
forecast, stock prices were considerably
Comparisons With Recent Economic stronger through early November 2013 than
Forecasts. Figure 2 (see page 13) compares our office assumed earlier this year.This has
some key forecast assumptions for the U.S. important implications for the state's personal
and California in 2013 and 2014 with those income taxes,which we discuss later in this
of some other recent forecasts by our office, report.
the state's Department of Finance,and the
UCLA Anderson Forecast,a research effort of The possibility of a Future Recession. A
the UCLA Anderson School of Management. recession occurs when there is a significant
Legislative Analyst's Office www.lao.ca.gov
California's Fiscal Outlook
decline in economic activity that spreads across severity of the most recent recession-the longest
the economy and lasts at least a few months. and deepest since World War II-may give rise
Our economic forecast currently does not to a longer than average economic expansion
assume that a recession occurs between now and that lasts well into the late 2010s or early 2020s.
2020,but of course,one is possible.Consistent In other words,with growth currently so slow
with other mainstream economic forecasters,we and so many unemployed,it may be a while
generally assume in our forecast the continuation before the economy"overheats'again and then
of the current economic expansion cycle in contracts. On the other hand,recessions could
line with projected long-term trends.In other be triggered by various causes that are difficult to
words,like most economic forecasters,we do not predict(such as a terrorist attack or international
presume that we can predict the timing of future conflict),and therefore,a recession could occur
recessions or significant economic downturns. at any time.In Chapter 1,for example,we
discussed how one future,hypothetical recession
The current,slow national economic scenario might affect state finances.
expansion began in June 2009.Since the Civil
War,the longest U.S.economic expansion lasted Federal Policy
ten years(from March 1991 to March 2001). The federal government is the nation's largest
Since World War 11,the average U.S.economic employer and purchaser of health care services.
expansion has lasted just under five years.The It levies considerably more taxes than either
Figure 1
LAO Economic Forecast Summary
United States 2013 2014 2015 2016 2017 2018 2019 2020
Percent change in:
Real gross domestic product 1.5% 2.5% 3.2% 3.2% 3.1% 2.9% 2.8% 2.5%
Personal income 2.8 4.7 4.9 5.2 5.4 5A 4.8 4.5
Wage and salary employment is 1.7 1.8 1.8 1.6 1.2 0.9 0.7
Consumer price index is 1.6 1.7 1.9 1.9 1.9 1.9 2.0
Unemployment rate 7.5% 7.1% 6.5% 6.0% 5.7% 5.4% 5.1% 5.0%
Housing starts(thousands) 914 1,152 1,481 1,611 1,605 1,613 1,634 1,615
Percent change from prior year 16.7% 26.1% 28.5% 8.8% -0.4% 0.5% 1.3% -1.2%
S&P 500 average monthly level° 1,637 1,780 1,850 1,930 1,992 2,055 2,128 2,203
Average target federal funds rate 0.1% 0.2% 0.4% 2.2% 3.8% 4.09/6 4.0% 4.0%
California 2013 2014 2015 2016 2017 2018 2019 2020
Percent change in:
Personal income 2.1% 5.41/ 5.5% 5.5% 5.6% 5.41A 5.41/ 5.2%
Wage and salary employment 1.7 2.2 2.0 1.8 is 1.2 1.4 1.3
Consumer price index is 1.6 1.7 1.9 1.9 1.9 1.9 2.0
Unemployment rate 8.9% 7.8% 7.1% 6.5% 6.0% 5.7% 5.3% 4.9%
Housing permits(thousands) 88 120 136 149 155 158 160 161
Percent change from prior year 50.4% 36.1% 13.9% 9.6% 3.7% 1.8% 1.3% 0.9%
Single-unit permits(thousands) 40 61 68 76 78 79 78 78
Multi-unit permits(thousands) 48 59 68 74 77 79 82 84
Population growth rate 0.8% 0.9% 0.9% 0.8% 0.7% 0.7% 0.7% 0.7%
AswmesS&P elotn Index remalne faits net al around 1,7e0,an seem,from October 25,W13 through Me"31,2014 ant thereafter grows more slowly Nan the rote of
gromhofnwninugmesdom lloproduct.
12 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
state or local governments. Federal regulations current quarter(October through December
also affect most parts of the economy.The 2013). Our office's economic forecast-largely
U.S.government's fiscal,policy,and monetary developed in the first half of October during
decisions,therefore,affect virtually every the shutdown-assumes that 2013 annual real
element of our economic forecast.This section gross domestic product(GDP) growth is between
discusses the effects of the October 2013 federal 0.1 and 0.2 percentage points lower than it
government shutdown and debt ceiling debates, otherwise might be due to the various negative
how currently restrained federal fiscal policy effects of the shutdown and debt ceiling debate.
affects our forecast,and our forecast assumptions (Other actions of the federal government earlier
concerning monetary policy. this year-discussed later in this section-
resulted in an additional drag on 2013 growth.)
Effects of Shutdown and
Debt Ceiling Debate The main effects of the shutdown and debt
Assumed Slowdown in Growth in Late 2013. ceiling on economic growth may have been the
Two key events-the partial shutdown of federal loss of some economic activity and hiring by
government operations in October 2013 and federal contractors during the current quarter,
uncertainty about whether federal leaders would as well as increased consumer and business
increase the government's maximum authorized uncertainty.Because the shutdown has affected
debt levels(the"debt ceiling")-are believed to federal economic data gathering(and is resulting
have slowed U.S.economic growth during the in one-time changes to certain economic
Figure 2
Comparing LAO November Forecast With Other Recent Forecasts
2013 2014
LA0 DOF UCLA LAO LAO DOF UCLA LA
May May Sept. Nov. May May Sept.
MWW 2013 2013 2013 2013 2013 2013 2013
United States
Percent change in:
Real gross domestic product 2.0% 2.0% 1.5% 1.5% 2.8% 2.8% 2.89/6 2.5%
Personal income 2.8 2.8 2.6 2.8 5.1 5.1 5.1 4.7
Wage and salary employment 1.5 1.5 1.6 iS 1.6 1.6 1.6 1.7
Consumer price index 1.4 iS 1.5 1.5 1.6 1.9 1.7 1.6
California
Percent change in:
Personal income' 3.3% 2.2% 3.8% 2.1% 5.9% 5.7% 5.71/6 5.41/6
Wage and salary employment 2.0 2.1 1.7 1.7 2.5 2.4 1.9 2.2
Unemployment rate 9.3% 9.4% 8.9% 8.91% 8.3% 8.6% 7.9% 7.8%
Housing permits(thousands) 91 82 79 88 123 121 104 120
a State amid natlOnel personal Income data,as well as U S.gross domestic product and otter fetlers data,now paper vdran s methodological changes that were implemented
by federal data eg..,.a duhng tend 3.For state personal'mcome data,for example,swed,changes began to be implemented at the eM of Sephardi both the LAO and
DOF May[contexts.as won as Me Wil September forecast State personal Income forecasts in November and haler,tMrelore,are not dreffircomparable to prior forecasts.
In iddhion,the LAD and DOF Maypem oral Income forecasts for 2013 assumed Andally iWn&el lands of 2013 call personal income,M reflected different commerce,
about Me preNWs where Iowa 01 FgRonal Income In the gate.
DOF=Department of Final OCIA=Dnivereity of California,Los Angeles'Anderson School of Management Forecast.
Legislative Analyst's Office www.lao.ca.gov 13
California's Fiscal Outlook
statistics for the month of October),it will deadlines.If our assumption proves incorrect and
take some time before the effects of the federal the 2014 deadlines result in additional drags on
debates can be known with a higher degree of economic growth,various economic metrics—
confidence. GDP,personal income,employment,stock prices,
and other assumptions—could be negatively
Shutdown and Debt Ceiling Deadlines affected,and California's fiscal situation could be
Not Assumed to Affect Economy in 2014. weakened to an unknown extent.
Enactment of a continuing appropriations act on
October 17 ensured that the federal government Forecast Could Be Affected by Major Tax,
avoided defaulting on debt or its other spending Budget,and Other Policy Choices. Our forecast
commitments until at least a few weeks after the also could be affected to the extent that federal
next formal debt ceiling deadline:February 7, leaders come to agreement soon on some of the
2014.As occurred this year,the U.S.Treasury major policy issues they have been discussing,
will be able to use`extraordinary measures'in including changes to the nation's tax code,
other federal accounts to avoid default until a alterations to future health and Social Security
few weeks after the February 7 deadline—likely benefits,modifications to the 2010 health care law
until some point in March,a period during which known as the Patient Protection and Affordable
the Treasury typically sends out large amounts Care Act(ACA),and changes to immigration
of individual income tax refunds.The act also policies.These types of changes could affect
funds the federal government until January 15 various aspects of the economy in significant
at current spending levels—reduced earlier this ways—either positively or negatively.
year under the U.S.government's sequestration
process for automatic spending reductions. Spending on health care makes up 18 percent
Accordingly,after January 15,another partial of U.S.GDP.Implementation of the ACA
government shutdown is possible. will affect many decisions by businesses and
employers,state and local governments,insurance
While these federal deadlines create the companies,and health care providers.Both our
possibility of additional economic disruptions state spending and economic forecasts contain
in early 2014,our forecast assumes little or no various assumptions about health care costs
economic slowdown next year related specifically in future years.It is likely that the significant
to those deadlines. Financial markets and changes resulting from the new law will result in
many other participants in the economy seem economic changes that differ from those assumed
desensitized to the recurring budget debates in in mainstream forecasting models,such as those
Washington,and with the last shutdown,federal in our forecast.This will affect both the U.S.and
leaders acted on a bipartisan basis to repay federal California economic forecasts in the future—
workers who were prohibited from working either positively or negatively.
during the period. (If such repayments occurred
after any future shutdowns,the economic impact Restrained Federal Fiscal Policy
would be minimized.)Our forecast assumption— The U.S.government runs annual budget
for little or no economic effect next year due to deficits in most years.It issues sovereign
these federal debates—will more likely prove debt—U.S.Treasuries—to the investing public
to be correct if federal leaders either come to and to certain government accounts(such as the
agreement quickly on 2014 budget matters or pass Social Security trust fund)to fund those deficits.
yet another continuing appropriations bill and The annual budget deficits and total federal debt
debt ceiling expansion in advance of the current each are expressed as a percentage of GDP in any
14 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
given year.Currently,the annual budget deficit points.This federal fiscal policy drag is greater
of the federal government totals about 4 percent than in any other year since the defense
of GDP,and total federal debt held by the public drawdown that followed World War II,according
totals 73 percent of GDP. to that firm. Other estimates vary.If,however,
one assumes that the Moody's analysis is correct,
Shrinking Recently,Deficits Expected to this would mean that,if federal fiscal policy
Grow in the Future.In recent months,as a result were economically neutral(producing no fiscal
of various federal tax and spending actions,the drag),our forecast might be for real GDP growth
end of spending for recession stimulus programs, in 2013 of about 3 percent—roughly double the
and the recovery of the economy,the federal level of economic expansion we are currently
government's annual budget deficits have shrunk projecting.
considerably—from 10 percent of GDP in 2009
to roughly 4 percent of GDP now.Health care Forecast Assumes No Additional Major
inflation also has been slowing,contributing to Federal Fiscal Restraints.With the federal
lower annual deficits.The Congressional Budget sequestration policy scheduled to ramp up in the
Office(CBO) estimates that deficits would coming months,it appears that the economic
decline further under current federal policies to drag from federal fiscal restraint is approaching
2 percent of GDP by 2015.Deficits are forecast to its peak,assuming no further substantial
gradually rise again thereafter due to projected increases in taxes or decreases in spending in
increases in interest rates (which increases the near term. Our forecast assumes that federal
interest costs on the national debt),spending policymakers act in the coming months to relax
pressures resulting from the nation's rapidly the currently scheduled sequestration cuts a
aging population,and continued inflation in bit—for example,by reducing scheduled defense
health care costs.According to the CBO,these cuts.For federal fiscal year 2014,the forecast
gradual increases in deficits could take total assumes a federal budget slightly higher than the
federal debt held by the public to near-record $967 billion for annually appropriated domestic
levels—around 100 percent of GDP—by the late and defense programs that was approved by the
2030s.As its sovereign debt levels rise,the U.S. House of Representatives. Federal spending is
economy and federal budgets could become more forecast to grow in future years at less than the
vulnerable to economic shocks.For example, rate of nominal GDP growth.Our economic
the federal government could be less able to run forecast also assumes the gradual elimination of
deficits,as it did in recent years,to aid state and extended unemployment insurance benefits over
local government finances during recessions. several years,rather than having them disappear
entirely in 2014.
Federal Fiscal Policy Has Slowed the Recent
Economic Recovery. In the past few years,federal Budget Adjustments Will Affect Future
fiscal and policy decisions have slowed the rate Economic Growth.There is general consensus
of U.S. economic growth.In September,Moody's that the federal government will have to
Analytics,an economic advisory firm,estimated implement fiscal and/or tax policy changes to
that the drag on the economy from (1) recent reduce its debt levels in future decades.There are,
sequestration and other federal spending cuts, however,substantial disagreements over when
(2) increases in payroll taxes, (3) increases in and how such changes should be implemented
taxes on high-income earners,and(4)other fiscal and on the size of such adjustments.As CBO
actions that went into effect this year is reducing has noted,federal leaders face trade-offs in
2013 real GDP growth by about 1.5 percentage deciding how quickly to implement policies
Legislative Analyst's Office www.lao.ca.gov 15
California's Fiscal Outlook
to moderate the future growth of federal debt. 2014. Further,the Federal Reserve is expected to
For example,to reduce projected federal debt keep its near-zero federal funds rate target until
in the late 2030s to about 70 percent of GDP, late 2015,when the U.S.unemployment rate is
the combination of increased revenues and assumed to decline to about 6.5 percent. In the
decreased spending would have to equal about later years of our forecast,the federal funds rate
1.9 percent of GDP per year if implemented is assumed to rise again to around 4 percent
beginning in 2025,rather than 0.9 percent of in 2017. (The federal funds rate was last above
GDP per year if implemented beginning in 2014. 4 percent in January 2008.)
(Those simulations omit the effects that deficits
and debt would have on economic growth and Housing
interest rates.Incorporating such effects would By most measures,the recent collapse
make the impact of delaying policy changes even of California's housing market was more
larger,CBO says.)To the extent that these policy widespread and severe than downturns in
changes affect the overall economy,economic other parts of the country. From the peak of
growth for California and the nation may slow in the market in 2006 and 2007 to the low point
the future,relative to past trends. during the housing crisis,a key measure of
Monetary Policy Expected to Tighten home values suggests that they fell about
50 percent.The median home sales price—a
Gradually common measure that is influenced by which
Accommodative Monetary Policy Still in homeowners choose to sell—plummeted from a
Place. In September 2013,the Federal Reserve peak of$600,000 to$245,000.Over roughly the
surprised many financial market participants same period,California shed nearly 1.4 million
by opting to keep in place its current monetary jobs,a contraction of 9 percent.For many,the
policy for the time being.That policy involves interaction of these two declines represented an
both short-term interest rates(specifically, unprecedented shock to household net worth
the federal funds rate) of near zero and and monthly finances. Households have slowly
regular purchases by the Federal Reserve of repaired their balance sheets since then while
both mortgage-backed and longer-term U.S. home prices,especially since early 2012,have
Treasury bonds.These purchases—known as made up substantial lost ground.In this section,
"quantitative easing"—are intended to maintain we discuss housing's role in the California
downward pressure on long-term interest economy,recent trends,and our forecast of
rates,support mortgage markets,and generally housing activity.
boost the slow economic recovery.At the same
time,inflation remains very low,such that the How Does California's Housing Market
Federal Reserve's Open Market Committee Affect the Economy7
has noted that"inflation persistently below its The housing market affects the economy
2 percent objective could pose risks to economic in three major ways:household net worth,
performance." migration trends,and construction activity.
First,rising home prices improve homeowners'
Forecast Assumes Gradual Tightening of financial standing,often leading them to increase
Monetary Policy. As the economy expands, spending.On average,each dollar increase in
gradual tightening of federal monetary policy is home values leads to a three-cent increase in
likely.Our forecast assumes that"tapering"—the spending.By contrast,each dollar decline in
gradual elimination of the Federal Reserve's bond home value leads to a 10-cent reduction in other
purchase programs—starts in late 2013 or early spending.Through this channel,home prices
16 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
affect consumption of goods and services,which homes and should,albeit slowly,increase
has ripple effects throughout the economy. the inventory of homes up for sale(a critical
Home prices also affect migration trends—that transition if the housing market is to normalize).
is,where people decide to live and work.For Though strong price increases come as
example,a localized increase in house prices comforting news for many homeowners,we view
beyond what occurs in the rest of the country the pace of the recent gains as having more to
makes residing in California comparatively do with short-term supply constraints than with
more expensive,resulting in a negative effect on underlying growth in the state's economy.
population growth.The final way housing prices
affect the economy is more indirect.Rising prices Why Have Home Prices Groton So Quickly?
encourage new construction.An increase in In the short-term,job growth and wage gains
construction jobs typically spurs job growth in boost demand for single-family housing,putting
other sectors that are dependent on local demand upward pressure on prices.Higher prices tend to
such as retail and restaurants. compel more owners to put their homes on the
market.The supply of additional homes absorbs
Although construction activity and existing demand,causing price increases to slow
employment are crucial to the state's near-term or stop altogether.In step with an improving
prospects,construction itself cannot sustain a economy,the demand for housing increased
local economy over the long-term.This is because in early 2012,yet the supply of homes did not
economic growth,including demand for new respond accordingly.Instead,short-term factors
housing,relies on increased overall income in an limited the number of available homes,driving
area.This,in turn,can be spurred by such sectors prices up 25 percent since January 2012.These
as manufacturing and technology,which sell factors include:
products in national and international markets,
thereby capturing outside income. • Cash Investors.Nationwide,6 million
owner-occupied single-family homes
Recent Trends:Is the Housing Market converted to rental units over the course
Returning to Normal? of the housing crisis.In most of these
California s housing sector improved broadly cases,investors purchased distressed
during 2012 and the first half of 2013.One homes in cash and converted them to
year ago,we noted that a sustainable housing rentals,sometimes purchasing hundreds
recovery appeared imminent.After losing of homes at one time.In Los Angeles,
ground throughout 2011,California single- cash purchases as a portion of all home
family home prices have climbed 25 percent. sales increased from 5 percent in 2005
Though initially led by the state's coastal areas, to 34 percent in May 2013,the largest
home price appreciation is now widespread, increase in the country.Other areas of
with year-to-date increases that exceed 8 percent California have similarly high all-cash
in each of the state's 28 metropolitan regions. sales rates.Investor demand pushed
These gains indicate healthy housing demand, prices upward—a helpful boost for
but also help to mend household balance sheets many distressed areas of the state—but
as price appreciation boosts homeowner equity. also contributed to reductions in the
Equity improvements reduce the number of inventory of owner-occupied homes for
"underwater"homeowners,whose outstanding sale,which,as shown in Figure 3(see next
mortgage balances exceed the value of their page),has contracted significantly since
January 2012.
