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Perspectives on the Economy and Demographics 2005-06

February 22, 2005 - The California economy is expanding at a healthy pace in early 2005, as evidenced by real estate construction, exports, company reports of sales and profits, and business-related tax receipts. The one area of concern remains jobs, which are lagging due to intense focus on cost cutting and efficiencies. We project the California economic expansion to continue at a moderate pace, with personal income expanding by roughly 5.6 percent and jobs growing 1.5 percent annually during the next two years.

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State Fiscal Picture 2005-06

February 22, 2005 - The Legislature has an important budget opportunity. We project that revenues are $2.2 billion higher (for the current and budget years combined) than reflected in the Governor's budget. This, combined with the magnitude of ongoing solutions proposed in the budget plan, would result in a balanced 2005-06 budget with a solid reserve. However, the price of inaction is significant. Without the adoption of ongoing solutions of the magnitude offered by the budget plan, the 2005-06 budget would be precariously balanced and the state would experience major budget shortfalls in 2006-07 and beyond. These shortfalls would be close to $10 billion.

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Governor's Budget-Related Reforms

February 22, 2005 - The Governor has proposed constitutional reforms involving several areas of the budget—including Proposition 98 K-14 education funding, the budget process, and transportation. The Governor has indicated that the main purpose of the reforms is to deal with "autopilot spending" and instill discipline in future budgets. We believe, however, that the administration's specific proposals work in exactly the opposite direction. That is, they would put more spending on autopilot and make it more difficult to balance future budgets in a rational way. The changes would also result in a diminution of legislative authority.

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Addressing Public Pension Benefits and Cost Concerns

February 22, 2005 - California “defined benefit” pensions in the public sector raise certain benefits and cost issues. The Governor proposes shifting all new public sector employees to “defined contribution” plans to address the high cost of the current system. Defined contribution plans address concerns with defined benefit pensions, but also introduce issues of their own. The Legislature could also address the benefits and cost concerns of current retirement plans within the existing defined benefit structure or with other pension plan alternatives.

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Transportation Funding Instability Continues

February 22, 2005 - The administration proposes to suspend $1.3 billion in Proposition 42 transportation funding and to reduce the General Fund's commitment to repay transportation loans in the near term. This would help the General Fund condition but restrict already limited transportation funding and increase near-term funding uncertainty. The administration also proposes changing the State Constitution to protect transportation funding in the long run by preventing future suspensions of Proposition 42. We recommend that the administration provide information to the Legislature that would allow it to determine (1) the effect of the Governor's proposals on the size of the transportation program and (2) TCRP project funding requirements in 2005-06. In order to provide long-term transportation funding stability while freeing up General Fund revenue for other purposes, we continue to recommend (1) the repeal of Proposition 42, (2) an increase of the gas tax to generate an amount of funding equivalent to Proposition 42, and (3) adjusting the gas tax for inflation.

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Water Policy Issues Facing the State

February 22, 2005 - Two of the most important water policy issues facing the state today are how to address what has been characterized by the administration as a “crisis” in flood management and how to finance the $8.1 billion CALFED Bay-Delta Program (CALFED). We analyze a Department of Water Resources White Paper recently submitted to the Legislature on addressing the state’s flood management challenges and make recommendations for legislative action. We also analyze a ten-year finance plan for CALFED that the budget indicates will be incorporated in the Governor’s May Revision. We find that the finance plan’s revenue assumptions may be unrealistic. As a result, the Legislature will need to establish its expenditure priorities so that the program can be “right sized” consistent with those priorities.

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Assessing the Governor's Reorganization Proposals

February 22, 2005 - On January 6, 2005, the administration released its plans to eliminate 88 boards and commissions and to reorganize the Youth and Adult Correctional Agency (YACA). For each of the plans, we provide an assessment of its fiscal effect and raise key issues. Although the administration recently has decided not to forward its boards and commissions proposal to the Legislature, the piece provides key considerations for the Legislature when seeking to consolidate these types of entities. Regarding the YACA proposal, we conclude it has the potential to improve the efficiency, accountability, and effectiveness of the state's prison system. However, the plan omits important details that the Legislature requires in order to fully evaluate its merits. Our analysis indicates that the proposed reorganization would probably result in net costs in the short term, but has the potential to achieve significant long-term net savings by placing a greater emphasis on inmate rehabilitation as a means of increasing public safety.

