Transcript Chancellor’s Budget Workshop State Economic and Fiscal Forecast Presented by: Ron Bennett, President and CEO John Gray, Executive Vice President.

Chancellor’s Budget Workshop
State Economic
and Fiscal Forecast
Presented by:
Ron Bennett, President and CEO
John Gray, Executive Vice President
Economic Overview
1
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The U.S. economy fell into recession in December 2007, the most severe
since the Great Depression
This recession was “declared” over in July 2009, three years ago, and yet
many believe that hard times are continuing
While the private sector may be adding jobs, the public sector – including
schools – continues to shrink
In order for education to see a turnaround, private sector employment
must rebound more strongly, which in turn will generate additional tax
revenues to fund various public services
In California, the Legislature and the Governor should be laying the
groundwork for future growth
Human capital investment – K-12 education and higher education
Infrastructure investment – roads, bridges, communications
The National Economy
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Little has changed since the May Revision
The economy is growing, but very slowly
Little progress has been made on employment, with only 80,000 jobs
added in June
Threats from the European Union remain, but a bail-out package for Spain
has been crafted
Gross Domestic Product (GDP) for the first quarter of 2012 has been revised
downward from 2.2% to 1.9%
For 2010, first quarter growth was 3.9% and for 2011, it was 0.4%
Unfortunately, last summer the brakes were applied as Congress
fumbled the debate on the debt ceiling, Standard and Poor’s
downgraded U.S. debt, and Japan was hit by a tsunami
A fiscal “train wreck” could occur if Congress doesn’t extend the Bush-era
tax cuts and reach agreement on scheduled federal spending reductions
The National Economy
3
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U.S. GDP
(Percent Change)
3.8%
4.0%
3.8%
2.5% 2.3%
1.7%
2.0%
0.4%
0.0%
1.3% 1.8%
3.0%
1.9%
-0.7%
-2.0%
-4.0%
3.9%
-3.7%
-6.0%
-6.7%
-8.0%
-8.9%
-10.0%
Q3
Q4
2008
Q1
Q2
Q3
Q4
Q1
Q2
2009
Source: U.S. Bureau of Economic Analysis, June 2012
Q3
2010
Q4
Q1
Q2
2011
Q3
Q4
Q1
2012
Public Section and
Private Sector Job Growth
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(Since 1997)
120%
115%
110%
105%
100%
95%
Private Growth Over Period
Public Growth Over Period
90%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
California’s Economy
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The California economy is growing slowly, held down largely by the home
foreclosure problem
The real estate market, however, may have turned the corner, with May
showing the third consecutive month of rising home prices, breaking the
$300,000 barrier for the first time since October 2010
The state’s 10.8% unemployment rate is the
third highest in the nation
Source: UCLA Anderson Forecast, June 2012
California’s Economy
6
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Just before recessing, the Legislature approved issuing $4.6 billion in state
bonds to begin the high speed rail project estimated to cost $68 billion
$3.3 billion in federal funds were an inducement to move forward
However, a University of California, Los Angeles (UCLA) study of Japan’s
bullet train concluded that the project did not stimulate the local economy
Japan’s high speed train did lead to urban/suburban sprawl
Claims that California’s high speed rail will lead to 450,000 jobs “are
not likely to be realized”
Source: UCLA Anderson Forecast, June 2012
California’s Business Environment
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California continues to be ranked the worst state (50th) for business
While California ranked high for living environment, the rankings for
workforce quality, taxation, and business regulations dragged it to the
bottom
“California continues to head in the wrong direction as its
tax policies will drive more businesses and people to
relocate in other states. State politicians feel business and
commerce are ‘necessary evils’ that provide the funds to
enable pursuit of their misguided agendas.”
CEO Magazine, June 2012
Source: CEO Magazine, June 2012
Comparing the Forecasts – Personal Income
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Personal Income
(Percent Change)
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
4.9%
4.0%
3.5%
3.4%
2012-13 Budget Act
UCLA, June 2012
2012
2013
The Value of Education
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Education, especially K-12, is critical to the economic success of individuals
and our state as a whole
Personal income accounts for more than half of state General Fund
revenues
Average Annual
Earnings
Educational attainment affects earnings
$103,054
$20,241
$30,627
$39,771
Source: U.S. Census Bureau Population Survey, 2009
$56,665
$73,738
Comparing the Forecasts – Employment
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Employment
(Percent Change)
1.9%
2.0%
1.8%
1.6%
1.5%
1.4%
1.0%
2012-13 Budget Act
UCLA, June 2012
0.5%
0.0%
2012
2013
Comparing the Forecasts – Inflation
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Consumer Price Index
(Percent Change)
2.5%
2.0%
2.0%
2.1%
2.0%
1.6%
1.5%
2012-13 Budget Act
UCLA, June 2012
1.0%
0.5%
0.0%
2012
2013
General Fund Budget Summary
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2011-12
2012-13
(In Millions)
Prior-Year Balance
-$2,685
-$2,882
Revenues and Transfers
$86,830
$95,887
Total Resources
$84,145
$93,005
Total Expenditures
$87,027
$91,338
Fund Balance
-$2,882
$1,667
$719
$719
-$3,601
$948
$0
$0
-$3,601
$948
Budget Reserve
Reserve for Encumbrances
Reserve for Economic
Uncertainties
Budget Stabilization Account
Total Available Reserve
Source: 2012-13 Budget Act
The $948 million
reserve represents just
1% of revenues and
transfers
$95.9 billion in 2012-13
revenues and transfers
assumes $8.5 billion in
voter-approved taxes
Expenditures are
increasing almost 5%
even after all of the
cuts
Is the Budget Credible?