Legislative Analyst's Office www.lao.ca.gov 17
California's Fiscal Outlook
Figure 3
Home Inventories Have Fallen Significantly
Number of Months Needed to Sell All For-Sale Homes, if Current Number of Sales Per Month Continues
14
January 2013
12 ■ September 2013
10
9
.... Historical Average ................. ............ ........... .......
6
4
2
Less Then$200,000 $30g000-$500,000 $500,000-$750,000 $750,000-$1 Million More Than$1 Million
• Strategic Sellers. The supply of homes for less than 15,000 in the first seven months
sale depends primarily on the eagerness of of 2012 to more than 21,000 in the first
current homeowners to sell.Short supplies seven months of 2013.Though large in
indicate a general unwillingness or an percentage terms,this gain represents
inability to sell.Unwilling owners may a historically small response relative to
wait to list their homes so as to benefit the price increases seen over the same
from expected upward price trends, period. (For comparison,the first seven
especially as price gains are accelerating. months of 2002 saw 72,000 single-family
A national survey of homeowners from permits.)In our view,it appears that
earlier this year found that only 25 percent single-family homebuilders,and,perhaps,
of owners felt it was a good time to sell their lenders,have remained cautious,
(whereas two-thirds agreed it was a good wary that increased supply in the short
time to buy),a sign that potential sellers term could dampen prices,threatening
are waiting.On the other end,more than the profitability of newly constructed
15 percent of California homeowners homes.Restricted credit,as well as
remain underwater on their homes.This land-use and development constraints
means some would-be sellers are unable to in some areas,also maybe holding
do so,keeping a sizable share of the state's back some new construction.Until
housing stock off the market homebuilding quickens,home demand
will not be tempered much by new home
• Cautious Homebuilders. Responding to construction.
rising home prices,construction activity
has begun to improve.Authorized Latest Data Suggest Home Prices Are
single-family permits,the first step in Decelerating to More Normal Trends.Recent
constructing a new home,increased from price gains appear to be decelerating.Rising
18 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
mortgage rates and expanding inventories have particular,we expect home price growth to
likely contributed to this deceleration.Interest decelerate significantly,to 7 percent in 2014.We
rates on a 30-year fixed rate mortgage have project that construction activity,responding to
climbed 1 percentage point since May,equating recent price and rent increases,will post strong
to a 15 percent increase in the monthly payment gains in 2014(as shown in Figure 4).In 2014,we
on a$200,000 loan.In turn,increased mortgage forecast residential housing permits to increase
costs have cooled housing demand.In August and by 31,000 units to 120,000 permits total.Permits
September,home inventories expanded for the are projected to increase to 136,000 units in 2015
first Lime in a year.These data inform our home before stabilizing around 160,000 units annually
price forecast for 2014,which is described below. by the end of our forecast period.Compared to
past years,multi-family unit permits are projected
Looking Ahead:Housing Strength Expected to make up a larger portion of newly constructed
to Normalize housing stock.Our residential permits forecast
We view the pace of recent price gains as has been lowered notably since our prior forecast,
unsustainable,and accordingly expect housing released in May 2013,due primarily to our
inventories to expand as more homeowners feel it lower expectation for new single-family home
is a good time to sell,as cash investor purchases construction.We caution,given the sizable shifts
decline,and new housing construction begins to taking place in today's housing market,that actual
ratchet up,each of which should absorb existing price gains and construction activity in the coming
demand and therefore slow price increases.In years could vary widely—either above or below—
our office's forecast over the next few years.
Figure 4
Residential Construction Projected to Return to Normal Levels
225,000
200,000 Mufti-Family PZ"
Single-Family Pem115
Projected
175,000
150,000
125,000 —
100,000 —
75,000
50,000
25,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Legislative Analyst's Office www.lao.ca.gov 19
California's Fiscal Outlook
REVENUES
Figure 5 summarizes our November 2013 2011-12,2012-13,and 2013-14 combined have
multiyear General Fund revenue forecast. increased since May by over$3 billion.As shown
in Figure 6,we now project that General Fund
In June 2013,the Legislature approved the revenues and transfers for 2011-12,2012-13,and
2013-14 Budget Act.The State Constitution 2013-14 combined will be$6.4 billion higher
requires the Legislature to determine the revenue than the amounts assumed in the 2013-14
estimates underlying each annual budget,so state budget plan. For 2012-13,state collections
that the budget meets the requirements for a exceeded forecasts. For 2013-14,most of the
balanced budget in Proposition 58(2004).In increase in our forecast since May results from
developing the 2013-14 budget,the Legislature higher assumptions concerning capital gains
considered both our office's May 2013 revenue and some other categories of taxable income
forecast,as well as the May 2013 revenue attributable largely to higher-income personal
forecast of the administration.Compared to the income tax(PIT) filers.Our increased capital
administration's forecast,our office's May 2013 gains assumptions result primarily from stronger
forecast projected$3.2 billion more in General stock market and real estate market performance
Fund revenues and transfers across the three since May.
fiscal years(2011-12,2012-13,and 2013-14),due
principally to our higher assumptions for capital Personal Income Tax
gains-related personal income taxes in 2013 PIT Collections Running Stronger than
and 2014.The Legislature and the Governor 2013-14 Budget Act Forecast. In 2012-13,
agreed to base the 2013-14 budget plan on the revenue collections were stronger than projected
administrations May 2013 revenue forecast. by either our office or the administration in May
Figure 6 compares our November 2013 revenue 2013.Through the end of October,2013-14 PIT
forecasts by fiscal year with those assumed in the estimated payments-tied in large part to capital
2013-14 budget. gains and business income-have exceeded
Higher Revenues Now Projected, Compared the administration's monthly projections by
to 2013-14 Budget Assumptions. Our offices 34 percent.Several key PIT payment dates
projections for General Fund revenues in remain during the fiscal year,but to date,the
Figure 5
LAO November 2013 Revenue Forecast
General Fund and Education Protection Account Combined(In Billions)
JEW 2012-13 2013-14 2014-15 2015.16 2016-17 2017.18 2018-19 2019
Personal income tax $65.0 $66.0 $71.4 $75.9 $79.6 $83.2 $82.9 $84.1
Sales and use tax 20.5 22.8 23.6 24.9 25.4 25.8 27.0 28.2
Corporation tax 7.7 8.3 8.9 9.5 10.1 10.6 11.2 11.8
Subtotals,"Big Three taxes (S93.2) ($97.11 ($103.8) ($110.3) ($115.1) ($119.6) ($121.1) ($124.1)
Insurance tax $2.2 $2.2 $2.3 S2.4 $2.5 $2.6 $2.7 $2.8
Other revenues 2.7 2.3 1.9 1.9 to 1.8 1.8 1.8
Net transfers and loans 1.7 0.3 -0.4 -0.8 -0.4 0.2 0.3 0.3
Totals,Revenues and Transfers S99.8 $101.8 $107.6 $113.8 $119.0 $124.2 $125.8 $128.9
20 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
available information suggests that PIT revenues the initial public offering(IPO)of stock by
are running considerably stronger than was Facebook,Inc.,and one-time accelerations of
assumed in the budget act. various types of income in 2012 by high-income
taxpayers—especially accelerated realizations
Uncertainty remains,however,given that 2012 of capital gains. (Such accelerations of income
income tax collections were elevated for a variety allowed some taxpayers to avoid higher federal
of reasons,as discussed below,and preliminary tax rates that went into effect for some in 2013.)
tax agency data on what was reported on 2012 PIT For tax year 2012,by our office's estimation,
returns will not begin to be made available until a capital gains seem to have produced slightly
few weeks from now. (Final tax agency data related over$10 billion of revenue for the state—around
to 2012 returns will not be available until several 15 percent of the current annual PIT base.We
months from now.)Moreover,the performance of now estimate that 2012-13 PIT revenues will
the stock market has been much stronger than our end higher than the levels projected in both the
office assumed in May,and stock performance in LAO and administration May 2013 forecasts.
the coming few weeks will affect 2013 capital gains Specifically,our current estimate of 2012-13 PIT
to some extent.Uncertainty also results from the revenues—$65 billion—is$1.1 billion above the
states complicated revenue accrual methodologies, 2013-14 Budget Act assumption,which was based
which move some PIT and other revenues from on the administration's May 2013 forecast.
one fiscal year to a prior one for budgetary
accounting purposes.We discuss accruals in the ... Which Means PIT Growth to Be Much
box on the next page. Slower in 2013-14...In our May 2013 forecast,
we projected that PIT collections would fall by
Key Forecast Trends 0.2 percent in 2013-14—an unusual assumption
2012-13 PIT Collections Were Elevated... since PIT revenues typically fall only in recession
PIT collections grew substantially in 2012-13 years.Because so much income was accelerated
due to voters'approval of Proposition 30,large from 2013 to 2012 to avoid higher federal taxes,
one-time withholding payments related to we assumed that net capital gains realizations by
Figure 6
Comparing LAO November 2013 Revenue Forecast With 2013.14 Budget Act Forecast
(General Fund and Education Protection Account Combined,in Millions)
201E-1 2013-14
2013-14 LAO 201344 LAO
Budget Act Nov.2013 Budget Act Nov.2013
Forecast Forecast Difference Forecast Forecast Difference
Personal income tax $63,901 $65,030 $1,129 $60,827 $66,002 $5,175
Sales and use tax 20,240 20,482 242 22,983 22,809 -174
Corporation tax 7,509 7,669 160 8,508 8,278 -230
Subtotals,"Big Three"taxes ($91,650) ($93,181) ($1,531) ($92,318) ($97,089) ($4,771)
insurance tax $2,156 $2,249 $93 $2,200 $2,163 $37
Other revenues 2,641 2,664 23 2,249 2,254 6
Net transfers and loans 1.748 1,748 331 342 10
Totals,Revenues and Transfers $98,195 $99,841 $1,646 $97,098 $101,847 $4,749
Note:OuroXloiecurria b12 revenue esgmatesincoNoreting,as beat we can,the net final payment aurrual reethodi for Proposition 30 and 39 revenues and other
bubgelaly revenue attnul pudean gt the state-are$21 ealion higher than aewmetl In the 201314 Budget kt
Legislative Analyst's Office www.lao.ca.gov 21
California's Fiscal Outlook
Legislative Action Needed to Oversee Complex Accrual Process
Prior-Year Revenue Estimates Now Change for at Least Two Years Thereafter.As the
2014-15 budget process begins,we think it is important to emphasize that,under the new
"net final payment"accrual process authorized in recent annual budgets for Proposition 30
revenues,personal income tax revenues essentially are still changing for 2011-12.As we under-
stand the accrual process,2011-12 revenue estimates should keep changing until at least May
2014,given that estimates of 2012 capital gains—a key driver of Proposition 30 revenues for
that year—will change until at least that point in time,as tax agencies review and`sample"for
statistical purposes more and more 2012 tax returns.Total 2012-13 revenues will change until
May 2015,and so on.Even as legislators make budget decisions and weigh various uncertainties
about 2013-14 and 2014-15 revenue and spending,they may know less than ever before about
the previous two fiscal years'budget results and the state budget reserves remaining therefrom.
We acknowledge that our revenue estimates may be too high or too low by hundreds of
millions of dollars per year—or,in some scenarios,over$1 billion per year—due simply to the
challenges we face in making projections concerning this complex part of the budget process.
Revenue Calculations Will Affect Future Budgeting.If the administration follows its past
practice,it will not display in its 2014 budget publications up-to-date estimates of 2011-12
revenues based on these accrual changes. Based on past practice,2011-12 revenues would
have been"closed"in 2013.Any changes to prior-year revenues—often minor under past
accrual policies—would be listed,along with many expenditure reconciliations,as changes
to the incoming General Fund balance. If the administration sticks to this past practice,the
Legislature will lack complete,transparent access to information that would be important to
budgeting—especially information that will help them decide whether Proposition 98 obliga-
tions have been appropriately estimated.
We recommend that the Legislature require the administration to display publicly for
budgetary decision-making purposes the adjusted prior-year revenue amounts included in its
adjustments to the incoming General Fund balance.Such prior-year revenue changes should
be incorporated in all historical documents related to state revenues—otherwise,the reliability
of that historical data could decline significantly.Finally,we recommend that the Legislature
require the administration—at least once a year on its website—to describe in plain English
each of the calculations used to move revenue from one fiscal year to a prior year via the accrual
process.
California residents would fall by 30 percent in assumption for that year is now a few percentage
2013,affecting both estimated payments in late points higher than it was in May.Moreover,
2013 and January 2014.Since May,however,the our 2014 capital gains assumption—which also
performance of the stock market has exceeded affects 2013-14 PIT collections—has risen by over
our prior assumptions.While we continue to 10 percent,given the recent growth in stock prices.
assume a large drop in net capital gains realized Our new forecast also assumes stronger growth
by California taxpayers in 2013,our capital gains for PIT withholding—revenue collections that
22 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
result mainly from Californians'wage income. We are now projecting that PIT revenues
This assumption seems more consistent with will comprise two-thirds of total General
recently strong year-over-year PIT withholding Fund revenues in 2014-15—the highest such
growth(after adjusting for the one-time percentage recorded to date in California history.
withholding payments resulting from the Proposition 30—with its temporary marginal tax
Facebook IPO in October 2012).After accounting rate increases for high-income households—has
for accruals,we now forecast that 2013-14 PIT increased PIT revenues recently.The percentage
revenues will rise by 1.5 percent to$66 billion. of the budget paid for from PIT revenues also has
This is$5.2 billion above the amount assumed in risen recently due to other tax policy changes.
the budget approved in June. Specifically,the shift of a portion of the state's
sales and use tax(SUT)from the General Fund
...And PIT Should Bounce Back in 2014-15. to local realignment accounts and a few other
The acceleration of large amounts of revenue changes have reduced the percentage of the
from 2013 to 2012 artificially depresses growth General Fund paid from other revenue sources,
in PIT revenues in 2013-14.Accordingly,both thereby increasing the share of the General
our office's forecast and the administration's Fund paid by the PIT.Finally,the amount of
forecast have projected that the growth rate for taxable income received by the top 20 percent
PIT revenues will bounce upward in 2014-15.In of taxpayers has,in real terms,grown much
this forecast,we project that PIT revenues grow faster than the amounts for middle-income and
by 8 percent to$71 billion in 2014-15. lower-income taxpayers in recent decades.As
these higher-income taxpayers pay the highest
2015-16 and Beyond.Our forecast assumes marginal tax rates,the increasing concentration
roughly 5 percent average annual growth in PIT of income in that group tends to generate
revenues between 2015-16 and 2017-18.This rate significant growth in PIT revenues over time.
of annual growth is consistent with what we
would expect in a mature economic expansion— Our forecast projects that PIT will maintain
such as that assumed in our multiyear economic that two-thirds share of annual General Fund
forecast through 2020—accompanied by some revenues. (As our forecast assumes a fairly
growth in stock and house prices.We then modest level of capital gains—compared to
project much slower growth in 2018-19 and the size of the economy—in future years,this
2019-20 due primarily to the expiration of amount could be higher in particularly strong
Proposition 30's higher PIT rates for high-income capital gains years,and it could be weaker
taxpayers at the end of 2018.This means that the when capital gains are very low.)We note,
PIT revenue loss from Proposition 30's expiration however,that the proportion of the General
will not occur all at once,but instead will be Fund supported by PIT revenues likely would be
spread over those two fiscal years.We now growing even if Proposition 30 were not in effect
project that PIT revenues will fall by 0.4 percent due to more income concentration among the
in 2018-19 to under$83 billion before rising by highest-income taxpayers and the other factors
1.4 percent in 2019-20 to$84 billion. described earlier.
PIT Revenues Make Up Bigger Percentage The Stock Market and Capital Gains
of General Fund Than Ever Before.Prior to the Higher Stock Market Driving Higher PIT
first fiscal year affected by Proposition 30,the Projections in the Near Term.The change from
PIT's share of total General Fund revenues and year to year in the state's net capital gains has
transfers had exceeded 60 percent only once—at proven over time to be closely correlated with
the end of the"dot-corn"bubble in 2000-01.
