chancellor’s budget workshop state economic and fiscal forecast presented by: ron bennett,...

Chancellor’s Budget Workshop

State Economic and Fiscal Forecast

Presented by:

Ron Bennett, President and CEOJohn Gray, Executive Vice President

© 2012 School Services of California, Inc.

2

Economic Overview

The U.S. economy fell into recession in December 2007, the most severe since the Great Depression

This recession was “declared” over in July 2009, three years ago, and yet many believe that hard times are continuing

While the private sector may be adding jobs, the public sector – including schools – continues to shrink

In order for education to see a turnaround, private sector employment must rebound more strongly, which in turn will generate additional tax revenues to fund various public services

In California, the Legislature and the Governor should be laying the groundwork for future growth

Human capital investment – K-12 education and higher education

Infrastructure investment – roads, bridges, communications


3

The National Economy

Little has changed since the May RevisionThe economy is growing, but very slowlyLittle progress has been made on employment, with only 80,000 jobs added in JuneThreats from the European Union remain, but a bail-out package for Spain has been crafted

Gross Domestic Product (GDP) for the first quarter of 2012 has been revised downward from 2.2% to 1.9%

For 2010, first quarter growth was 3.9% and for 2011, it was 0.4%Unfortunately, last summer the brakes were applied as Congress fumbled the debate on the debt ceiling, Standard and Poor’s downgraded U.S. debt, and Japan was hit by a tsunami

A fiscal “train wreck” could occur if Congress doesn’t extend the Bush-era tax cuts and reach agreement on scheduled federal spending reductions


4

The National Economy

Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

-3.7%

-8.9%

-6.7%

-0.7%

1.7%

3.8% 3.9% 3.8%

2.5%2.3%

0.4% 1.3%1.8%

3.0%

1.9%

U.S. GDP(Percent Change)

2008 20102009 2011 2012

Source: U.S. Bureau of Economic Analysis, June 2012


5

Public Section andPrivate Sector Job Growth

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201190%

95%

100%

105%

110%

115%

120%(Since 1997)

Private Growth Over PeriodPublic Growth Over Period


6

California’s Economy

The California economy is growing slowly, held down largely by the home foreclosure problem

The real estate market, however, may have turned the corner, with May showing the third consecutive month of rising home prices, breaking the $300,000 barrier for the first time since October 2010

The state’s 10.8% unemployment rate is the third highest in the nation

Source: UCLA Anderson Forecast, June 2012


7

California’s Economy

Just before recessing, the Legislature approved issuing $4.6 billion in state bonds to begin the high speed rail project estimated to cost $68 billion

$3.3 billion in federal funds were an inducement to move forward

However, a University of California, Los Angeles (UCLA) study of Japan’s bullet train concluded that the project did not stimulate the local economy

Japan’s high speed train did lead to urban/suburban sprawl

Claims that California’s high speed rail will lead to 450,000 jobs “are not likely to be realized”

Source: UCLA Anderson Forecast, June 2012


8

California’s Business Environment

California continues to be ranked the worst state (50th) for business

While California ranked high for living environment, the rankings for workforce quality, taxation, and business regulations dragged it to the bottom

Source: CEO Magazine, June 2012

“California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are ‘necessary evils’ that provide the funds to enable pursuit of their misguided agendas.”

CEO Magazine, June 2012


9

Comparing the Forecasts – Personal Income

2012 2013

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

4.9%

3.4%3.5%4.0%

Personal Income(Percent Change)

2012-13 Budget ActUCLA, June 2012


The Value of Education

Education, especially K-12, is critical to the economic success of individuals and our state as a whole

Personal income accounts for more than half of state General Fund revenues

Educational attainment affects earnings

10

No High School

Diploma

High School

Diploma

Associate Degree

Bachelor's Degree

Master's Degree

Doctorate

$20,241 $30,627 $39,771

$56,665 $73,738

$103,054

Av

era

ge

An

nu

al

Ea

rn-

ing

s

Source: U.S. Census Bureau Population Survey, 2009


11

Comparing the Forecasts – Employment

2012 2013

0.0%

0.5%

1.0%

1.5%

2.0%

1.4%

1.9%

1.6%1.8%

Employment(Percent Change)



12

Comparing the Forecasts – Inflation

2012 20130.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2.0% 2.0%2.1%

1.6%

Consumer Price Index(Percent Change)



13

General Fund Budget Summary

2011-12 2012-13

(In Millions)

Prior-Year Balance -$2,685 -$2,882

Revenues and Transfers $86,830 $95,887

Total Resources $84,145 $93,005

Total Expenditures $87,027 $91,338

Fund Balance -$2,882 $1,667

Budget Reserve

Reserve for Encumbrances $719 $719

Reserve for Economic Uncertainties -$3,601 $948

Budget Stabilization Account $0 $0

Total Available Reserve -$3,601 $948

The $948 million reserve represents just 1% of revenues and transfers

$95.9 billion in 2012-13 revenues and transfers assumes $8.5 billion in voter-approved taxes

Expenditures are increasing almost 5% even after all of the cuts

Source: 2012-13 Budget Act


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Is the Budget Credible?