13
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Budgeted Reserve vs. Final Reserve
(In Millions)
Budgeted
Reserve at
Enactment
2012-13
$948
2011-12
$543
2010-11
$1,205
2009-10
$500
2008-09
$971
Final
Reserve One
Year Later
Difference
The 2012-13 Budget
Act contains a
$948 million reserve
Is this credible?
You decide!
14
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General Fund Revenues
15
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$92.5
(In Billions)
State Revenues
$88.6
$84.6
$78.0
2011-12
2012-13
Risks to the State Budget
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The Governor’s tax initiative is the biggest risk to the State Budget, with
$8.5 billion at stake for the current year
The latest Field Poll puts the initiative at 54% in support and 38% opposed
The Legislature’s approval of the high speed rail project could threaten
the tax initiative, with nearly one in three voters polled saying they
would be less inclined to support raising taxes if the Legislature funds
the project
The already anemic economic recovery could stall, as consumer confidence
wanes and spending slows
The sovereign debt crisis in the European Union could drag down U.S.
exports
Disruptions in the supply of oil could spike energy prices
Risks to the State Budget
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Federal law could trigger a recession unless Congress acts first
Bush-era tax cuts are set to expire in January 2013
Automatic federal spending cuts could take place, per last year’s Budget
agreement
Like prior years, the courts or the federal government could disallow Budget
solutions enacted by the Legislature
Medi-Cal reductions have previously been disallowed
The state’s corrections system is under federal receivership
Reductions to safety net programs such as State Supplemental Payments
(SSP) and child care are vulnerable to court challenge
The state revenue forecasts could be flawed
The Legislative Analyst’s Office (LAO) has called into question the
Department of Finance’s (DOF) assumptions regarding capital gains
income
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Proposition 98 – The Promise
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Proposition 98, enacted by voters in 1988,
was intended to:
Provide a source of stable and
adequate resources for K-14 public
schools
Reduce class sizes to no more than
20:1 in all grades K-12
Establish a minimum base of funding
from which resources could grow to
match the top ten states in the nation
Painting: Leonardo da Vinci, “Mona Lisa”
Simply put, it was the picture of hope, and
the promise of a bright future for schools
Proposition 98 – The Picture Today
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Painting: Edvard Munch, “The Scream of Nature”
Extensive manipulation of
Proposition 98 has distorted the
initiative’s original vision
Proposition 98 is routinely adjusted,
both legislatively and
administratively, so that it achieves
the K-14 funding targets desired by
the Legislature and the Governor
Zero year-over-year change in K-12
funding for 2012-13 is the state’s
budgetary goal, if new taxes are
approved by voters . . .
. . . even though Proposition 98 is
touted to increase by more than 14%
Proposition 98
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Proposition 98 Funding
(In Billions)
“Over Appropriation”
$785 Million
$60.0
$50.0
Initiative Funding
$40.0
$30.0
$56.6
$20.0
$53.6
$49.1
$49.5
$49.7
$46.9
2008-09
Test 2
2009-10
Test 1
2010-11
Test 2
2011-12
Test 1
2012-13
Test 1
(Suspended)
(Projected)
(Projected)
$10.0
$0.0
2007-08
Test 3
Majority Vote Budget – Proposition 25
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Proposition 25 meant that State Budget spending plans could be passed by a
simple majority instead of a two-thirds super majority
Has resulted in two on-time budgets
But, do on-time budgets mean balanced budgets?
After the Governor vetoed the first enacted Budget last year, the State
Controller withheld lawmaker salaries
A recent court decision said the State Controller is not empowered to
decide the “acceptability” of a Budget enacted by the Legislature – the
State Controller has appealed
What’s the future of State Budgets under Proposition 25?
On-time Budgets, but also midyear trigger cuts
More manipulation of Proposition 98
“Two-Budget” scenarios – the optimistic, passable Budget with midyear
cuts triggered if reality doesn’t fit the optimistic picture
Negotiations Process Flow Chart
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Negotiations Process Timeline
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Thank you for attending!