Legislative Analyst's Office www.lao.ca.gov 23
California's Fiscal Outlook
changes in stock and house prices,as well as assets,every forecast of California's public finances
stock trading volume.Recently,both stock and must reflect an assumption—either explicit or
house prices have been growing rapidly. Our implicit—about the direction of the stock market.
office's May 2013 forecast assumed that the Our forecasting methodology attempts to use
S&P 500 index remained close to its May 14,2013 the most realistic assumptions possible about
level of 1650 through the rest of 2013.As of stock performance in the near term and,to the
October 25,when we finalized our economic extent that these assets seem overpriced relative
assumptions for this forecast,it closed at 1760 to historical norms,to bring them closer to those
(7 percent above our prior assumptions).This is norms over time.Currently,there is not clear
the key reason for the higher capital gains in our evidence that stocks are overpriced significantly
forecast in the near term and a major reason for compared to those norms.Accordingly,we
our higher forecast of 2013-14 PIT revenues. assume stable stock prices in the near term and
modest growth thereafter.
Stock Market Valuations Near Historical
Norms. In general,key stock market valuation Nevertheless,over any given forecast period—
metrics—such as the price-to-earnings(PE) even the next few quarters—stock prices can be
ratio for the S&P 500—are in line with historical expected to differ from any set of assumptions.
norms.Some such metrics are somewhat above They may be lower in some periods,and they
norms,and some are below.We note,however, may be higher in others.This volatility—as well
that PE ratios are considerably below the levels as fundamental changes in stock prices that
experienced during the dot-com bubble,when occur during bull and bear markets—may cause
Californians'net capital gains realizations actual capital gains to differ significantly from
peaked as a percentage of personal income in any forecast.In the near term,for example,
the state at 10.6 percent. Our forecast assumes annual PIT revenues can be$2 billion higher
that net capital gains total 5.9 percent of personal or lower than forecast based on differing
income in 2012,4.3 percent in 2013(lower due capital gains results alone. (Other forecasting
to the income accelerations described earlier), differences could produce additional changes
and 6 percent in 2014.This incorporates an in revenues.)State leaders should consider all
assumption that stock prices remain stable—at of this information when making budgetary
or near their October 25 level—through commitments and determining the level of
March 2014.Thereafter,we assume that stock financial reserves for the state to have at any
prices grow slower than the overall growth of given time.
the U.S.economy,which results in net capital
gains falling to 4.4 percent of personal income Sales and Use Tax
by the end of our forecast period in 2020.This Estimated General Fund SUT revenue totaled
forecasting assumption is intended,in the $20.5 billion in 2012-13,about$240 million higher
context of the economic expansion we assume than the amount assumed in the 2013-14 budget.
through 2020,to keep stock prices near historical In 2013-14,we expect SUT receipts to increase
norms throughout the period. by 11 percent to$22.8 billion(about$170 million
below the 2013-14 budget assumption).The
Volatile Stock Prices Certainly Cannot Be
Projected growth in Proposition
reflects(1)the
Predicted With Precision.Because PIT is the
full-year effect of Proposition 30's temporary
states largest revenue source,and a significant, one-quarter cent SUT increase and(2)projected
volatile portion of that tax is generated from growth in underlying taxable sales of 6.9 percent.
capital gains on the sales of stocks and other In 2014-15,we forecast SUT revenue to increase
24 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
by 3.3 percent to$23.6 billion.This lower revenue to below 5 percent later in the forecast period.
growth is largely due to the new tax credit Similarly,we expect housing permits to grow by
for manufacturing equipment established by 36 percent from 2013 to 2014,with slower growth
Chapter 69,Statutes of 2013 (AB 93,Committee in later years.
on Budget),which begins in 2014-15.(Underlying
revenue growth—that is,without the impacts of 2011 Realignment and Other Local Sales
the credit—is 5.4 percent,in line with projected Taxes. Roughly half of California's sales tax
growth in taxable sales)Projected SUT revenues revenue is distributed to counties,cities,and
then increase by 5.6 percent in 2015-16 before special districts through various mechanisms,
growing more slowly over the following two including the funding stream established to
years as the one-quarter cent Proposition 30 support the 2011 realignment plan.Some factors
SUT increase expires at the end of 2016.Revenue that affect the growth in state General Fund
growth stabilizes towards the end of our forecast, sales tax revenue—such as the Proposition 30
closely tracking projected growth in taxable sales. quarter-cent SUT rate increase and the new sales
tax exemption for certain equipment purchases—
Housing Permits Play a Major Role in the do not affect local sales tax revenues.Instead,
Sales Tax Forecast.The main determinant of growth in taxable sales is the primary driver of
SUT receipts is taxable sales.For a variety of changes in local sales tax revenue.As shown in
reasons,taxable sales and housing permits tend Figure 7,we expect steady growth in 2011 Local
to move together,making housing permits a Revenue Fund sales tax revenue despite the
useful economic indicator for forecasting taxable fluctuations in General Fund sales tax revenue.
sales.House construction generates some taxable Specifically,we estimate that 2011 realignment
sales directly(through purchases of construction sales tax revenues will grow by 7 percent in
materials and other
goods),but it also acts Figure 7
as a proxy for consumer General Fund Sales Tax Revenue Will Fluctuate
confidence,which is More Than 2011 Local Revenue Fund Sales Tax Revenue
difficult to measure
directly.As a result, Percent Change From Prior Year
housing permits can
account for year-to-year 2% •
variation in taxable sales • General Fund
that cannot be explained 10 • 2011 Local Revenue Fund
by variation in personal i
income or nationwide a
retail sales.For taxable
sales and housing 8
permits,we project
significant growth from
2012-13 to 2013-14 and 4
slower growth thereafter. •♦
Specifically,we expect 2
taxable sales to grow
about 7 percent in
2013-14 before falling 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Legislative Analyst's Office www.lao.ca.gov 25
California's Fiscal Outlook
2013-14 and by 5.4 percent in 2014-15.Annual . . .But California CT Revenues Remain
growth in these revenues is expected to increase Depressed.Taxable corporate profits apportioned
slightly to 5.5 percent in 2015-16 and then to California have recovered somewhat but
decelerate to 4.4 percent by the end of the have not returned to their prerecession levels.
forecast period. Despite the strong growth trend in U.S.profits,
California CT revenues have declined in several
Corporation Tax recent years.The precise reasons for this are
Estimated General Fund corporation tax likely varied and will take more time to assess.
(CT)revenue totaled$7.7 billion in 2012-13, The weakness in California CT collections is
$160 million above the 2013-14 Budget Act partially the result of budget actions passed by
assumption.We forecast that CT revenue will the Legislature in recent years to collect revenues
increase to$8.3 billion in 2013-14,$230 million earlier and delay the use of certain tax credits
below the budget act assumption.Thereafter,our and deductions.These measures had the net
forecast projects that CT revenue will increase effect of moving revenue forward to 2008-09
steadily,reaching$11.8 billion in 2019-20. and 2009-10 from future years.While the effects
This reflects an average annual growth rate of of some of these measures may have run their
6 percent. course,the state is only now beginning to feel the
full impact of others,such as the suspension of
Forecasting Complicated by Continued net operating loss (NOL)deductions. In addition,
Uncertainty.As we have noted in prior years, in 2011 and 2012 corporations were permitted
the Legislature and voters(with passage of to choose their preferred method for allocating
Proposition 39)have recently enacted major profits to California.We tentatively estimate that
changes in business tax policy that have this reduced the CT base by about 13 percent
drastically changed the relationships between in 2011 and 2012.Proposition 39 changed this
economic and tax data.In the near term,it is policy by requiring most corporations to use
easy to imagine actual annual revenues for this the"single sales factor"method of apportioning
tax being hundreds of millions of dollars higher multistate and multinational profits to taxation
or lower than our forecast in any given year. It in California beginning in 2013. (The Franchise
may take several years before data is available to Tax Board is unlikely to be able to determine the
help us address these forecasting uncertainties. impact of Proposition 39 with precision until the
spring of 2015,when preliminary CT data for tax
Nationally, Corporate Profits Have year 2013 becomes available.)If the net revenue
Recovered...The vast majority of California change resulting from all of these apportionment
CT revenue is paid by large multistate and changes is negative,this could help explain some
multinational corporations that apportion of the recent weakness in CT collections.
(allocate) a share of their profits to California.
Corporate profits,both nationally and in NOL Deductions Assumed to Increase
California,declined significantly during Tenfold in 2012. The use of NOL deductions—in
the 2007-2009 recession.National corporate which corporations deduct a prior loss from
profits,as estimated by the Bureau of Economic current tax year profits—were suspended for
Analysis,have recovered to their prerecession most corporations for tax years 2008-2011.As
levels and then some.Further,our forecast a result,2012 was the first year in which large
assumes that U.S.profits will grow by 12 percent corporations were able to use NOL deductions
in 2014. since the recession.We assume that increasing
profits will be somewhat offset by widespread use
26 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
of NOL deductions.Our forecast assumes that to retire the principal amounts of these loans are
$30 billion in NOLs were deducted in tax year booked as transfers out of the General Fund,so
2012,declining to around$21 billion per year that when the state repays significant amounts of
by 2020. Should this level of NOL deductions such loans,the net transfers and loans displayed
not materialize,CT revenue could exceed our in Figure 5 tend to be a negative amount.Some
forecast.On the other hand,a higher level of special fund loans have specific repayment dates
NOL deductions could reduce CT revenue. in prior budget acts,and,consistent with case
law,it is state practice to repay funds in cases
Use of Tax Credits Projected to Increase.As when they have an imminent fiscal need for such
profits continue to increase,businesses will be repayment.Based on these criteria,our forecast
more able to use new or previously generated assumes$696 million of special fund loan
tax credits to reduce taxes owed.We assume repayments in 2013-14,$630 million in 2014-15,
that businesses will use a total of$3 billion in $1 billion in 2015-16,$660 million in 2016-17,
tax credits in 2013 and that this level steadily and$100 million in 2017-18. Thus,in our forecast
rises to a total of$3.5 billion in 2020.Increases showing future state surpluses,we assume—
of CT credit usage are slowed,compared to what consistent with these criteria—that$1.5 billion of
they would be otherwise,by our assumptions special fund loans remain outstanding as of the
related to the replacement of enterprise zones end of the 2019-20 fiscal year.
with different tax provisions.The research and
development tax credit accounts for the majority The Governor's wall of debt proposal
of the credits used to offset CT liability.We anticipates a faster retirement of special fund
assume that businesses will use about$2.3 billion loans than indicated in our forecast.His proposal
in research and development tax credits in 2013 would make special fund loan repayments
and that this will rise to$3.2 billion by 2020. the focus of the Legislature's discretionary,
non-Proposition 98 wall of debt payments over
Net Transfers and Loans the next few years.Specifically,the Governor
LAO Forecast Assumes Current-Law Special would dedicate about$1 billion more of General
Fund Repayments. In recent years,to help Fund resources to special fund repayments
balance the General Fund budget,the Legislature through 2016-17—principally in 2015-16.If
approved billions of dollars of loans from several the Legislature were to adopt the Governor's
dozen of the state's special funds—funds for proposal,therefore,this would reduce the
specific programs that are often supported by operating surpluses displayed in some years of
dedicated fee revenues related to the programs our forecast,especially in 2015-16. (The approach
themselves.As of the end of 2012-13,$4.6 billion we discuss in Chapter 1 for using possible
of these loans remained outstanding.Payments General Fund surpluses would repay all special
fund loans—and other parts of the wall of
debt—within a few years.)
Legislative Analyst's Office www.lao.ca.gov 27
California's Fiscal Outlook
28 www.lao.ca.gov Legislative Analyst's Office
Chapter 3
Spending Projections
In this chapter,we discuss our estimates of from 2013-14 through 2019-20.Spending is
spending for 2012-13 and 2013-14,as well as projected to slow considerably in the outer
our spending projections for 2014-15 through years of the forecast.This is principally due
2019-20.Figure 1 (see next page) displays our to healthy growth in local property taxes
expenditure forecast for the General Fund and and the end of the"triple flip,"both of which
the Education Protection Account(EPA) created reduce General Fund spending necessary to
by Proposition 30 (2012). meet the Proposition 98 minimum guarantee.
Across the rest of the budget,we project that
Spending Estimates for Medi-Cal spending will grow at an average
2012-13 and 2013-14 annual rate of 6 percent from 2013-14 through
Higher Revenue Forecast Increases 2019-20.Growth in Cal Grants spending
Proposition 98 Spending.As discussed in (5.8 percent annually) is almost entirely
Chapter 2,our forecast of General Fund due to implementation of a new scholarship
revenues for 2011-12,2012-13,and 2013-14 program beginning in 2014-15.As discussed
combined is about$6.4 billion higher than later in this chapter,spending on California
the 2013-14 budget assumptions.As described Work Opportunity and Responsibility to Kids
below,this results in about$4.8 billion in (CaIWORKs)is projected to decline at a yearly
higher General Fund Proposition 98 spending rate of 13.2 percent during the forecast period
in 2012-13 and 2013-14 combined. In total,our due largely to a decision in the 2013-14 budget
spending estimates for 2012-13 and 2013-14 to offset a significant portion of General Fund
combined are$5 billion higher than the 2013-14 program costs with certain realignment funds.
budget assumptions,2.6 percent above the General Fund spending on Proposition 98—the
combined enacted total for those years. single largest state program—is projected to
grow at only 2.6 percent a year over the period.
Expenditure Growth Total Proposition 98 spending,however,grows
During the Forecast Period at the more rapid annual pace of 4.1 percent,as
Spending Projected to Slow Considerably property tax revenues are assumed to grow at
Near End of Forecast.We project spending healthy rates over the period.
to grow at an average annual rate of 3 percent
Legislative Analyst's Office www.lao.ca.gov
California's Fiscal Outlook
EDUCATION
Overview of Education Forecasts. Below, Colleges. Our higher education forecast projects
we discuss three education-related expenditure spending for the California State University
projections. Our Proposition 98 forecast (CSU),the University of California(UC),
projects spending for preschool,elementary,and Hastings College of the Law,and state financial
secondary education(commonly referred to as aid programs.Our child care forecast projects
K-12 education),and the California Community spending on subsidized care for CalWORKS
families and other low-income working families.
Figure 1
Projected General Fund and Education Protection Account Spending
(Dollars in Millions)
E
2
Education programs
Proposition 98 $42,212 $42,123 $45,409 $47,414 $47,448 $48,747 $48,627 $49,103 2.6%
OEIA payment - - 410 - - - - - -
Child Care 751 742 756 T78 804 844 885 925 3.7
CSU 1,991 2,242 2,242 2,242 2,242 2,242 2,242 2,242 0.0
UCb 2,166 2,844 2,844 2,844 2,844 2,844 2,844 2,844 0.0
CSAC 70B 1,039 1,162 1,206 1,370 1,448 1,453 1,459 5.8
Health and Social Services
Medi-Cal 14,929 16,255 16,509 17,127 18,757 20,050 21,336 23,048 6.0
CaIWORW 1,521 1,195 716 651 602 565 536 509 .13.2
SSI/SSP 2,753 2,787 2,825 2,865 2,906 2,948 2,991 3,036 1.4
IHSS 1,772 1,842 1,893 1,996 2,070 2,139 2,209 2,280 3.6
DOS 2,648 2,789 2,951 3,088 3,230 3,336 3,446 3,560 4.2
DSH 1,278 1,408 1,445 1,451 1,458 1,465 1,471 1,471 0.7
Other° 1,458 1,465 1,520 1,554 1,578 1,590 1,602 1,615 1.6
CDCR 8,347 8,746 8,702 8,808 8,819 8,864 8,912 8,960 0.4
Judiciary 750 1,184 1,199 1,191 1,182 1,174 1,165 1,154 -0.4
Infrastructures 4,677 5,156 5,790 6,299 6,399 6,952 6,899 7,056 5.4
Other programs 9,391 7,823 8,062 8,709 8,989 9,327 9,584 9,821 3.9
Totals $97,352 $99,639 $104,436 $108,224 $110,698 $114,635 $116,205 $119,085 3.0%
Percent change - 2.3% 4.8% 3.6% 2.3% 3.5% 1.5% 2.5% -
a Fam 2a131am 2a182h.
b Beglnningln2o1514,indutlesaeneral Furd fordMseMco s toflnarce atepmje atUC.For2012l3,sb VmdlingondemumY for UCtotale UM011ion
and is Included In net wince on imresmamre bares°
Beginning In 201 refif oaseding reamer and In Gereml Fund Vending as cone funds reseed to wanted under 1991 radgnment are selredetlm help pay grand wss
aepaddiree,amionafleau el.
d Induced DHCS stets Vendors,DHCS forms man progmens,DPH,DSS slate Volumes,DSS county atlminldrabon,and DCSS.Smaller hum,and decal services programs
are induded in titer safari
e Debt service an general ddgason antl leesaieuenue derl Does not ireluda General Fund tlem seMw doss,of Iwserevenue bands mmtled trough to Callfoma Community
College poison of Prapo9Aon a8 funding(W million in 2o12-13).
GEIA=Quality Etlursson Imesmand Ad;CSAC=Calaomia Studem Altl Commission;Dos=Isparlof Developmental Services;DSH=Depamnent of$me Hiammus;
CDCR=Centel Depamneru of Commons and R floomiitudde DHCS=Department of Hsash Care Saudi DPH=DepamnerAm Pubic Heels;DSS=Department of$wial
SeMcw,antl DCSS=Depadment of CNm SuppM Services.
