LAO 2007-08 Budget Analysis: Perspectives and Issues Outline Analysis of the 2007-08 Budget Bill
Perspectives and Issues Outline

Part I: State’s Fiscal Picture

The Budget Proposal

Economic Forecast—Sluggish Growth Through Mid-2007

Revenue Forecast—Modest Growth in 2006-07, Larger Increase in 2007-08

Total Budget Spending

General Fund Condition

Key Features

LAO Outlook

2007-08 Budget Would End With Deficit

The BSA and the Budget


BSA and the General Fund Condition

Structural Shortfalls Would Persist …

… As Would Other Risks and Pressures

Issues and Considerations

Part II: Perspectives on the Economy and Demographics


Recent U.S. Developments

All Major Economic Sectors Except Housing Expanded in 2006

Reduced Oil Prices Having Positive Economic Impact

How Long Will 2006 Drop in Oil Prices Last?

Inflation Eased Late in the Year

Profits Jumped Again in 2006

Economy Regained Some Momentum in Late 2006

California Trends

Economy Survived a Substantial Real Estate Decline in 2006

Is Real Estate Stabilizing?

Other Indicators Are Positive

The Budget’s Economic Outlook

LAO’s Economic Outlook

National Outlook

Inflation and Interest Rates to Decline

California Outlook

Special Factors Affecting the Outlook

California’s Minimum Wage Increase

Key Forecast Risks

Comparison to Other Forecasts

The Demographic Outlook

State Population to Exceed 38 Million in 2008

Population Growth Components

Growth to Vary by Age Group

Overall Budgetary Implications

Part III: Perspectives on State Revenues

The Budget’s Forecast for Total State Revenues

Proposed Revenue-Related Changes

The Budget’s General Fund Revenue Outlook

The LAO’s General Fund Revenue Outlook

We Expect Lower Revenues—Down $2 Billion

Key Factors Underlying Our Lower Estimates

The LAO’s Forecast for Major Revenue Sources

Personal Income Tax


PIT Revenue Forecast

Key Forecast Factors

Sales and Use Tax


SUT Rates

SUT Revenue Forecast

Key Forecast Factors

Corporation Tax


CT Revenue Forecast

Key Forecast Factors

Significant Risk—LLC Fee Litigation

Other Revenues and Transfers

The Budget’s Forecast for Special Funds Revenues

Modest Underlying Growth Expected

Part IV: Perspectives on State Expenditures

A. An Overview of State Expenditures

Proposed Total Spending in 2006-07 and 2007-08

Allocation of Total State Spending

General Fund Spending

Special Funds Spending

Local Public Safety Funds Not Included in Special Funds Total

Spending From Federal Funds and Bond Proceeds

Federal Funds

Bond Proceeds

Budgetary Borrowing

State Appropriations Limit

COLAs in the Budget

Which Programs Receive COLAs in the 2007-08 Budget?

A Historical Perspective on Spending

B. Major Expenditure Proposals In the 2007-08 Budget

Proposition 98


Governor’s Proposal

Issues for Legislative Consideration

Higher Education


Governor’s Proposal

Issues for Legislative Consideration

Health Services


Governor’s Proposal

Issues for Legislative Consideration

Social Services


Governor’s Proposal

Issues for Legislative Consideration

Criminal Justice


Governor’s Proposal

Issues for Legislative Consideration



Governor’s Proposals

Issues for Legislative Consideration



Governor’s Proposal

Issues for Legislative Consideration

State Employment and Retirement


Governor’s Proposal

Issues for Legislative Consideration

Part V: Major Issues Facing the Legislature

A Proposition 98 Roadmap

Many Benefits From Taking a Long-Term Perspective

Significant New Revenues in Forecast

Recent Research Efforts Could Help Inform Planning

A Roadmap Expresses Priorities, Other Program Goals

Major Components of a K-12 roadmap

Data Reveal Significant Performance Gaps

Address Needs of High School Students

Maintain School District Fiscal Health

Implementing the Roadmap’s K-12 Priorities

Early Child Development and Preschool

Augment Programs Targeting At-Risk Students

Create Fiscal Solvency Block Grants

How the LAO Plan Adds Up

Major Components of a CCC Roadmap

Major Recent Improvements in Community College Funding

Projected Slowing of CCC Enrollment

Community College Performance Challenges

Investing New Resources to Meet CCC’s Challenges

How the LAO Plan for the CCC System Adds Up


Potential Fiscal Risks to the State in the Governor’s Health Care Coverage Plan



Overview of the Governor’s Plan

How Would the Uninsured Be Covered?