Budgeted Reserve vs. Final Reserve(In Millions)

Budgeted Reserve at Enactment

Final Reserve One

Year Later Difference

2012-13 $948

2011-12 $543

2010-11 $1,205

2009-10 $500

2008-09 $971

The 2012-13 Budget Act contains a $948 million reserve

Is this credible?

You decide!

-$3,601

-$1,976

-$6,842

-$4,458

???

-$4,144

-$3,181

-$7,342

-$5,429

???


15


16

General Fund Revenues

2011-12 2012-13

$92.5

$88.6

$84.6

$78.0

Sta

te R

eve

nu

es(I

n B

illio

ns)

$5.9 billion cutto Proposition 98

if taxes fail

May Revision 2011

$8.5 Billion

New Taxes

Base Revenues

$84.0 Actual 2011-12 Revenues

$4.0 Billion

2011-12 Adopted Budget

The Governor’s Plan


17

Risks to the State Budget

The Governor’s tax initiative is the biggest risk to the State Budget, with $8.5 billion at stake for the current year

The latest Field Poll puts the initiative at 54% in support and 38% opposed

The Legislature’s approval of the high speed rail project could threaten the tax initiative, with nearly one in three voters polled saying they would be less inclined to support raising taxes if the Legislature funds the project

The already anemic economic recovery could stall, as consumer confidence wanes and spending slows

The sovereign debt crisis in the European Union could drag down U.S. exports

Disruptions in the supply of oil could spike energy prices


18

Risks to the State Budget

Federal law could trigger a recession unless Congress acts firstBush-era tax cuts are set to expire in January 2013Automatic federal spending cuts could take place, per last year’s Budget agreement

Like prior years, the courts or the federal government could disallow Budget solutions enacted by the Legislature

Medi-Cal reductions have previously been disallowedThe state’s corrections system is under federal receivershipReductions to safety net programs such as State Supplemental Payments (SSP) and child care are vulnerable to court challenge

The state revenue forecasts could be flawedThe Legislative Analyst’s Office (LAO) has called into question the Department of Finance’s (DOF) assumptions regarding capital gains income


19


20

Proposition 98 – The Promise

Proposition 98, enacted by voters in 1988, was intended to:

Provide a source of stable and adequate resources for K-14 public schools

Reduce class sizes to no more than 20:1 in all grades K-12

Establish a minimum base of funding from which resources could grow to match the top ten states in the nation

Simply put, it was the picture of hope, and the promise of a bright future for schools

Painting: Leonardo da Vinci, “Mona Lisa”


21

Proposition 98 – The Picture Today

Extensive manipulation of Proposition 98 has distorted the initiative’s original vision

Proposition 98 is routinely adjusted, both legislatively and administratively, so that it achieves the K-14 funding targets desired by the Legislature and the Governor

Zero year-over-year change in K-12 funding for 2012-13 is the state’s budgetary goal, if new taxes are approved by voters . . .

. . . even though Proposition 98 is touted to increase by more than 14%Painting: Edvard Munch, “The Scream of Nature”


22

Proposition 98

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$56.6$49.1 $49.5 $49.7 $46.9

$53.6

Proposition 98 Funding(In Billions)

Test 3 Test 2 Test 1 Test 2(Suspended)

Test 1 Test 1

Initiative Funding$2.9 Billion

“Over Appropriation”$785 Million

(Projected)(Projected)


23

Majority Vote Budget – Proposition 25

Proposition 25 meant that State Budget spending plans could be passed by a simple majority instead of a two-thirds super majority

Has resulted in two on-time budgetsBut, do on-time budgets mean balanced budgets?

After the Governor vetoed the first enacted Budget last year, the State Controller withheld lawmaker salariesA recent court decision said the State Controller is not empowered to decide the “acceptability” of a Budget enacted by the Legislature – the State Controller has appealed

What’s the future of State Budgets under Proposition 25?On-time Budgets, but also midyear trigger cutsMore manipulation of Proposition 98“Two-Budget” scenarios – the optimistic, passable Budget with midyear cuts triggered if reality doesn’t fit the optimistic picture


24

Negotiations Process Flow Chart


25

Negotiations Process Timeline

Thank you for attending!

chancellor’s budget workshop state economic and fiscal forecast presented by: ron bennett,...

Documents

california economy

school services of california

university of california

californias economy

local economy

national economy source

various public services

public sector