30 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
Proposition 98 to make maintenance factor payments when
Proposition 98`Minimum Guarantee" year-to-year growth in state General Fund
for Schools and Community Colleges. State revenues is relatively strong,such that increases
budgeting for schools and community colleges in education funding are accelerated. The state
is governed largely by Proposition 98,passed can always provide more than the minimum
by voters in 1988.The measure,modified by guarantee in any given year.
Proposition 111 in 1990,establishes a minimum
funding requirement,commonly referred to as 2012-13 and 2013-14 Revisions
the minimum guarantee. Both state General Minimum Guarantee$1.7 Billion Higher
Fund (including EPA) and local property tax in 2012-13.Figure 2 compares our updated
revenue apply toward meeting the minimum estimates of the minimum guarantee in 2012-13
guarantee.In addition to Proposition 98 funding, with what was assumed for that year at the
schools and community colleges receive funding time the 2013-14 spending plan was enacted.
from the federal government,other state sources As the figure shows,we estimate the minimum
(such as the lottery),and various local sources guarantee has increased$1.7 billion.The
(such as parcel taxes). increase results from our estimate that 2012-13
General Fund revenues are$1.6 billion higher
Calculating the Minimum Funding than assumed in the spending plan.The higher
Guarantee. The Proposition 98 minimum state revenues result in more than a dollar-for-
guarantee is determined by one of three tests dollar increase in the Proposition 98 minimum
set forth in the State Constitution.These tests guarantee because of the way the state has
are based on several inputs,including changes decided to make maintenance factor payments
in K-12 average daily attendance,per capita when Test 1 is operative.In total the state will
personal income,and per capita General Fund be making a$5.4 billion maintenance factor
revenue.Though the calculation of the minimum payment in 2012-13 (leaving$5.6 billion in
guarantee is formula-driven,a supermajority outstanding maintenance factor).
of the Legislature can vote to suspend the
formulas and provide less funding than the Minimum Guarantee$2.7 Billion Higher in
formulas require.This happened in 2004-05 and 2013-14.Also shown in Figure 2,we project the
2010-11.In some cases,including suspensions, 2013-14 minimum guarantee to be$58 billion—
the state creates a future obligation referred to $2.7 billion higher than the 2013-14 Budget Act
as a"maintenance factor."The state is required estimate.The higher minimum guarantee is
Figure 2
Increases in 2012-13 and 2013-14 Minimum Guarantees
(In Millions)
ZUU-13 2013-14
2013-14 November 2013-14 November
Budget LAO Budget LAO
Plan Plan Forecast Change
Minimum Guarantee
General Fund $40,454 $42,212 $1,758 $39,055 $42,123 $3,068
Local property tax 16,011 15,994 -17 16,226 15,833 -393
Totals $56,465 $58,206 $1,741 $55,281 $57,966 $2,675
Legislative Analyst's Office www.lao.ca.gov 31
California's Fiscal Outlook
primarily due to our projected increase in the would receive the greatest benefit.These districts
year-to-year growth of General Fund revenues. tend to be ones that have low property values
Although the minimum guarantee increases or are located in counties that historically have
by$2.7 billion,General Fund Proposition 98 distributed a greater share of property tax
spending increases by$3.1 billion as a result of revenues to cities,counties,and special districts.
our local property tax forecast being$393 million By having state payments provided to them on
lower than the budget act estimate.We forecast schedule,these districts'cash flow situations
redevelopment agency(RDA)property tax would improve and they would have less need to
revenues will be$332 million lower,while other borrow either internally or externally.
local property tax revenues will be$61 million
below budget act estimates. In 2013-14,we Paying down the mandate backlog also would
estimate that$941 million in maintenance factor benefit virtually all school and community
will be created(bringing the state's outstanding college districts but would have different
maintenance factor up to$6.8 billion).The distributional effects.This is because some
2013-14 budget plan assumed$2.6 billion in districts file more claims and claim much
maintenance factor was created,but the amount higher costs (in per-pupil terms)than other
has decreased due to the stronger projected districts.In addition,school districts serving
growth in General Fund revenues. high school students would benefit greatly from
the state's pay-off of the high school graduation
Additional 2012-13 and 2013-14 Funding requirements mandate.All school districts would
Can Be Used to Pay Down Outstanding be eligible to benefit notably from the pay-off of
Obligations.We estimate that the minimum the Behavioral Intervention Plan mandate. In
guarantees for 2012-13 and 2013-14 will be up all these cases,as school and community college
a combined$4.4 billion.Given the 2012-13 districts already paid the costs associated with
school year has been completed and the 2013-14 the original mandated activities,they benefit
school year is underway,the additional funding from additional general purpose funds that
in practical terms is available for one-time they could use for any high-priority,one-time
purposes,including paying down the state's still purpose.For example,school districts could
sizeable outstanding school and community use the funding to help further implement
college obligations.Of the$11.5 billion in the Common Core State Standards or address
outstanding Proposition 98 obligations,the deferred maintenance.
state has$6.2 billion in outstanding deferrals,
$4.8 billion in unpaid mandate claims,and Paying down the ERP obligation would affect
$462 million owed for the Emergency Repair only those schools in the bottom three deciles
Program(ERP).Using the additional 2012-13 of the state's academic accountability index that
and 2013-14 funds for these purposes would filed repair requests with the Office of Public
reduce the state's outstanding obligations by School Construction several years ago. (Schools
almost 40 percent. no longer can submit applications,as previously
approved projects exceed the amount owed for
Paying Down Different Types of Obligations the program.)Given these schools likely already
Has Different Distributional Effects.Paying undertook the emergency repairs,they would
down deferrals would provide some benefit to be able to use new ERP funding for any current
most districts(about 850 of 958 school districts high-priority,one-time purpose(including other
and 68 of 72 community college districts),but maintenance needs).
districts that rely most heavily on state funding
32 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
2014-15 Budget Planning for ongoing purposes.Under this approach,
2014-15 Guarantee$4.2 Billion Higher K-12 per-pupil programmatic funding still
Than Updated 2013-14 Guarantee. Our forecast would increase about$600 (7 percent)year
projects a minimum guarantee of$62.2 billion over year. Balancing one-time and ongoing
in 2014-15.This is a$4.2 billion increase from spending in 2014-15 can help districts plan for
our projected 2013-14 minimum guarantee.'the and accommodate programmatic growth.It also
increase in the guarantee is driven primarily can minimize the adverse effect on schools and
by the year-to-year growth in General Fund community colleges if General Fund revenues
revenues.We project that Test 1 will be operative do not materialize as expected(due either to
in 2014-15 and a large maintenance factor an economic slowdown or typical volatility in
payment will be required($3.6 billion).This revenues from capital gains).This is of particular
large maintenance factor payment is a result of a concern in 2014-15 given the guarantee would
projected decline in per capita personal income be extremely susceptible to swings in revenues
(-0.8 percent)coupled with a large projected (as described above).If revenues fall short in
increase in per capita General Fund revenues 2014-15,one-time funding could be rescinded
(6.4 percent). (The maintenance factor payment with minimal or no effect on ongoing school and
is driven primarily by the difference between community college programs.If revenues fall
these two factors,with the payment increasing short in 2015-16,ongoing programs also would
as growth in General Fund revenues outpaces experience little or no reduction,as the prior-year
growth in personal income.)This situation is one-time funding commitments would impose
very similar to what the state faced in 2012-13, no ongoing cost pressure.That is,the state's
with the minimum guarantee and the required decision to moderate ongoing programmatic
maintenance factor payment very sensitive to commitments in 2014-15 would make having
changes in General Fund revenues. to cut those programs less likely the following
year in the event General Fund revenues came in
2014-15 Guarantee Almost$8 Billion Higher weaker than projected.
Than Current Ongoing Programmatic Spending
Level. As Figure 3 shows,of the$55.3 billion Figure 3
in Proposition 98 funding the state provided in
the 2013-14 spending plan,it designated almost Considerable New Proposition 98
$900 million for one-time purposes,leaving Funding Projected for 2014-15
$54.4 billion for ongoing purposes.Hence our (In Millions)
estimate of the 2014-15 minimum guarantee is o13.14 Budget Act Spending Level $55,281
almost$8 billion (14 percent)higher than the
Back out one-time actions:
current ongoing Proposition 98 spending level. Deferral pay downs -272
Common Core implementation -250
Balancing One-Time and Ongoing Spending Career Pathways program -250
Key to 2014-15 Budget Planning.Given such a Governor vetoes -35
large projected year-to-year funding increase,we CCC building maintenance -30
recommend the Legislature use the additional CCC adult education planning grants -25
funds for a combination of one-time and ongoing CCC technology initiative adjustment -7
Total
purposes.The state,for example,could provide
roughly half(about$4 billion) for one-time 2013-14Ongoing Spending RP $S4,41 one-lime Actions -
,412
purposes(including further paying down New Funds Available in 2014-15 $7,748
existing one-time obligations) and roughly half W14-15 minimum Guarantee $62,160
Legislative Analyst's Office www.lao.ca.gov 33
California's Fiscal Outlook
Forecast for Later Years in 2016-17,after the state's Economic Recovery
Slower Growth When Proposition 30 Bonds-approved by voters in 2004 to help
Revenues Expire. Figure 4 displays our estimates close the state budget gap-are repaid. (Under
of the minimum guarantee throughout the the so-called triple flip,the state effectively
forecast period.As the figure shows,we project diverted local sales taxes to pay off the bonds
annual increases in the minimum guarantee of and reimbursed cities and counties with school
about$3 billion from 2015-16 through 2017-18. and community college property taxes.The
In 2018-19 and 2019-20,we project more modest state then automatically bacicfilled the lost
annual growth in the minimum guarantee as the property tax revenues to schools and community
PIT revenues enacted by Proposition 30 phase colleges with additional Proposition 98 General
out over 2018-19 and 2019-20. Fund revenues.With the end of the triple flip,
these local property tax revenues will return
School Property Trues Grow Quickly Over to schools and colleges.) Second,we project
Forecast Period. Over the next several years, that residual RDA property tax revenues-the
we project underlying local property taxes to amounts left over after RDAs pay their various
grow,on average,about 7 percent each year. obligations-increase from$763 million in
-Though above levels seen in recent years,our 2013-14 to$1.9 billion in 2019-20.The growth in
estimates are in line with average historical residual RDA revenues is somewhat offset by the
growth.In addition to growth from underlying steady decrease in revenues from RDA assets.
local property taxes,a couple of specific factors We forecast schools and community colleges will
will result in additional school property tax receive$402 million in RDA asset revenues in
growth in the coming years.First,we project 2013-14,with decreases annually through 2017-18
that school and community college property tax and no RDA asset revenues projected thereafter.
revenues will increase by$1.6 billion,beginning
Figure 4
Proposition 98 Forecast
(Dollars in Billions)
Minimum Guarantee
General Fund $45.4 $47.4 $47.4 $48.7 $48.6 $49.1
Local property tax 16.8 17.9 20.6 21.9 23.1 24.6
Totals $623 $65.3 $88.1 $70.7 $71.7 $73.7
Year-to-Year Change in Guarantee
Amount $4.2 $3.2 $2.8 $2.6 $1.1 $1.9
Percent change 7.3% 5.1% 4.2% 3.8% 1.5% 2.7%
Proposition 98 Obligations
Maintenance factor created/paid(+/-) $3.6 -$0.2 - $0.6 $2.1 $1.3
Outstanding maintenance factor 3.2 3.1 $3.2 3.9 6.2 7.8
Key Factors
Proposition 98'Test" 1 2 3 3 3 3
K-12 average daily attendance -0.1% -0.2% -0.3% -0.4% -0.3% -0.3%
Per capita personal income(Test 2) -0.8 4.9 4.6 5.0 4.8 4.8
Per capita General Fund(Test 3) 6.4 5.8 4.1 3.7 1.1 2.3
K-14 cost-of-living adjustment 0.9 2.2 2.3 2.6 2.6 2.5
34 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
Increases in Guarantee Largely Covered Higher Education
by Local Property Tax Growth. Over the last In addition to community colleges(which
four years of the forecast period,we project the are part of the Proposition 98 forecast),the
minimum guarantee increases by$5.6 billion,yet state's higher education system includes CSU,
the General Fund contribution to Proposition 98 UC,and California Student Aid Commission
increases only$1.7 billion.This is because local (CSAC).The CSU educates about 430,000
property tax revenues received by schools and undergraduate and master's students at
community colleges apply towards meeting the 23 campuses.The UC is a comprehensive
minimum guarantee,such that increases in research university educating about 240,000
this revenue stream typically reduce the state's undergraduate,master's,and doctoral students at
Proposition 98 General Fund contribution. ten campuses. Both universities receive support
Given the strong projected growth in property for their core instructional programs primarily
tax revenues described above,the state's General from a combination of state funds and student
Fund Proposition 98 requirement bears little of tuition revenue.The CSAC is responsible for
the growth in the guarantee over this period. administering state financial aid programs—
Absent this growth in property tax revenues, most notably,the Cal Grant program—with
the state's General Fund costs would be notably support from the state General Fund,federal
higher over the forecast period and would result in Temporary Assistance for Needy Families
significantly lower budgetary surpluses. (TANF)funds,and the Student Loan Operating
State Could Make Progress but Likely Not Fund(SLOF).
Fully Implement LCFF by End of Forecast Assumptions
Period.The administration estimated the state Forecast Sensitive to Underlying
could afford to fully implement the Local Control Assumptions.Unlike many other areas of
Funding Formula(LCFF)for county offices of the state budget that are constrained by
education(COEs)by 2014-15 and the LCFF for constitutional or federal requirements,the
school districts by 2020-21.Under our forecast, Legislature has significant discretion over
the state would meet its time frame for COEs but university and financial aid expenditures.At the
likely would be unable to meet the time frame for same time,the universities have greater control
school districts,even given the projected increases over their total operating budget than most state
in the minimum guarantee.The appropriation agencies because they have the ability to raise
provided in the 2013-14 budget was sufficient to additional revenue by increasing student tuition.
fund roughly 70 percent of the total cost of LCFF These factors mean that expenditures on the
for school districts.By 2019-20,we forecast the universities and financial aid are very sensitive to
state could fund roughly 90 percent of the full future legislative actions and the systems'future
LCFF cost,suggesting the state would need a decisions on tuition levels.
few more years than originally planned to fully
implement the LCFF for school districts.(Our Assumes No COLA or Enrollment Changes
estimate assumes the state funds at the minimum for Universities. Our forecast assumes the state
guarantee,no new categorical programs are does not provide COLAs for the universities,
created under the forecast period,and existing consistent with state law regarding no automatic
categorical programs receive only growth and COLAs for most state programs.In addition,
cost-of-living adjustments [COLA].We also we assume no enrollment changes at either
assume community colleges continue to receive CSU or UC.Changes in enrollment at CSU
roughly 11 percent of all Proposition 98 funds) and UC typically are driven by changes in the
Legislative Analyst's Office www.lao.ca.gov 35
California's Fiscal Outlook
college-age population and the universities' Grant participation over the period,significant
eligibility policies. Our demographic projections improvement in the economy—especially
show declines in the traditional college-age in employment—could somewhat reduce
population in each year of the forecast period, future demand for financial aid. Our forecast
with the number of 18-24 year olds 7 percent also assumes no changes in Cal Grant award
lower in 2020 compared to 2014.Regarding the amounts.Cal Grant award amounts would
universities'eligibility targets,the state's Master increase automatically only if tuition at UC and
Plan for Higher Education calls for CSU and UC CSU increased during the forecast period.
to draw from the top 33 percent and 12.5 percent
of high school graduates in the state,respectively. Assumes Continued General Fund Offsets.
Though the state no longer conducts eligibility In recent years,the state has used two funding
studies,recent research from the Public Policy sources—TANF and SLOF—to offset some
Institute of California(PPIC) suggests that both General Fund Cal Grant costs.Our forecast
universities are drawing from beyond their assumes the state continues to use$542 million
Master Plan eligibility pools. Both CSU and UC, in TANF funding annually throughout the
however,report unmet enrollment demand. forecast period for Cal Grants.We also assume
CSU reports more than 20,000 eligible students the state continues to rely on SLOP contributions
annually being denied admission in recent years, for the next two years.The SLOF,which is
while UC reports an increase in the number of funded by proceeds from California s federal
eligible students being denied admission to their student loan program,helped to support Cal
preferred campus.The apparent conflict between Grant costs in some years prior to the loan
the PPIC study and university admissions reports program's 2010 transfer to Educational Credit
may result from different ways of measuring Management Corporation (ECMC)—a national
the eligible pool of students.Though a more loan servicing organization.As part of the
refined study examining CSU and UC's current transfer,ECMC agreed to continue sharing a
eligibility,admission,and enrollment trends portion of its proceeds for a few years.ECMC set
would offer the Legislature better guidance in a goal of$500 million in total contributions for
making enrollment decisions,the totality of Cal Grants,has paid$345 million since 2010,and
available data suggest CSU and UC enrollment has signaled its intention to make two additional
pressures will be low over the forecast period. contributions.Accordingly,our forecast includes
$77 million SLOF support in each 2014-15 and
Assumes No Participation or Award Changes 2015-16,followed by a General Fund backfill of
for Cal Grants. Our forecast also assumes this amount in 2016-17.
no changes in Cal Grant participation rates.
