Budget Overspends on Inflation

Proposed Increase for Rising Costs Unnecessary

Governor’s Budget Proposes 3.2 Percent Increase. In a typical year, a department’s operating expenses will tend to increase due to inflation. For instance, rent, utilities, and transportation expenses rise over time. To allow departments to pay for these rising costs without reducing other services, the administration usually builds a “price increase” into the Governor’s budget. The 2009–10 Governor’s Budget includes a 3.2 percent inflationary adjustment for operating expenses. This adjustment results in a General Fund cost of $136 million in 2009–10. Of this amount, two–thirds ($93 million) is for the California Department of Corrections and Rehabilitation (CDCR).

Inflation Projections Dropping Rapidly. In August 2008, when the administration decided to build in the price increase for the upcoming 2009–10 budget, a projection of 3.2 percent for inflation was reasonable. In recent months, however, the sagging economy and falling energy prices have made the forecast for inflation much lower. We now project that inflation for government expenses will amount to only 0.4 percent in 2009–10. Given a projection of such modest inflation, we recommend that the Legislature delete the price increase and simply have departments absorb any increased operating expenses. This action would reduce proposed General Fund expenditures by $136 million.