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On November 18th, we released the 21st annual edition of our Fiscal Outlook, which projects California’s state budget condition through 2019-20 under a few different economic scenarios. This note provides the calculations and assumptions underlying the report’s estimates on Proposition 2 (2014), which changed the state’s budgeting practices concerning reserves and debt payments. Specifically, this note details the calculations we used to estimate the first 2015-16 "true up" deposit into the state’s rainy day fund.

LAO Contact: Ann Hollingshead

Budget and Policy Post
December 3, 2015

Fiscal Outlook Supplement on Proposition 2: True Up Calculations

On November 18th, we released the 21st 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.

Figure 1

Proposition 2 "True Up" Calculation for 2015-16

(In Millions)

Total taxes from capital gains

$13,940

Amount equal to 8 percent of all General Fund taxes

-9,610

Subtotals, Capital Gains Taxes Over 8 Percent Threshold

($4,331)

Less Proposition 98 share

-$195

Subtotal, Excess Capital Gains Captured by Proposition 2

($4,136)

Less capital gains portion of debt appropriations made in 2015-16 budget

-978

Less capital gains portion of previous BSA deposit

-978

Total, True Up Deposit Into the BSA

$2,180

BSA = Budget Stabilization Account

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.

Figure 2

Higher LAO Estimate of Capital Gains Explains True Up

(In Millions)

June 2015
Budget Act
(Administration Estimate)

November 2015
Fiscal Outlook
(LAO Estimate)

Difference

Capital gains that exceed 8% threshold

$2,329

$4,331

$2,001

Proposition 98 share

374

195

-$179

Proposition 2 Capital Gains Requirement

$1,955

$4,136

$2,180