Cal Grant participation historically has been Forecast
driven primarily by the number of high school State Spending on Universities Projected to
graduates in the state,though the number Be Flat Over Entire Forecast Period. Specifically,
of students completing federal financial aid we project that state spending for CSU and UC
applications and the condition of the economy will be$2.2 billion and$2.8 billion,respectively,
also can influence Cal Grant participation.The each year from 2013-14 through 2019-20.
number of high school graduates is expected (Consistent with current state policy,our forecast
to decline somewhat over the forecast period. assumes that spending on debt service for state-
The number of aid applications,which has supportable capital outlay projects at UC is paid
grown significantly in recent years,also appears from UC's support budget,while CSU's state-
to be leveling off.Though we assume flat Cal supportable debt-service costs are paid separately
36 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
by the state and included in our statewide Other Budgeting Approaches
debt-service projections.) Governor's Multiyear Funding Plan for the
Universities Would Increase Costs Significantly.
State Spending on Cal Grants Also Flat. Though our forecast shows no increases in state
Following steady increases that have more spending on the universities over the coming
than doubled Cal Grant expenditures since six years,the Governor already has indicated an
2007-08,we expect costs to remain relatively interest in augmenting the universities'budgets.
level at$1.7 billion over the forecast period. As part of his 2013-14 budget plan,the Governor
This forecast reflects our baseline assumptions proposed providing CSU and UC with an
regarding enrollment and tuition,as well as cost unallocated base increase of 5 percent in 2013-14
increases and savings resulting from prior-year ($125 million for each segment) and 5 percent
policy actions.The California Dream Act of in 2014-15 ($142 million for each)—followed by
2010—Chapter 604,Statutes of 2010(AB 131, 4 percent increases in 2015-16 ($120 million each)
Cedillo)—makes some nonresident students and 2016-17($124 million each). ('the proposed
eligible to receive state financial aid beginning in increases are the same for each university
2013-14.Dream Act costs will increase as current because the Governor bases them both on UC's
recipients renew their awards and additional budget.)The final budget package included
cohorts of high school graduates and community only the base increase for 2013-14 without any
college transfer students qualify for new awards. commitment by the state for out-year funding.
We anticipate these costs will level off at about Nevertheless,our understanding is that the
$85 million beginning in 2016-17.These cost administration intends to maintain the multiyear
increases are largely offset by savings resulting plan in 2014-15.If the Legislature were to adopt
from two policy changes enacted in recent years: the Governor's plan,state expenditures on
(1)reductions in Cal Grant maximum award both universities combined would increase by
amounts at private colleges and universities and $284 million above 2013-14 levels in 2014-15,
(2)the phase out of loan assumption programs growing to$772 million annually by 2016-17.
for teachers and nurses.
Legislature Could Take Alternative
New Scholarship Program Drives Budget Approach and Consider Funding Universities'
Growth.The 2013-14 budget package created Main Cost Drivers. During last year's budget
the Middle Class Scholarship Program,a new deliberations,we expressed various concerns
financial aid program for certain CSU and UC with the Governor's multiyear funding plan—
students.Under the new program,students such as the rationales for providing the specific
with family incomes up to$150,000 will qualify base increases proposed for CSU and UC and for
for scholarships that cover up to 40 percent of treating the two university systems identically.
their tuition (when combined with all other The Legislature could take a different,more
public financial aid).The program is to be traditional approach to building the universities'
phased in over four years,beginning in 2014-15. budgets that focuses on major cost drivers,
Budget legislation provides$107 million for the including deferred costs and inflationary
program in 2014-15,$152 million in 2015-16,and pressures. One particularly notable deferred cost
$228 million in 2016-17,with funding for the is UC's unfunded liability in its pension plan. If
program capped at$305 million beginning in the Legislature were to provide the full amount
2017-18. requested by UC to fund these liabilities,state
costs for UC would increase by over$230 million
annually.
Legislative Analyst's Office www.lao.ca.gov 37
California's Fiscal Outlook
Addressing Inflationary Pressures on slots through the General Child Care,Alternative
University Budgets. One main cost driver for Payment,and Migrant Child Care programs.
the universities is inflation.In 2014-15,inflation (Waiting lists for accessing non-CalWORKs
is estimated at 2.2 percent. ('Throughout the child care are common.)The state also
remainder of the forecast period,inflation is administers activities to support the child care
projected to hover around 2.5 percent.) In the system,including professional development for
past,we have recommended that inflationary child care providers and referral services to help
cost increases be shared by the state and students parents find child care.
(in the form of tuition increases).this provides
an incentive for students to hold universities Potential 2013-14 Funding Shortfall
accountable for cost increases.Augmenting Likely Can Be Covered by Unspent Prior-Year
state funding for the universities by 2.2 percent Funds. As shown in Figure 1 (on page 32),
in 2014-15 would cost a total of$111 million the 2013-14 Budget Act included$742 million
whereas increasing student tuition at the in non-Proposition 98 General Fund for
universities by 2.2 percent would generate a total subsidized child care and related support
of$96 million in additional tuition revenue. services. (This amount excludes funding for
(Higher tuition would indirectly increase Cal the State Preschool and Stage 1 programs,
Grant awards for CSU and UC students.Of the which are contained within our Proposition 98
$96 million,$26 million would come in the form and CalWORKs forecasts,respectively.) Based
of larger Cal Grant awards.) The universities on data from the first quarter of 2013-14,we
could use this COLA-related funding to cover a project combined costs for the CalWORKs
number of cost increases,such as those related Stage 2 and Stage 3 programs will exceed the
to health care premiums,utilities,and faculty budget act appropriation by$22 million.These
and staff salaries.In addition,UC could use its higher-than-anticipated costs appear due to a
funding to cover increased debt-service costs. larger proportion of families opting for care
in licensed child care centers rather than by
Child Care license-exempt providers. (The subsidy for
The state subsidizes child care for some licensed care is higher,with license-exempt care
low-income,working families,including capped at 60 percent of the subsidy for licensed
those families participating in the CaIWORKs providers) Based on California Department of
program.Generally,for CalWORKs families Education estimates,unspent prior-year funds
the state subsidizes child care over the course likely are available to cover this shortfall should
of several years,with Stage 1 care provided it materialize. (The Legislature would need to
for families seeking employment,Stage 2 care authorize this additional spending through
provided for families that have gained stable legislation.
employment and are transitioning off of cash 2014-15 Costs Projected to Be Slightly
assistance,and Stage 3 care provided for Lower Than Revised 2013-14 Costs.We project
families who have been off of cash assistance for at leas[two years.Families may conti subsidized child care costs will be$756 million
nue in 2014-15.This reflects a 2 percent increase
receiving Stage 3 subsidized care until their over the 2013-14 Budget Act amount but a
children turn 13 or their income exceeds the
eligibility threshold(70 percent of the state 1 percent decrease from our revised estimate
median income).Low-income,working families of 2013-14 costs($764 million).We project
not currently or previously participating in caseload in the Stage 2 program will decrease
CalWORKs may access subsidized child care slightly in 2014-15 and Stage 3 caseload will
38 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
remain virtually flat. (Our forecast assumes the opting for licensed rather than license-exempt
Legislature provides sufficient funding for all child care continue to increase above the trend
eligible children in CalWORKs Stage 3)We displayed in the first quarter of 2013-14,the
assume the average per-child cost of care for the cost of the CaIWORKs programs would rise
Stage 2 and Stage 3 programs does not change compared to our forecast. Second,our forecast
from our revised 2013-14 estimates.For the assumes the state makes no changes to existing
non-CalWORKs child care programs,we assume provider reimbursement rates,which have been
costs decline by less than 1 percent in 2014-15. flat since 2006.Should the Legislature increase
This reflects a small decline in the population of the provider reimbursement rates,costs also
children under age five and no COLA through would increase.
2014-15,as specified in current law. (Our forecast
assumes the state maintains the$10 million Potential Changes to Federal Funding and
augmentation made to non-CalWORKs Requirements Could Affect State Costs. In
programs in 2013-14.) addition to state funding, subsidized child care
and support services are supported with federal
Child Care Costs to Steadily Rise Over funding. Our forecast assumes California's
the Forecast Period.We project annual cost federal Child Care and Development Fund
increases for subsidized child care of 3 percent (CCDF) allotment remains level across the
to 5 percent over the remainder of the forecast period,with the recent$8 million annual
period.By 2019-20,we anticipate costs of sequestration reduction maintained. (Our
$925 million,a 25 percent increase over the forecast assumes the state continues to backfill
2013-14 appropriation.We project annual growth this sequestration cut every year of the forecast
rates of about 2 percent for Stage 2 and Stage 3 as period.) Because CCDF dollars generally are
the state phases out CaIWORKS work-exemption used interchangeably with state General Fund
policies that curbed child care caseload in recent to support the state's child care programs,
years.For the non-CalWORKs programs,we additional reductions to the CCDF likely
project annual growth rates of about 3 percent would create similar pressure for the state to
due to the resumption of statutory COLAs in backfill.Moreover,the federal government
2015-16(averaging about 2 percent) and slow recently released draft regulations that would
growth in the population of children under age require states to provide additional training and
five. oversight for child care providers. Furthermore,
the regulations would require many providers
Two Factors Could Increase Costs of to meet higher standards.Because the federal
Providing Child Care.Our projections government has not indicated that increased
assume the average cost of care for a child in a requirements would be accompanied by an
CalWORKs child care program will remain at increase to the CCDF,implementing these
2013-14 levels throughout the forecast period. regulations could increase overall state costs for
Two factors could increase these per-child costs. child care programs or result in a reduction in
First,should the share of CalWORKs families the number of children served.
HEALTH AND HUMAN SERVICES
Overview of Services Provided. California's and additional services for various groups of
major health programs provide health coverage eligible persons—primarily poor families and
Legislative Analyst's Office www.lao.ca.gov 39
California's Fiscal Outlook
children as well as seniors and persons with funded and an increase in limited-term savings.
disabilities.The federal Medicaid program, For example,over these years,more General
known as Medi-Cal in California,is the largest Fund spending in CalWORKs is being offset with
state health program both in terms of funding realignment revenues and there is an increase
and number of persons served.As of December in savings in Medi-Cal associated with provider
2013,the bulk of the population formerly served payment reductions and the Managed Care
by the Healthy Families Program (HFP)—a Organization (MCO)tax.Over the final four
health care insurance program for children—will years of the forecast,we project that spending
have transitioned to Medi-Cal.In addition,the will increase on average by about$1.6 billion
state supports various public health programs each year,eventually reaching$35.6 billion.
and community services and state-operated The bulk of the spending increases in 2016-17
facilities for the mentally ill and developmentally through 2019-20 reflect Medi-Cal increases in
disabled.Beyond these health programs,the caseload and the per-person cost of providing
state provides a variety of human services and health care services.Medi-Cal General Fund
benefits to its citizens.These include income spending grows faster in the latter part of the
maintenance for the aged,blind,or disabled; forecast period as savings that offset costs in
cash assistance and welfare-to-work services for the earlier years of the forecast are reduced and
low-income families with children;protection as the state's share of costs for the Medi-Cal
of children from abuse and neglect;and the expansion under federal health care reform ramp
provision of home-care workers who assist the up.
aged and disabled in remaining in their own
homes.Although state departments oversee Although the average annual increase in
the management of these programs,the actual HHS spending is 3.9 percent during the forecast
delivery of many services is carried out by county period,there is substantial variation in spending
welfare and child support offices,and other local growth rates by program.General Fund spending
entities.Health programs are largely federally for Medi-Cal averages 6 percent per year during
and state funded,while most human services the forecast period.The Supplemental Security
programs have a mixture of federal,state,and Income/State Supplementary Program(SSI/SSP)
county funding. is projected to have average annual growth of
1.4 percent,while General Fund spending for the
Overall Spending Trends. The 2013-14 CalWORKs program is projected to decline at
budget provided$28.1 billion in General an average annual rate of about 13 percent. (As
Fund spending for health and human services will be discussed below,this decline reflects both
(HHS)programs.We now estimate that these projected caseload declines as well as the infusion
General Fund costs in 2013-14 will be slightly of non-General Fund funding sources to support
higher—by$130 million,primarily reflecting the program over the forecast period.)
assumed savings in Medi-Cal that will not occur
for a variety of reasons.Based on current law Anticipated Lower Caseload Growth in
requirements,we project that General Fund Some Programs Reduces Cost Pressures.The
spending for HHS programs will increase to recession in the latter part of the 2000s raised
$28.3 billion in 2014-15 and$29.1 billion in unemployment and reduced income,resulting
2015-16.1his modest growth in General Fund in historically high numbers of Californians
spending over these years is not primarily due to enrolling in certain state HHS programs.As
a slowing down in program growth,but rather is a result,caseload growth for several HHS
largely reflective of changes in how programs are programs from 2007-08(the beginning of
40 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
the recession)to 2011-12(post-recession)was (discussed in more detail below).We project that
well above historical trends.For example,the General Fund support will grow to$16.5 billion
CalWORKs caseload increased by 27 percent in 2014-15,a 1.6 percent increase from estimated
over this period.Our economic forecast calls current-year expenditures.As noted above,the
for healthy employment growth over the next relatively small growth rate is largely reflective of
six years (although unemployment rates are an increase in savings associated with provider
projected to remain at relatively elevated levels). payment reductions and the MCO tax(discussed
Accordingly,our caseload projections for several in more detail below).On average,we project
HHS programs reflect substantially lower growth that General Fund spending will increase by
rates compared to the experience of the recent about 6 percent annually over the forecast period,
recessionary years,and in some cases—such as reaching a total of$23 billion by 2019-20.Some
CaIWORKs—we are projecting caseload declines of the most significant factors contributing to
over some or all of the forecast period.This in the estimated net increases in spending over
turn reduces costs pressures. Below,we discuss the forecast period are: (1)increases in caseload
spending trends in the major HHS programs. and the per-person cost of providing health care
services, (2)the full implementation of recently
Federal Patient Protection and enacted budget reductions, (3)the restoration
Affordable Care Act(ACA) of certain services that were eliminated in
The ACA,also referred to as federal health previous years'budgets, (4)the continuation
care reform,is far-reaching legislation that of two recently enacted fees/taxes that leverage
makes significant changes to health care additional federal funds to offset state General
coverage and delivery in California.The Fund spending,and(5) the fiscal effects
scope of the ACA is so broad that it will be associated with implementing the ACA.
years before all of its provisions will be fully
implemented and its overall ramifications fully Projected Changes in Caseload and Average
understood.Our forecast includes significant Costs Per Enrollee. Absent the effects of the
budgetary adjustments to account for the future ACA(which we discuss in more detail below),
implementation of several significant ACA we project that the cost per person for Medi-Cal
provisions,most of which affect the Medi-Cal health care services will grow at an average
Program and are discussed below. Some of these annual rate of 4.6 percent and the number of
adjustments result in cost increases for the state individuals enrolled in Medi-Cal will grow
while others result in cost reductions. 1.4 percent annually over the forecast period.
Medl-Cal Implementation of Recent Actions to Reduce
Overall Spending Trends. We estimate that General Fund Spending.Our forecast makes
2013-14 General Fund spending for Medi-Cal important assumptions about the ongoing
local assistance administered by the Department General Fund cost reductions associated with
of Health Care Services(DHCS)will be recently passed legislation.Some of these key
$16.3 billion—approximately 1 percent higher assumptions include:
than what was assumed in the 2013-14 Budget , provider Payment Reductions. In 2011,
Act.The higher current-year spending estimate Y
reflects,among other things,the delay of the budget-related legislation authorized a
Coordinated Care Initiative(CCI)from January reduction in certain Medi-Cal provider
2014 to April 2014 and updated estimates of payments by up to 10 percent.However,
the savings related to provider rate reductions until recently,federal court injunctions
prevented the state from implementing
Legislative Analyst's Office www.lao.ca.gov 41
California's Fiscal Outlook
many of these reductions. In May 2013, over$140 million annually once fully
a federal court ruled in favor of the state implemented in 2015-16.
and the injunctions were liked in June.