Health Care for Undocumented Immigrants

Some Public Programs Currently Treat Undocumented Immigrants

Governor’s Plan Would Expand Benefits for Undocumented Immigrants

Fiscal Effects of the Governor’s Plan

Spending Under the Governor’s Plan

Funding Sources for the Governor’s Plan

Issues for Legislative Consideration

Potential May Exist for Legal Challenges

Federal ERISA

Some Federal and Local Funding at Risk

Some Federal Funding for Medi-Cal Program Expansion Uncertain

Modeling Health Care

Model Strengths

Model Limitations


Federal Funding for HFP Expansion Uncertain

Recapturing County Realignment Funds Uncertain

Risks and Uncertainties: Economic and Demographic

Uninsured Population Potentially Higher Than Estimated

The Issue of Long-Run Health Cost Inflation

State Coverage Costs in the Purchasing Pool

Risks and Uncertainties: Flows From Private to Public Insurance

Crowd Out

Adverse Health Selection

Some Additional Funds Available

Section 125 Revenue Losses Likely Overstated

Some Fiscal Effects Omitted From Governor’s Plan

Summary of Fiscal Risks and Uncertainties in the Governor’s Plan


Legislative Oversight of State Employee Compensation

The Processes for Setting Employee Pay and Benefits

The Employee Compensation Process Prior to 1982

Definitions of Employee Groups

Current Process for Unionized State Employees

Current Process for Excluded and Exempt Employees

Some MOUs Make It Difficult for Legislature to Oversee Employee Pay

Automatic Pay Raise Formulas Compromise Legislature’s Power of the Purse

Long-Term Agreements Lock in Spending

MOUs Have Given Arbitrators Enormous Power in Agreements

MOUs Are Long and Complex Documents

Administration Actions Have Undermined Legislature’s Role

Administration Claims Broad Authority to Raise Pay

An Example: How These Pay Raises Undermine Legislative Authority

Administration Needs to Pay Attention to Manager and Supervisor Pay Annually

Recommendations to Enhance Legislative Oversight of Employee Compensation

End Automatic Pay Raise Formulas

Arbitrators’ Authority to Order Unanticipated State Spending Should Be Curbed

Approve One-Year or Two-Year MOUs

Joint Hearings on Selected MOUs With Major Fiscal or Policy Impacts

More Time Before Voting on MOUs

Require Administration to Submit Excluded and Exempt Pay Proposal Annually

Administration’s Flexibility to Increase Pay Should Be Limited


Improving the Mandate Process

Concerns With the Process

Lengthy Process Poses Difficulties for State and Local Governments

Complicated Claiming Methodologies

Inherent Difficulties in Estimating Mandated Costs

Linking Payment Methodology to Legal Description of Mandate

Complexity Causes State-Local Friction and Delays

Past Legislative Action

Administration’s Proposal

Concerns With Proposal

LAO Three Part Mandate Reform Package

Amend the Reasonable Reimbursement Methodology Statute

How Would This Approach Improve the Mandate Process?

Allow Methodologies to Be Developed Through Negotiations

How Would This Improve the Mandate Process?

Create an Alternative Dispute Resolution Process

Legislative Policy Control Over Mandates

Local Governments Disagreeing With the Proposed Resolution

How Would This Approach Improve the Mandate Process?


The Governor’s Tax Proposals

Proposal to Eliminate the Teacher Retention Tax Credit


Credit Features and Eligibility

Use of the TRTC

What Has the Credit Accomplished?

Effects on Retention Hard to Identify but Likely Are Limited

Issues Concerning Reimbursement of Classroom Expenditures

LAO Bottom Line

Proposal Involving Out-of-State Purchases of Vessels, Vehicles, and Aircraft


The Key Issue—What Does “Use” Mean?

Past and Current Criteria

LAO Report Requirement

LAO Report Findings

General Approach and Considerations

Economic and Fiscal Effects Involving Vessels

Overall Fiscal and Economic Effects

Legislative Issues and Considerations

The One-Year Test Is Preferable

But Other Changes Also May Merit Consideration

A State Policy Approach: Promoting Health Information Technology in California

Common Health Information Technology Terms