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Additional Options for Addressing the State’s Fiscal Problem

February 18, 2004 - In this piece, we present options for the Legislature's consideration. We have identified expenditures that may be considered of lower priority in tough budget times. It is not that these activities are without merit or not desirable. In better fiscal times we would not necessarily put such options on the table. However, we offer them in the context of a need to solve a massive budget shortfall. We have also identified selected revenue options for the Legislature's consideration. These options generally involve tax expenditure programs which are either inefficient at achieving their objectives or are not the most efficient means of doing so.

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The Problem of Abusive Tax Shelters

February 18, 2004 - The current level of abusive tax shelters (ATS) activity—and its potential for future expansion—raises significant administrative challenges for FTB and for the continued viability of the state's revenue system. The use of ATSs not only results in significant immediate term revenue losses to California—in the hundreds of millions of dollars annually—but can also result in declining compliance by an increasing number of taxpayers over the longer term. While the Legislature has taken important steps to curtail the use of ATSs, it may want to consider additional measures in this regard. This discussion provides an overview of the ATS phenomenon, addresses the impacts of such shelters on the state, and suggests measures the Legislature may want to consider to address the ATS problem.

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Mandates: Mounting Liabilities and Need for Reform

February 18, 2004 - The administration's budget summary outlines ideas for changing the mandate system. While these ideas have merit, they do not go far enough to correct the structural problems inherent in the existing system. We identify six areas of concern that merit legislative consideration in any reform proposal.

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Better Care Reduces Health Care Costs for Aged and Disabled Persons

February 18, 2004 - We describe the current Medi-Cal health care delivery system and evaluate its strengths and weaknesses in regard to addressing the health care needs of the aged and disabled. We identify additional aged and disabled persons that would benefit from receiving care from managed care plans. We recommend the enactment of legislation directing the Department of Health Services (DHS) to gradually shift an estimated 330,000 aged or disabled persons from the fee-for-service system to the Medi-Cal managed care system. We further recommend strengthening the existing Medi-Cal managed care system to address problems that limit the ability of DHS to ensure access to services and quality of care.

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Deficiencies: Rethinking How to Address Unexpected Expenses

February 18, 2004 - The Constitution gives the Legislature the power to appropriate funds. In order to address unexpected expenses (or "deficiencies") that arise during a fiscal year, the Legislature provides the administration with limited authority to spend at higher rates than foreseen in the budget act. The use of this deficiency process, however, has a history of problems—from being used to establish new programs with no statutory authority to serving as an alternative to the normal state budget process. Given this history, we outline a framework for legislative consideration which identifies a new approach to meet unexpected expenses. In our view, this framework would continue to allow necessary adjustments, while better protecting the appropriation authority of the Legislature.

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Another Property Tax Shift?

February 18, 2004 - Similar to the 1990s, the budget proposes to shift $1.3 billion of property taxes from local governments to K-14 districts and reduce state education spending by an equal amount. In our view, the Legislature should use its authority over this tax for the overall betterment of local government, not as a state rainy day fund. Accordingly, we recommend the Legislature reject this proposal. If the Legislature chooses to review proposals to reduce local taxes, we offer guidelines for this process and outline an alternative budget reduction consistent with these guidelines. While this alternative also represents an undesirable intrusion into local finance, it would have fewer negative effects.

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State Fiscal Picture 2004-05

February 18, 2004 - The basic budget problem currently facing the state involves an unfunded gap of slightly over $17 billion. Most of this—$15 billion—represents an ongoing projected structural imbalance between current-law revenues and expenditures in 2004-05 and beyond. A key element of the Governor's plan is the assumed approval of a $15 billion economic recovery bond on the March 2004 statewide ballot to pay off the accumulated 2002-03 budget deficit and help address the remaining budget shortfall. Our own evaluation of the proposal indicates that even if all of its elements were adopted, 2004-05 would end with a General Fund deficit of $0.8 billion. We further project that an ongoing General Fund structural deficit of close to $7 billion would exist beyond the budget year, absent corrective action.

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Perspectives on the Economy and Demographics 2004-05

February 18, 2004 - The U.S. and California economies are entering 2004 with significant momentum which we believe will continue through the budget year. The one major exception to the generally upbeat economic picture is employment growth, which continues to lag despite major gains in consumer and business spending and output in the economy. The lack of job growth has not held back the recovery so far, but continued softness in this key area could undermine consumer and business confidence, spending, and ultimately at some point in the future, the overall economic expansion.