Since the 2013-14 budget was enacted, Restoration of Certain Medi-Cal Benefits
several types of providers have been That Were Previously Eliminated. The 2013-14
exempted from the payment reduction budget restored some Medi-Cal benefits that
through either an administrative were eliminated or restricted in recent years.
decision by DHCS or recently enacted Beginning May 2014,orally consumed enteral
legislation. Payment reductions for nutrition products and a portion of the dental
some of the non-exempt providers were services for adult beneficiaries will be restored.
implemented in September 2013 and the Our forecast assumes the costs associated with
remaining reductions are expected to be these restorations will be roughly$17 million in
implemented by early 2014.Our forecast 2013-14 and over$100 million annually in the
assumes the payment reductions result following years.
in$365 million General Fund savings in
2013-14,or roughly$50 million less than Continuation of Hospital Fee and MCO
what was assumed in the 2013-14 budget. Tax. Our forecast assumes the continuation of
Our forecast assumes about$700 million two recently enacted fees/taxes that are used to
in annual General Fund savings leverage additional federal funds to offset state
associated with the payment reductions General Fund spending.
in 2014-15 and 2015-16(including the • Hospital Fee.The hospital quality
retroactive recoupment of payments back
to June 2011) and roughly$500 million in assurance fee generates revenue that is
annual savings thereafter. used to increase Medi-Cal payments
to hospitals and offset General Fund
• CCI. The 2012-13 budget package costs for providing children's health
authorized the CCI as an eight-county coverage.Under current law,the fee
demonstration project intended to expires on December 31,2016.However,
integrate physical health care services the Legislature has extended the fee
and long-term services and supports three times since its initial enactment
for Medi-Cal beneficiaries through and,in the current version of the fee,the
managed care plans.The 2013-14 Legislature established some parameters
budget assumed a net General Fund for future fees that are authorized after
cost of$21 million related to the first 2016. Our forecast assumes that a fee
six months of CCI implementation will be reauthorized in 2016 and fee
beginning January 1,2014.In August revenue will continue to offset General
2013,the administration announced Fund monies—reaching over$1 billion
that CCI implementation would begin annually toward the end of the forecast
no sooner than April 1, 2014. Our period.
forecast reflects this implementation ,delay and assumes additional related MCO Tax. Current state law authorizes
costs of$27 million General Fund in a 3.9 percent(equal to the current state
2013-14. Our forecast assumes the General Fund sales tax rate)tax on
CCI will begin to generate savings premium revenues collected by Medi-Cal
of nearly$80 million in 2014-15 and MCOs through 2015-16.The revenue
from these taxes will be matched with
42 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
federal Medicaid funds and will be used matching rate for coverage of the
to: (1)increase Medi-Cal managed care expansion population will be 100 percent
capitated rates by an amount that offsets for the first three years,but will decline
the tax paid by MCOs and(2)fund between 2017 and 2020,with the state
Medi-Cal managed care payments.The eventually bearing 10 percent of the
Legislature has authorized several similar additional cost of health care services
taxes on MCOs since 2010,but all prior for the expansion population.While
taxes were at the state's 2.35 percent gross the expansion will add at least several
premiums insurance tax rate rather than hundred thousand enrollees beginning
the 3.9 percent state General Fund sales in 2014—potentially growing to over
tax rate. Our forecast assumes federal a million additional enrollees within a
approval of the new MCO tax,which will couple of years—the federal government
generate over$300 million General Fund will pay the large majority of the costs of
savings in 2012-13 and growing to nearly the expansion during our forecast period.
$800 million General Fund savings by However,our forecast projects costs in
2015-16—largely due to the significant the low hundreds of millions of dollars
increase in the number of people beginning in 2016-17 and increasing
expected to enroll in Medi-Cal managed to over$500 million in 2019-20. The
care plans and the additional services Medi-Cal expansion will have other
that will be delivered through those significant fiscal effects on state and local
Plans.In addition,our forecast assumes governments due to changes that were
that the MCO tax is extended from made to 1991 health realignment funding
2016-17 through 2019-20,but at the lower to adjust for the effects of the ACA.We
2.35 percent gross premiums insurance discuss these changes and the associated
tax rate.This assumption reflects the state fiscal effects in more detail below.
current policy of reauthorizing the
MCO tax,but at a rate that is more • Increased Costs for Persons Currently
consistent with past MCO taxes.We Eligible, but Not Enrolled.We project
estimate that such an extension would that several ACA provisions—such as
result in General Fund savings of about the individual mandate to obtain health
$500 million to$600 million annually. insurance coverage and streamlined
Medi-Cal eligibility processes—will
ACA Implementation. Our spending increase the demand for Medi-Cal by
projections assume that implementation of the persons who are currently eligible but
ACA will have several significant fiscal effects on have not enrolled in the program.Unlike
the Medi-Cal Program. the expansion population,the state will
be responsible for 50 percent of the costs
• Medi-Cal Expansion. Beginning for services provided to persons who
January 1,2014,California will expand are eligible for Medi-Cal under current
Medi-Cal coverage to include most standards.The 2013-14 budget includes
adults under age 65 with incomes at or costs of slightly more than$100 million
below 133 percent of the federal poverty associated with increased enrollment
level who are not currently eligible for among currently eligible persons.Our
Medi-Cal—hereafter referred to as revised estimates of costs for additional
the Medi-Cal expansion.The federal currently eligible persons in 2013-14 is
Legislative Analyst's Office www.lao.ca.gov 43
California's Fiscal Outlook
somewhat higher—nearly$130 million. care for beneficiaries in Medi-Cal by reversing
We project that these costs will increase recent provider rate reductions.As we discussed
to roughly$500 million dollars annually above,our forecast assumes roughly$500 million
within a few years—largely due to in annual General Fund savings associated
projected increases in the number of with prospectively implementing provider rate
additional persons enrolling after the reductions.To the extent the Legislature is
ACA is fully implemented. concerned about inadequate access to care in
the Medi-Cal Program,it may want to consider
• Increased Federal Matching Rate for making some targeted rate increases for certain
Children's Health Insurance Program types of Medi-Cal providers.To the extent
(CHIP). From October 1,2015 to possible,the decision to increase rates and the
October 1,2019,the ACA authorizes amount of any such increases should be based on
a 23 percentage point increase in the an assessment of several factors,including which
federal CHIP matching rate—from types of services Medi-Cal beneficiaries have
65 percent to 88 percent in California. most difficulty accessing and the degree to which
Our forecast assumes the enhanced access to those services appears to be inadequate.
federal matching rate will offset about
$230 million in General Fund spending The ACA and Changes to
in the Medi-Cal Target Low-Income 1991 Health Realignment
Children's Program(formerly HFP) 2013-14 Budget Established a Structure to
in 2015-16 and roughly$350 million Redirect Some Health Realignment Funds.
annually prior to its expiration in 2019. Historically,counties have had the fiscal and
programmatic responsibility for providing
• Enhanced Mental Health and Substance health care for low-income populations
Use Disorder Services. As part of ACA without public or private health coverage—also
implementation and the 2013-14 budget, known as indigent health care.As part of 1991
the Legislature authorized an enhanced realignment,the state provided a dedicated
set of mental health and substance funding stream to counties for indigent health
use disorder services for Medi-Cal care and public health—hereafter referred to as
beneficiaries beginning January 1, health realignment funds. Health care services
2014.Our forecast assumes partial-year provided by counties to indigents are commonly
General Fund costs of about$65 million referred to as the county health care safety net.
in 2013-14 and costs of roughly
$200 million annually for these enhanced The Medi-Cal expansion shifts much of the
services by the end of the forecast period. responsibility for indigent health care to the
state and federal governments,and counties
Potential Issuefor Future Legislative are likely to experience significant savings.In
Consideration:Access to Care and Provider recognition of the shifting responsibilities for
Rates. The Legislature has expressed some indigent health care under the ACA,the 2013-14
concern about beneficiaries'access to health budget established a structure under which a
care services in the Medi-Cal Program and the portion of county health realignment funds will
degree to which implementation of provider be redirected to help pay CalWORKs grant costs
rate reductions may reduce access.In light of previously borne by the state—thereby offsetting
the projected operating surpluses outlined in state General Fund costs.
this report,the Legislature may wish to commit
some of the surplus to help improve access to
44 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
Amount of Redirected Health Realignment Projected Savings in 2014-15 and Beyond
Funds Determined on a County-by-County Are Subject to Substantial Uncertainty.
Basis. In recognition of the significant Our projections of state savings associated
differences among counties and the Legislature's with changes in 1991 health realignment in
interest in protecting the county health care 2014-15 and beyond are subject to substantial
safety net,the 2013-14 budget established a uncertainty—actual savings could be several
complex structure to determine the amount of hundred million dollars higher or lower.At the
1991 health realignment funds that would be time of this report,some of the largest sources of
redirected to the state.The methods used to uncertainty are:
determine the redirected amount differ among
counties and some counties will have the option • Many Counties Have Not Selected
to choose between two general approaches—the Which Option They Will Use to
so-called"60 percent option"or the so-called Determine the Redirected Amount. It
"shared savings formula."For more detail on the is still unclear which counties will select
different methods for determining the redirected the 60 percent option and which counties
amount,see our November report, The 2013-14 will select the shared savings formula to
Budget: California Spending Plan. determine the amount of realignment
funds that will be redirected.
Forecast Assumes State General Fund
Savings of Nearly$1 Billion in Some Years. • Data Used to Determine Historic
Figure 5 shows our projections of the amount of County Revenues and Costs Is Still
health realignment funds that will be redirected. Unavailable. Counties that select the
Our forecast adopts the 2013-14 budget shared savings formula are still in the
assumption that$300 million will be redirected process of gathering historic data that
from county health programs in 2013-14.Our will be submitted to the DHCS and
projections of savings in future years include, used to calculate the amount of 1991
among other things,our rough estimates of realignment funds that will be redirected.
county savings associated with the Medi-Cal
expansion.These savings reflect our estimates of • Effects of the ACA on County Hospital
the ACAS reductions in federal Disproportionate Patient Volume and Revenue. For
Share Hospital (DSH)payments that currently go counties that own and operate hospitals
to county hospitals.The DSH reductions increase and select the shared savings formula,the
significantly in 2017-18 through 2019-20,thereby redirected amount will depend on how
reducing estimated county savings in those years. the ACA affects the number of patients
Since redirected funds are to be used to offset who will receive care from the public
CalWORKs grant costs,the General Fund offsets hospital system,whether or not these
are largely reflected in the CaIWORKs portion patients have Medi-Cal coverage,and
of our forecast. (Please
see the CalWORKs Figure 5
section of this chapter projected State Savings Associated With the Affordable
for more detail on how Care Act and Changes to 1991 Health Realignment
these projected savings
amounts are reflected in General Fund (In Millions)
our forecast.) -15 2015-16 2016-17 201 - 2019-20
$300 $930 $955 $916 $738 $708 $778
Legislative Analyst's Office www.lao.ca.gov 45
California's Fiscal Outlook
the level of reimbursement for services In-Home Supportive Services(IHSS)
provided to Medi-Cal enrollees—all of We project that General Fund spending
which are subject to uncertainty. for IHSS will increase from about$1.8 billion
in 2013-14 to nearly$1.9 billion in 2014-15.
• Future Federal Funding for County For the forecast period,we project costs to
Hospitals.County hospitals currently increase an average of 3.6 percent each year,
receive billions of dollars in federal resulting in General Fund expenditures of
funding from the state's Section 1115 nearly$2.3 billion in 2019-20.These estimated
Medicaid waiver and DSH payments. expenditure increases are primarily driven
The amount of funding available from by caseload growth(which we project to be
these sources in the future is subject 2 percent annually)and three factors exerting
to a significant amount of uncertainty. upward pressure on IHSS providers'wages.These
In some counties,significant changes factors include: (1)new federal labor regulations
in the amount of the waiver and/or that require employers to pay overtime wages to
DSH funding would have a significant home care workers(including IHSS providers),
effect on the amount of county savings (2)the state's recently authorized increases to
determined by the shared savings the minimum wage,and(3)anticipated wage
formula. increases negotiated through the collective
bargaining process.
Given the various sources of uncertainty
described above,we were forced to make a variety We note that in prior years our IHSS forecast
of assumptions when projecting state savings. included elements of budgetary uncertainty due
For example,our forecast generally assumes that to pending lawsuits that challenged previously
counties that own and operate hospitals will enacted budget reductions.However,an IHSS
select the shared savings formula and most other settlement agreement approved by the court in
counties will select the 60 percent option.Our May 2013—and legislation that effectuated the
forecast assumes no significant changes in county terms of the agreement—effectively resolves the
costs and revenues associated with currently budgetary uncertainty related to the previously
eligible Medi-Cal beneficiaries and uninsured enacted budget reductions.The terms of the
patients who remain ineligible for Medi-Cal after agreement replace the previously enacted
2014.We also assume federal waiver funding for reductions with a new budget reduction plan
county hospitals will remain relatively steady over that enables the state to realize net General Fund
the entire forecast period. savings of approximately$175 million a year
Department of State Hospitals beginning in 2013-14.
We estimate the General Fund spending for the Three Factors Put Upward Pressure on IHSS
department in 2013-14 will be about$1.4 billion, Providers'Wages.The U.S.Department of Labor
and will grow by about$60 million by 2019-20. recently released new regulations that require
The increase in General Fund spending over the home care workers,including IHSS providers,
forecast period is mainly due to two factors: (1)the to be paid overtime of at least one-and-a-half
startup of the new California Health Care Facility times their regular pay rate.This requirement,
(CHCF) in Stockton accounts for an estimated which takes effect on January 1,2015,represents
$30 million increase from 2013-14 to 2014-15,and a new General Fund cost estimated to be about
(2)the annual projected increases in the patient $60 million annually. Second,the state's new
population. minimum wage of$9 per hour(up from$8 per
46 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
hour)beginning July 1,2014 and$10 per hour will be negotiated by counties and to account
beginning January 1,2016 further increases for the inflation factor of 3.5 percent.Because
wages for IHSS providers who earn less than the we estimate that the MOE will be growing
new minimum wage level.Because most IHSS at roughly the same rate as the overall IHSS
providers are currently paid more than$9 but program,we project that the additional costs
less than$10,the bulk of the costs associated incurred by the General Fund as a result of the
with the minimum wage increase—General county MOE will hold steady during the forecast
Fund costs of approximately$44 million period at about$40 million annually.If total
annually—result from the increase from$9 to IHSS program costs grow faster than counties'
$10. Finally,future wage increases resulting from MOE expenditure level,then the additional costs
collective bargaining between IHSS provider incurred by the General Fund as a result of the
unions and counties would also increase General MOE would be higher than we estimate.
Fund program costs.With the implementation of
the CCI,eight counties will be transitioning from Developmental Services
negotiating wages at the county level to statewide We estimate that General Fund spending
collective bargaining for wages and benefits.To for the Department of Developmental Services
the extent that the transition of the eight CCI (DDS)will total about$2.8 billion in 2013-14.
counties to statewide collective bargaining yields We project that General Fund expenditures will
faster wage growth than the historical trend for grow to$3 billion in 2014-15 and to$3.6 billion
county-negotiated wages suggests,IHSS program by the end of the forecast period in 2019-20 (an
costs would be higher than our forecast projects. average annual increase of 4.2 percent over the
forecast period).These projected expenditure
General Fund Costs Associated With County increases are mostly due to cost increases for
Maintenance of Effort(MOE)Hold Steady. regional centers resulting from(1)a growing
Budget-related legislation adopted in 2012-13 caseload(we project 3.4 percent annual growth)
enacted a county MOE,in which counties and(2)increased costs per case(we project
generally maintain their 2011-12 expenditure 0.8 percent annual growth).The increased
level for IHSS—to be adjusted annually for costs per case are primarily due to greater
(1)an inflation factor of 3.5 percent beginning in authorization and utilization of services as well
2014-15 and(2) a percentage of wage increases as rising costs for community services provided
negotiated by counties.Under the previous by regional centers.Further,the expenditure
IHSS funding structure,the state and counties increases in the DDS budget are also driven
each paid a fixed percentage of the nonfederal by the new federal labor regulations regarding
share of IHSS program costs.Under the new overtime pay for home care workers as well as
county MOE financing structure,the state the state's minimum wage increase (please see
General Fund assumes any nonfederal IHSS the IHSS write-up above for more detail on
costs above counties'MOE expenditure level.To these changes).These expenditure increases are
account for known wage increases negotiated partially offset by reductions in the budget for
by counties in 2012-13 and 2013-14,we estimate developmental centers as a result of individuals
that the MOE level for counties increases by transitioning to the community and the closure
$12 million(to about$925 million)in 2012-13 of the Lanterman Developmental Center.
and by$19 million (to an estimated$943 million)
in 2013-14.For the remainder of the forecast CalWORKs
period,this MOE level will be further adjusted Total Program Spending to Remain
to account for additional wage increases that Relatively Flat. . . The CaIWORKs program
Legislative Analyst's Office www.lao.ca.gov 47
California's Fiscal Outlook
is funded by a combination of the federal Fund spending in CaIWORKs is driven by two
Temporary Assistance for Needy Families main factors:
(TANF)block grant,the state General Fund,
and county funds.The 2013-14 budget provides • Caseload Savings Accrue to the General
$5.5 billion(all funds)to support the CaIWORKs Fund.First,because the TANF block
program,including$2.7 billion TANF, grant is fixed and fully allocated in the
$1.2 billion General Fund,and$1.6 billion state budget,incremental changes in total
county funds(almost entirely realignment program spending,including savings
revenues). From this current-year base,we that result from a declining caseload,
estimate that CaIWORKs costs will remain primarily accrue to the General Fund.
relatively steady,with total spending increasing
by approximately$140 million in 2014-15 and • General Fund Spending to Be Offset
gradually tapering to around current levels With Realignment Funds. Current law
by the end of the forecast period.This steady provides that health realignment funds
overall trend masks two underlying trends be redirected to help pay CaIWORKs
that are expected to have opposing effects on grant costs in each county as part of the
total spending.First,the CaIWORKs caseload state-based expansion of the Medi-Cal
is expected to continue to decline as the state Program. (For more information on the
of the economy and the labor market improve, redirection of health realignment funds,
ultimately resulting in annual savings in the see the Medi-Cal write-up in this section
hundreds of millions of dollars by the end of of the report.)We project that redirected
the forecast period.Second,the 2013-14 budget health realignment funds will be more
package redirected a portion of the growth in than enough to fully offset General
certain revenues provided to counties under Fund spending on CaIWORKs grants,
1991 realignment to pay for gradual increases beginning in 2014-15.The remaining
to the CaIWORKs grant level over time,thereby General Fund expenditures displayed in
increasing total program spending. (For more our forecast primarily represent spending
information on the statutory mechanism that on services and administration in the
provides these gradual grant increases,see the CalWORKS program.
