Fiscal Outlook Supplement on Proposition 2: True Up Calculations

On November 18^th, we released the 21^st annual edition of our Fiscal Outlook. This note details the calculations we used to estimate the “true up” deposit for 2015-16 in that report.

Proposition 2 and the Budget Stabilization Account (BSA). Passed by voters in 2014, Proposition 2 changes budgeting practices concerning reserves and debt payments. On reserves, Proposition 2 created new rules for minimum annual deposits into the Budget Stabilization Account (BSA), the state’s rainy-day fund. Proposition 2 makes reserve deposits by putting aside: (1) 1.5 percent of General Fund revenues (we refer to this as the “base amount”) and (2) a portion of capital gains revenues that exceed a specified threshold.

Estimated $2.2 Billion Proposition 2 True Up. Under Proposition 2’s “true up” provisions, the Legislature reevaluates the capital gains portion of the BSA estimate twice: once in each two subsequent budgets. Under these reevaluations, the state revises the BSA deposit up or down if capital gains taxes were higher or lower than the state’s prior estimates. In other words, if the initial estimate was too low, the Legislature must make an additional deposit, whereas if the estimate was too high, the difference is transferred back into the General Fund. As shown in Figure 1, our current estimate of the 2015-16 Proposition 2 requirement includes a $2.2 billion true up deposit made in the 2016-17 budget.

Revision in Capital Gains Estimates Explains True Up. The state does not revisit its estimate of debt payments in the true up calculation, which means that the state does not make additional debt payments if capital gains are higher than expected. As a result, our estimate of the true up deposit is equal to the difference between the state’s estimated capital gains requirement in the 2015-16 Budget Act and the revised estimate of those capital gains requirements now. In Figure 2, we compare our November 2015 estimate to the June 2015 budget assumption (based on the administration’s estimates). The figure shows that the true up calculation shown above is also identical to the net revisions in capital gains and Proposition 98 shares between the Budget Act and our new estimates in the Fiscal Outlook.