CaIWORKs write-up in the Human Services
section of our publication, The 2013-14 Budget: Assume Legislature Will Make Changes
California Spending Plan.)We estimate that to Current Law to Achieve Full General Fund
increased spending from a higher level of grants Savings From Redirected Health Realignment
will offset the majority of savings expected from Funds. As noted above,we estimate that the
the projected caseload decline over the forecast amount of health realignment funds available
period. to be redirected to pay for CaIWORKs General
Fund grant costs will exceed the amount of
.. . While General Fund Spending Projected costs that are available to be offset beginning in
to Decline.Although total spending in the 2014-15.For the purposes of our state General
CaIWORKs program is expected to remain Fund forecast,we have assumed that health
relatively flat,General Fund spending in the realignment funds will be redirected to offset
program is projected to decline from$1.2 billion General Fund costs in the CaIWORKs program
in 2013-14 to$716 million in 2014-15,gradually to the extent possible under current law and
declining further to$509 million by the end of have treated the remaining redirected health
the forecast period in 2019-20.Reduced General realignment funds as unallocated savings.
Our forecast assumes unallocated General
48 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
Fund savings of approximately$180 million in exempt recipients will increase by
2014-15,with this amount growing to as much as approximately$90 million.
$330 million annually over the forecast period.
To realize the full General Fund savings that we • Uncertain Savings From 24-Month
have assumed in our forecast,the Legislature Time Limit. As a condition of receiving
has various options,including: (1)increasing the aid,adult CalWORKs recipients must
amount of the TANF block grant that is spent generally comply with work requirements
in CSAC and increasing General Fund spending and are limited to a cumulative 48 months
on CalWORKs grants by an equal amount of aid.Effective January 2013,state work
(our current-law forecast assumes that the requirements were made more flexible,
amount of the TANF dollars allocated to CSAC but adult recipients were restricted to
remains fixed throughout the forecast period); a cumulative 24 months of aid under
(2) changing current law to allow redirected the more flexible requirements.Once
health realignment funds to offset General Fund the 24 months have been exhausted,
costs for administration and services in the adult recipients will be required to
CaIWORKs program(in addition to General meet relatively more stringent federal
Fund costs for grants);or(3) changing current work requirements in order to continue
law to allow redirected health realignment funds to receive aid(up to the 48 month
to also offset General Fund costs in programs maximum).Additionally,beginning
outside of CaIWORKs,such as CalFresh in 2013-14,new supportive services
administrative expenditures. (comprising the early engagement
strategies discussed below)will be made
Other Policy Changes to Affect Program available that are intended to assist
Spending Levels in Short Term. In the short recipients to become self-sufficient
term,year-over-year changes in total and more quickly.Taken together,these
General Fund CaIWORKs spending are also policy changes will likely result in some
driven by the ongoing implementation of recent savings as some recipients(1)respond
policy changes.The most significant of these positively to increased services and
include: work requirement flexibility to obtain
employment that allows them to leave the
• Cost of Restoring Funding-Due to caseload or(2)exhaust their 24 months
Expiration of Work Exemptions. In of participation under state work
prior years,the Legislature achieved requirements and fail to comply with
General Fund savings by not providing federal work requirements,resulting in a
employment and supportive services to decreased cash grant and loss of access to
certain CalWORKs recipients who were many supportive services.Our forecast
temporarily exempted from mandatory assumes that the introduction of the
participation in welfare-to-work activities. 24-month clock will result in decreased
Beginning in January 2013,the temporary costs to the General Fund,though the
exemptions were eliminated and counties timing and magnitude of these savings are
began the process of gradually requiring uncertain.
the participation of all formerly exempt
recipients by January 2015.As this process • Cost of Full-Year Implementation of
continues,we estimate that General Fund Early Engagement Strategies. In 2013-14,
costs to provide services to formerly the state began implementing three
Legislative Analyst's Office www.lao.ca.gov 49
California's Fiscal Outlook
strategies outlined in statute intended to SSI/SSP
assist CaIWORKs recipients in obtaining State expenditures for SSI/SSP are estimated
self-sustaining employment during their to be$2.8 billion in 2013-14,and increase by an
24 months of participation under state average of$42 million annually through 2019-20,
welfare-to-work requirements.these when expenditures are projected to reach an
strategies include:(1)the development estimated$3 billion.The projected spending
of a statewide online welfare-to-work increases are primarily due to average annual
appraisal tool, (2)intensive case caseload growth of about 1.1 percent.During
management and supplemental services the 2013-14 budget development process,the
for certain CalWORKs families,and Legislature expressed interest in reinstating a
(3)additional funding for subsidized COLA for SSI/SSP grant recipients.While our
employment positions.We estimate forecast does not assume the provision of a
that fully implementing these strategies COLA over the forecast period,we estimate that
according to current law will result in reinstating a COLA for the state-funded SSP
additional annual General Fund costs of portion of the grant would cost approximately
approximately$90 million. $50 million annually or$300 million more by
2019-20 if provided each year over the forecast
period.
JUDICIARY AND CRIMINAL JUSTICE
The major state judiciary and criminal justice lower-level adult offenders from the state to the
programs include support for two departments in counties.
the executive branch—the California Department
of Corrections and Rehabilitation(CDCR)and the Our forecast projects that General Fund
Department of Justice—as well as expenditures for spending on corrections will increase to
the state court system. $9 billion by 2019-20.This increase is primarily
due to ongoing costs of accommodating
the minor growth projected in the inmate
CDCR population while complying with the court-
We estimate that General Fund spending ordered population cap,as well as the planned
for support of CDCR operations in the current activation of additional prison facilities.
year will be$8.7 billion,which is a net increase However,as we describe below,a few key factors
of$399 million,or about 5 percent,above the could substantially affect the fiscal impact that
2012-13 level of spending.This increase primarily compliance with the federal court order will have
reflects(1)costs to comply with a federal court on the state.
order to reduce the state's prison population(as
discussed in more detail below),(2) additional Recent State Actions to Comply With Federal
employee compensation costs due to the Court Order.In September 2013,the Legislature
expiration of the personal leave program,and passed and the Governor signed Chapter 310,
(3)costs associated with the activation of the Statutes of 2013 (SB 105,Steinberg),to address
CHCF and the DeWitt Correctional Annex in the federal three judge panel order requiring
Stockton.These increases are partially offset by the state to reduce the prison population to no
additional savings from the 2011 realignment, more than 1375 percent of design capacity by
which shifted responsibility for managing many December 31,2013. (Design capacity generally
50 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
refers to the number of beds CDCR would use as much contract bed space as assumed in
operate if it housed only one inmate per cell our forecast.For example,if the state comes to a
and did not use temporary beds,such as settlement with inmate attorneys that alters the
housing inmates in gyms.Inmates housed in population cap or the deadline for compliance,
contract facilities are not counted toward the the state could purchase fewer contract beds than
population cap.) Chapter 310 provides CDCR currently planned.Similarly,the state would also
with$315 million in General Fund support not need as many contract beds over the forecast
and authorizes the department to enter into period if it chooses to comply with the population
contracts to secure a sufficient amount of cap by reducing the size of the inmate population
inmate housing to meet the court order and to in future years.Depending on(1)the outcomes of
avoid the early release of inmates which might negotiations with the plaintiffs,(2)how the state
otherwise be necessary to comply with the order. chooses to comply with the population cap in the
The authority provided to CDCR to expand its long term,and(3)the actual growth of the inmate
contract capacity expires January 1,2017. population,the fiscal effect of complying with the
cap could be several hundred million dollars less
The measure also requires that if the per year than is reflected in our forecast.
federal court modifies its order capping the
prison population,a share of the$315 million
appropriation in Chapter 310 would be deposited Judicial Branch
into a newly established Recidivism Reduction We estimate that General Fund spending
Fund for activities designed to reduce the state for the support of the judicial branch in the
prison population,including recidivism reduction current year will be$1.2 billion,which is about
programs.On September 24,2013,the three- $434 million(or 58 percent)above the amount
judge panel issued an order directing the state in 2012-13.This net increase is primarily due to
to meet with inmate attorneys to discuss how to the fall restoration of a one-time$418 million
implement a long-term overcrowding solution.The General Fund reduction made to the trial courts
order also prohibits the state from entering into in 2012-13,as well as an ongoing$60 million
any new contracts for out-of-state housing during augmentation for increasing public access to trial
this meeting process.A subsequent order moved court services.Despite these augmentations,the
back the deadline for meeting the population cap courts maintain ongoing reductions of a few
to February 24,2014. hundred million dollars allocated in prior years,
particularly due to the expiration of one-time
Several Factors Could Alter Fiscal Effect of actions to address the state's recent budget
Compliance With Order. Our forecast assumes problems(such as fund transfers).The Legislature
that CDCR will use contract beds throughout the could decide to provide additional General Fund
forecast period to comply with the population support in the future to offset these reductions.
cap and accommodate the projected growth in However,our forecast assumes that General Fund
the prison population.However,there are several spending on the judicial branch will remain
circumstances under which the state may not roughly flat at about$1.2 billion over the forecast
period.
Legislative Analyst's Office www.lao.ca.gov 51
California's Fiscal Outlook
OTHER PROGRAMS
Employee Compensation negotiates health premium rates each year.We
Forecast Reflects Costs of Current assume that these health premiums will increase
Agreements. Our forecast assumes that state at a rate exceeding inflation for the foreseeable
General Fund employee compensation costs future.
will increase by$280 million in 2014-15 and an
additional$500 million between 2015-16 and Additional Labor Agreements Could Result
2019-20.These costs result primarily from the in Higher Costs. Our forecast does not include
state's existing labor agreements with most of its any change in state costs associated with future
21 employee bargaining units.A small portion labor agreements that could be approved by the
of these costs—over$20 million in 2014-15 and Legislature,including agreements with the three
over$20 million more in 2015-16—results from state employee bargaining units that currently
higher state employee costs required due to have expired agreements.These three units
California's upcoming minimum wage increases. represent the state's attorneys,scientists,and
stationary engineers.
Over$100 million of the 2014-15 costs results
from assumed July 2014 salary increases of about State Retirement Costs
2 percent for employees in 13 state employee Our forecast reflects current-law increases
bargaining units,as well as their non-represented in the state's annual payments to(1)pension
managers,plus some other compensation costs programs for state and CSU employees,
for these units.These 13 bargaining units have (2)teachers'pensions,(3)state and CSU retiree
labor agreements that require Department of health benefit programs,and(4)pension
Finance(DOE)approval before these 2014-15 pay programs for judges. (The teachers'pension
increases are granted. (Our forecast,therefore, program is administered by the California State
assumes that DOF determines that there are Teachers'Retirement System [CaISTRS],and
sufficient funds to provide these increases in the other three programs are administered by
2014-15.)Employees in these bargaining units CalPERS.)
and their managers also are assumed to receive
salary increases of between 2 percent and CalPERS Contributions Driven by Pay
2.5 percent in July 2015 ($120 million in 2015-16), Raises,Investments, and Actuarial Methods.
consistent with the units'labor agreements. In Our forecast assumes that the state's required
addition,the forecast reflects salary increases General Fund contribution to Ca1PERS for state
of between 3 percent and 4 percent in January and CSU pensions rises from$2.3 billion in
or July 2015 (about$90 million in 2014-15 and 2013-14 to$2.8 billion in 2019-20. Our forecast
an additional$100 million in 2015-16)for four incorporates the requirement that CSU pays
other bargaining units that have approved labor (from CSU resources) all CalPERS pension
agreements with the state. costs related to growth in the CSU payroll after
2013-14. Our forecast further assumes that
Increases in the premium costs for state (1) CalPERS investment returns hit the system's
employee health care benefits average over assumed investment target of 7.5 percent per
6 percent per year in our forecast(about year during the forecast period and(2) the state
$70 million in 2014-15).The California Public does not approve any pay increases for state
Employees'Retirement System (CalPERS) workers beyond those included in its current
52 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
labor agreements.These assumptions limit the pension policy changes—beyond these amounts
growth of the state's Ca1PERS contribution rates. required under law.)
If,by contrast,salary levels were to increase
faster than we assume,investment returns were Retiree Health Costs to Continue Rapid
to be significantly less,and/or actuarial methods Increases.The forecast assumes continued
of Ca1PERS were to change,the state's required pay-as-you-go payments for the vast majority
payments to Ca1PERS could be hundreds of of state and CSU retiree health costs.The
millions of dollars more than we forecast by bulk of these payments are contained in two
2019-20. General Fund line items for the state's retiree
health benefit payments.We project that these
CaISTRS Contribution Driven by Rates costs will grow from$1.8 billion in 2013-14 to
Set in Statute and Teacher Compensation $3.3 billion in 2019-20.This represents a more
Growth.The forecast assumes that the state's than 10 percent annual growth rate during the
contributions to CaISTRS grow from$1.4 billion forecast period.This growth is driven by two
in 2013-14 to $1.8 billion in 2019-20. State elements: (1)projected annual growth in state
contributions in 2013-14 are based on 2011-12 employee and retiree health plan premiums and
statewide payroll levels for K-12 and community (2)a rising population of state and CSU retirees.
college teaching and administrative personnel
of$26.1 billion. The preliminary estimate for State-Mandated Local Programs
2012-13 statewide payroll(upon which the (Non-Education)
state's 2014-15 contributions will be based) is Over the last several years,the Legislature
essentially identical.We assume that statewide has taken various actions to reduce or defer
payroll increases by 3 percent to 6 percent costs for state mandates on local governments.
annually beginning in 2013-14. These actions include permanently repealing
mandates and suspending statutory requirements
The state pays about 4 percent of teacher to implement mandates. Our forecast assumes
payroll(calculated based on a two-year lag) to that the Legislature continues to suspend all
CaISTRS,as required in state law. The system mandates it suspended in 2013-14.Beginning in
also receives payments from school districts and 2015-16,our forecast also assumes that the state
teachers to cover pension program costs,which makes annual payments to retire the backlog
also are fixed in law.The state also contributes of mandate claims incurred prior to 2004-05,
additional funds each year when certain as specified in current law.No payments are
unfunded liabilities emerge, as they did after the assumed,however,for the backlog of mandate
decline of world financial markets in 2008. In claims incurred since 2004-05 as no plan to
our forecast,these supplemental contributions retire these debts has been adopted.Under
total about 1 percent of compensation in 2013, these assumptions,state costs for mandates will
rising to roughly 1.5 percent in 2015 and be around$60 million in 2014-15,increasing
thereafter. (These additional state contributions to about$230 million in 2015-16 and about
are very small compared to the billions of $260 million by the end of the forecast period.
dollars of additional funding per year that
CaISTRS needs to pay its unfunded liabilities. Unemployment Insurance(UI)
Because our forecast assumes only current-law Interest Payments on Federal Loan.
state payments to CaISTRS,the forecast does California's UI Trust Fund has been insolvent
not assume additional payments to retire the since 2009,requiring the state to borrow from
system's large unfunded liabilities—or other the federal government to continue payment
Legislative Analyst's Office www.lao.ca.gov 53
California's Fiscal Outlook
of UI benefits.California's outstanding federal Financial Information System
loan is estimated to be$9.7 billion at the end For California (FI$Cal)
of 2013. The state is required to make annual The FI$Cal project seeks to build an
interest payments on this federal loan.These integrated financial information system for the
interest costs total$259 million in 2013-14(about state—in the areas of budgeting,accounting,
$2.5 million less than what was appropriated in procurement,and cash management—to
the 2013-14 Budget Act).The budget authorizes replace the current fragmented and outdated
this interest payment from the General Fund. systems.The FI$Cal project implemented the
Based upon our projections of the future new financial information system within the
unemployment rate and the Employment first group of departments,as scheduled in
Development Department's projections of benefit July 2013,without incident.The project will
payments and UI Trust Fund revenues,we continue to implement the system in a growing
project that the General Fund annual interest number of departments through subsequent
payments will gradually decline each year— deployments.The FI$Cal project is estimated to
from$259 million in 2013-14 to$2.5 million cost$617 million(all funds) and is planned to be
in 2019-20 (when we estimate the loan will be fully implemented in July 2016.
completely paid off).
We project that General Fund spending for
Our projections do not incorporate any FI$Cal will increase dramatically from$2 million
potential actions,such as an increase in UI in 2013-14 to$114 million in 2015-16,decrease
taxes or decrease in benefits,that could be to$80 million as the project comes to a close
taken during the forecast period to address in 2016-17,and then transition towards a net
the underlying UI Trust Fund insolvency and savings in 2018-19 and 2019-20 as the recovery
reduce the state's interest payment obligation to of federal funds over these two years outpaces
the federal government.For forecast purposes, maintenance and operation costs(estimated to
we also do not assume that the General Fund be$16 million annually from the General Fund).
interest obligation would be met in future years The increase in General Fund contributions
by creating new alternative funding sources during the forecast period compensates for
or through special fund loans to the General accelerated special fund contributions in prior
Fund.We note,however,that pursuant to federal years.The project is also expected to recover
law and beginning in tax year 2011,the federal federal funds for some of the development costs,
unemployment tax credit for which employers but not until the system is fully implemented and
are eligible(up to 5.4 percentage points of the in use by federally funded programs.
total 6 percent tax on employee wages up to
$7,000)began to be reduced incrementally for 215t Century Project
each year that the state continues to have an In February 2013,the California Technology
outstanding federal loan to the UI Trust Fund. Agency(now the Department of Technology)
The increase in federal unemployment taxes suspended the 21st Century Project,an
paid by California employers due to the tax information technology effort by the State
credit reduction—approximately$600 million in Controller's Office(SCO)to replace the state's
2013 and$935 million in 2014—is used to make aging human resources management and payroll
principal payments that reduce the federal loan systems.The state suspended the project because
balance. (The state,however,remains responsible the initial pilot phase of the project was unable
to pay the interest payments on any outstanding to issue accurate payroll. System errors included
loan balance.) under- and over-compensation of wages,failure
54 www.lao.ca.gov Legislative Analyst's Office
California's Fiscal Outlook
to issue payments to retirement accounts,and its own authority the lease-revenue bonds
erroneous deductions related to employee previously issued on its behalf by the state.This
insurance.At the same time,SCO terminated its decreases the amount of debt service that is now
contract with the project's primary vendor,SAP backed by the state General Fund. Finally,the
Public Services Inc.To date,the state has spent administration slowed the pace of bond sales
over$266 million of the estimated$373 million over the last three years and refinanced some
total project costs. existing debt at lower interest rates.
The suspension of the 21"Century Project Debt Service Expected to Grow Modestly.
means that the state's need for an updated Over the forecast period,General Fund debt
human resources management and payroll service is projected to grow 5 percent annually,
system remains unmet.We expect that during reaching$7.3 billion by 2019-20.Projections
the forecast period an assessment of the project of debt-service costs depend primarily on the
will be conducted,which will inform a decision volume of future bond sales,their interest
on how to proceed in addressing the state's rates,and their maturity structures.The
unmet need.While we expect General Fund exact timing of bond sales depends upon
expenditures for a modernized system during when various programs will need bond funds
the forecast period,we assume no project costs in and the accessibility of financial and credit
our forecast given the uncertainty surrounding markets. During the entire forecast period,
that decision. we assume that a total of about$33 billion
of already authorized general obligation and
Debt Service on Infrastructure Bonds lease-revenue bonds will be sold as currently
General Fund Debt-Service Costs Have approved projects move forward.A large share
Not Increased Significantly Since 2009-10. of this—about$25 billion—is from the nearly
The state uses General Fund revenues to pay $54 billion in infrastructure bonds authorized
debt-service costs for principal and interest by voters in 2006 and 2008.We also expect
payments on two types of bonds used primarily that transportation debt-service costs will
to fund infrastructure—voter-approved general exceed available transportation funds during
obligation bonds and lease-revenue bonds the forecast period and the General Fund will
approved by the Legislature.We estimate that pay the remaining costs.Our forecast is based
General Fund costs for debt service on these on the expected sale of bonds that have already
bonds will be$5.4 billion in 2013-14.While there been authorized—that is,it does not include
has been some variation in costs in recent years, any additional bonds that may be authorized
this amount is roughly equal to the annual costs by the voters or Legislature during the forecast
for debt service since 2009-10. General Fund period(such as the water bond scheduled for the
debt-service costs have not increased significantly November 2014 ballot).
over this period for a few reasons.Most notably,
the Legislature and Governor enacted legislation Debt-Service Ratio(DSR)Expected to
to permanently offset some General Fund Remain Just Under 6 Percent. The DSR for
debt-service costs with transportation funds. general obligation and lease-revenue bonds—that
In addition,legislation was enacted to offset is,the ratio of annual General Fund debt-service
some housing-related debt-service costs in costs to annual General Fund revenues and
2011-12 through 2013-14 with proceeds from transfers—is often used as one indicator of
the National Mortgage Settlement.Additionally, the state's debt burden.There is no one"right"
the 2013-14 budget enabled UC to reissue under level for the DSR.The higher it is and more
Legislative Analyst's Office www.lao.ca.gov 55
California's Fiscal Outlook
rapidly it rises,however,the more closely bond just under 6 percent throughout the forecast
raters,financial analysts,and investors tend period.This is because General Fund debt service
to look at the state's debt practices and the and General Fund revenues are expected to grow
more debt-service expenses limit the use of at similar rates.To the extent additional bonds
revenues for other programs.Figure 6 shows are authorized and sold in future years beyond
what Californias DSR has been in the recent those already approved,the state's debt-service
past and our DSR projections for the forecast costs and DSR would be higher than projected in
period.We estimate that the DSR will remain Figure 6.
Figure 6
Projected Debt-Service Ratios
]r
A.M., ,Wt Vnsold
6
5
4
3
2
71Bonds Al�dy Sold
85-86 90-91 95-96 00-01 05-06 10-11 1 15-16 1
Fares
'RMIo of mnu Gmmll Fund!de.11lcepM .mGeal Fundend Fw Pa MAOMMI M an d O en.
SWn,.M1314, ..,, leaerenu b.,.—M m N.1Vnrv ,dCft
wbmbwere MMWd
order dnere auffp
56 www.lao.ca.gov Legislative Analyst's Office
LAO Publications
The Legislative Analyst's Office )LAO) is a nonpartisan office which provides fiscal and policy information and
advice to the Legislature.
To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service,
are available on the LAO's website at www.loo.co.gov. The LAO is located at 925 L Street, Suite 1000,
Sacramento, CA 95814.
LEGISLATIVE AND PUBLIC AFFAIRS SPECIAL COMMITTEE
AGENDA REPORT Item Number
4
a
Orange County Sanitation District
FROM: James D. Herberg, General Manager
Originator: Eric Saperstein, ENS Resources
SUBJECT: FEDERAL LEGISLATIVE AFFAIRS
GENERAL MANAGER'S RECOMMENDATION
Information Only.
SUMMARY
Legislative consultant will provide an oral update to the Committee detailing federal
legislative activities for the prior month. A written update from the federal lobbyist is
provided as part of the report.
ADDITIONAL INFORMATION
N/A
PRIOR COMMITTEE/BOARD ACTIONS
N/A
CEQA
N/A
BUDGET/DELEGATION OF AUTHORITY COMPLIANCE
N/A
ATTACHMENTS
The following attachment(s) are provided in hard copy and may also be viewed on-line at the OCSD
webske(www.ocsd.coml with the complete agenda package:
Legislative Updates: Federal
Page 1 of 1
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RESOURCES
MEMORANDUM
TO: Jim Colston
FROM: Eric Sapirstein
DATE: December 1,2013
SUBJECT: Washington Update
The past month witnessed Congress setting the stage for the final weeks of the
session scheduled to adjourn on or around December 15. As noted in the past,
Congress and the White House reached a temporary accord on spending and thus a
continuing resolution was enacted maintaining governmental program spending
through January 15, 2014. Current budget negotiations are centered on the
adoption of a much delayed budget blueprint due by December 13 dictated under
the temporary spending agreement. Assuming passage of a budget, the House and
Senate could then proceed to finalizing spending measures for the remaining
months of fiscal year 2014. Passage of a budget agreement is vital to avoid a second
round of indiscriminate budget cuts known as sequestration that would be triggered
in January,absent a budget agreement.
For the District, this is important for two key reasons. First, if sequestration is not
modified or eliminated, programs such as cash subsidy payments to the District
under the Build America Bonds program would be subject to another 7% reduction
(estimate). Second, failure to reach an accord could also constrain federal support
of water infrastructure needs. Since both parties and the White House would like to
avoid sequestration, if only to avoid a dramatic $20 billion cut in defense spending,
prospects are better than last year that some kind of agreement might be fashioned
in the next several weeks.
The House Committee on Appropriations has agreed to appoint Representative Ken
Calvert to lead the important Subcommittee on Interior and Environment. This
subcommittee holds jurisdiction over USEPA and many programs at the Department
of the Interior that address water infrastructure assistance and NEPA compliance
issues. Calvert will now play a heightened role as he picks up the subcommittee
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gavel. In this capacity, he will be required to define spending priorities for these
agencies including the all-important matter of how many resources should be
allocated to support water quality infrastructure needs. This appointment carries
an important and additional impact for the District Because Calvert sits as the
number two member on the Subcommittee on Energy and Water Development with
its jurisdiction over USCOE and USBR programs, he effectively has a major role in
almost every budgetary policycnaking matter impacting water infrastructure needs,
ranging from water quality to recycling to desalination to drinking water needs.
Finally, one important procedural event occurred during the past month. Senate
Majority Leader Harry Reid (D-NV) brought a rule change to the Senate Floor that
eliminated the use of a filibuster for most Presidential nominations (excluding
Supreme Court nominees). Now, only a 51 majority is required. This means that the
long stalled nominations of a series of USEPA appointments including that of
Assistant Administrator for the Office of Water may be debated and voted on by the
Senate.
A number of activities occurred of direct interest to the District and are summarized
below.
WRDA Rewrite Moves into Conference Committee Deliberations
The House and Senate formally began the final stage of developing a Water
Resources Development Act (WRDA). Members of the WRDA Conference
Committee met to kick-off the conference to reconcile differences between H.R.
3080 and S. 601. While the meeting was ceremonial to allow members to emphasize
their support of a renewed law, it also served as a means to direct House and Senate
staff to use the remaining weeks to iron our a compromise bill that the committee
could vote on before the end of the year. While it is unclear if time remains in the
session for a bill be drafted and then approved by both chambers, it is clear that
WRDA may be one bill that makes it through the legislative morass for enactment if
not this year then early in 2014.
For the District, we continued to work with the delegation to ensure that legislative
provisions that would support the cost-effective removal of riprap from the Santa
Ana River remain in any final compromise. House delegation staff informed us that
the committee is aware of the importance of the issue. As of this writing, we expect
that any final agreement will provide the necessary authority to develop a riprap
removal program that could benefit from cost-shared federal support.
In addition to the priority to address such ecosystem needs, the committee
continues to debate the wisdom of authorizing a WIFIA program. We have
identified to committee and delegation staff the concerns of current Senate language
that would allow for WIFIA assistance to a water quality infrastructure project, but
deny the use of traditional tax-exempt financing for elements of a project not
supported by WIFIA. Senator Boxer's staff has informed us that this issue is of
utmost concern and will be addressed as part of any final WRDA agreement.
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Infrastructure Financing
The concerns about the failing grades of the nation's infrastructure continued to be
raised with the introduction of legislation. The bill sponsored by Representative
Earl Blumenauer (D-011), The Water Infrastructure Trust Fund (H.R. 3582) secured
bipartisan support last month. The measure would create a stream of revenue to
supplement the SRF program and establish a WIFIA-like loan guarantee program.
The measure would rely on funding from a voluntary $0.03 fee assessed on
manufacturers of drinks and "flushables". Because the fee is voluntary, it is unclear
to what extent revenues would be generated. A paying entity would be provided
with the authority to label its products with a seal denoting support for clean water
infrastructure financing needs. Presumably this would be similar to the USEPA
Energy Star Program seal.
A second bill,The BRIDGE Act(S. 1718),introduced by Senator Mark Warner(D-VA)
seeks to create a new, independent infrastructure bank that would provide up to
$10 billion in loans and loan guarantees to support a multitude of public
infrastructure needs including environment-related infrastructure needs such as
wastewater and stormwater projects. The measure is notable because it enjoys
bipartisan support and highlights the priority to maintain federal grants and
traditional municipal financing but calls for innovative approaches to meet the
funding gap.
The importance of these measures and other bills introduced during the past year is
found in the fact that an increasing number of bills are being introduced and often
with bipartisan interest and support The growing attention to water infrastructure
needs may lead to congressional action during the second session next year.
USBR Issues Funding Opportunity Notice on WaterSMART Program
Last month, the U.S. Bureau of Reclamation issued an announcement of its intent to
solicit requests for funding of studies that can assist in addressing water scarcity
issues throughout the west The WaterSMART program is notable for its priority to
consider public agency needs to conduct feasibility studies of promising water
recycling project studies. As a result of this fact, we advised the District about the
value of reviewing the announcement to determine if it is applicable to ongoing
District interest in enhancing its water recycling capabilities. According to the
Bureau,actual solicitations will be made later this winter or in early spring.
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ORANGE COUNTY SANITATION DISTRICT
Agenda
Terminology Glossary
AQMD Air Quality Management District
ASCE American Society of Civil Engineers
BOO Biochemical Oxygen Demand
CARB California Air Resources Board
CASA California Association of Sanitation Agencies
CCTV Closed Circuit Television
CEQA California Environmental Quality Act
CRWQCB California Regional Water Quality Control Board
CWA Clean Water Act
CWEA California Water Environment Association
EIR Environmental Impact Report
EMT Executive Management Team
EPA U.S. Environmental Protection Agency
FOG Fats, Oils, and Grease
FSSD Facilities Support Services Department
gpd Gallons per day
GWR System Groundwater Replenishment System (also called GWRS)
LOS Level of Service
MGD Million gallons per day
NACWA National Association of Clean Water Agencies
NPDES National Pollutant Discharge Elimination System
NWRI National Water Research Institute
O&M Operations and Maintenance
OCCOG Orange County Council of Governments
OCHCA Orange County Health Care Agency
OCSD Orange County Sanitation District
OCWD Orange County Water District
OOBS Ocean Outfall Booster Station
OSHA Occupational Safety and Health Administration
POTW Publicly Owned Treatment Works
ppm Parts per million
RFP Request For Proposal
RWQCB Regional Water Quality Control Board
SARFPA Santa Ana River Flood Protection Agency
SARI Santa Ana River Inceptor
SARWQCB Santa Ana Regional Water Quality Control Board
SAWPA Santa Ana Watershed Project Authority
SCADA Supervisory Control and Data Acquisition system
SCAP Southern California Alliance of Publicly Owned Treatment Works
SCAQMD South Coast Air Quality Management District
SOCWA South Orange County Wastewater Authority
SSMP Sanitary Sewer Management Plan
SSO Sanitary Sewer Overflow
SWRCB State Water Resources Control Board
TDS Total Dissolved Solids
TMDL Total Maximum Daily Load
TSS Total Suspended Solids
WDR Waste Discharge Requirements
WEF Water Environment Federation
WERF Water Environment Research Foundation
Activated-sludge process — A secondary biological wastewater treatment process where bacteria
reproduce at a high rate with the introduction of excess air or oxygen, and consume dissolved
nutrients in the wastewater.
Biochemical Oxygen Demand (BOD)—The amount of oxygen used when organic matter undergoes
decomposition by microorganisms. Testing for BOD is done to assess the amount of organic matter in
water.
Biosolids — Biosolids are nutrient rich organic and highly treated solid materials produced by the
wastewater treatment process. This high-quality product can be recycled as a soil amendment on
farm land or further processed as an earth-like product for commercial and home gardens to improve
and maintain fertile soil and stimulate plant growth.
Capital Improvement Program (CIP) — Projects for repair, rehabilitation, and replacement of assets.
Also includes treatment improvements, additional capacity, and projects for the support facilities.
Coliform bacteria—A group of bacteria found in the intestines of humans and other animals, but also
occasionally found elsewhere used as indicators of sewage pollution. E. coli are the most common
bacteria in wastewater.
Collections system — In wastewater, it is the system of typically underground pipes that receive and
convey sanitary wastewater or storm water.
Certificate of Participation (COP) — A type of financing where an investor purchases a share of the
lease revenues of a program rather than the bond being secured by those revenues.
Contaminants of Potential Concern (CPC) — Pharmaceuticals, hormones, and other organic
wastewater contaminants.
Dilution to Threshold (DIT) — the dilution at which the majority of the people detect the odor
becomes the D(f for that air sample.
Greenhouse gases — In the order of relative abundance water vapor, carbon dioxide, methane,
nitrous oxide, and ozone gases that are considered the cause of global warming ("greenhouse
effect').
Groundwater Replenishment (GWR) System — A joint water reclamation project that proactively
responds to Southern California's current and future water needs. This joint project between the
Orange County Water District and the Orange County Sanitation District provides 70 million gallons a
day of drinking quality water to replenish the local groundwater supply.
Levels of Service (LOS)—Goals to support environmental and public expectations for performance.
NOMA— N-Nitrosodimethylamine is an N-nitrosoamine suspected cancer-causing agent. It has been
found in the Groundwater Replenishment System process and is eliminated using hydrogen peroxide
with extra ultra-violet treatment.
National Biosolids Partnership (NBP) — An alliance of the National Association of Clean Water
Agencies (NACWA) and Water Environment Federation (WEF), with advisory support from the U.S.
Environmental Protection Agency (EPA). NBP is committed to developing and advancing
environmentally sound and sustainable biosolids management practices that go beyond regulatory
compliance and promote public participation in order to enhance the credibility of local agency
biosolids programs and improved communications that lead to public acceptance.
Plume—A visible or measurable concentration of discharge from a stationary source or fixed facility.
Publicly-owned Treatment Works (POTW)— Municipal wastewater treatment plant.
Santa Ana River Interceptor (SARI) Line — A regional brine line designed to convey 30 million
gallons per day (MGD) of non-reclaimable wastewater from the upper Santa Ana River basin to the
ocean for disposal, after treatment.
Sanitary sewer — Separate sewer systems specifically for the carrying of domestic and industrial
wastewater. Combined sewers carry both wastewater and urban run-off.
South Coast Air Quality Management District (SCAQMD) — Regional regulatory agency that
develops plans and regulations designed to achieve public health standards by reducing emissions
from business and industry.
Secondary treatment — Biological wastewater treatment, particularly the activated-sludge process,
where bacteria and other microorganisms consume dissolved nutrients in wastewater.
Sludge—Untreated solid material created by the treatment of wastewater.
Total suspended solids (TSS)—The amount of solids floating and in suspension in wastewater.
Trickling filter — A biological secondary treatment process in which bacteria and other
microorganisms, growing as slime on the surface of rocks or plastic media, consume nutrients in
wastewater as it trickles over them.
Urban runoff — Water from city streets and domestic properties that carry pollutants into the storm
drains, rivers, lakes, and oceans.
Wastewater—Any water that enters the sanitary sewer.
Watershed —A land area from which water drains to a particular water body. OCSD's service area is
in the Santa Ana River Watershed.