Saturday, January 10, 2015

Let's Take a Look at the Budget

Apart from the excitement and drama revolving around the governor’s conflict with UC over its tuition/funding proposal, what can we say about the general condition of the state budget?  Let’s look at the table below, taken directly from the governor’s official budget document.
              Regular  Rainy  Total  Change
$Billions     Reserve  Day
June 30, 2014    $5.1    $0    $5.1      --
June 30, 2015    $1.4  $1.6    $3.0   -$2.1
June 30, 2016    $1.5  $2.8    $4.3   +$1.3
Source: Governor’s Budget Summary, 2015-16,

When folks talk about the budget, they generally mean the state’s General Fund, effectively the operating budget of the state.  You can consider the General Fund to be the state’s checking account.  At the start of each fiscal year (end of the prior fiscal year), there is a balance in the account.  If during the year, more goes out than comes in, the balance will be reduced.  If more comes in than goes out, the balance will rise.  In ordinary parlance, one might call the change in the balance a “deficit” in the first case and a “surplus” in the second case.

Last November, the governor asked the voters to approve a new formula for a separate “rainy day” fund (a fund that actually goes back to Governor Schwarzenegger’s economic recovery proposals of 2004 but which was ineffective in tucking away money for a rainy day).  Voters went along with the Governor Brown and approved a new formula for putting money aside.

The existence of a rainy day fund that is actually accumulating money makes it necessary to combine the regular reserve and the rainy day fund to see if, overall, more is coming into the General Fund in the course of a year than is going out.  We have to sum the two reserves to see what the total is, or is projected to be.  And that is what the table above does.

According to the governor’s estimate, the General Fund had a regular reserve of $5.1 billion at the start of the current 2014-15 fiscal year.  (It might be noted that back in June when the estimate was made for budgetary enactment, the regular reserve was estimated to contain $3.9 billion.  So an extra amount of over a billion dollars seems to have appeared. Why?  Not clear.  But let’s put that issue aside.)  The governor now says that the general fund’s reserve will fall to $1.4 billion at the end of this fiscal year, but some of that drawdown involves a transfer of $1.6 billion to the rainy day fund.  So total reserves, as the table above indicates, will drop to $3 billion. 

Put another way, despite all the talk of surpluses, there is a deficit of over $2 billion this year.  Now one could argue there is some prepayment of debt that might be considered an offset.  True, but however you look at it, there is less cash on hand to deal with any future adverse event.

What is the projection for next year?  The combined reserve will rise to $4.3 billion, so – because total reserves are rising – there is a surplus projected for next year.  Since the budget proposes spending of over $113 billion next year, the reserve is under 4% of expenditures.  The governor acknowledges that the condition of the budget is precarious and, indeed, a 4% reserve wouldn’t be much of a cushion in the face of an economic downturn.

Given this analysis, what can we say about the above-mentioned conflict with UC over its tuition/state funding plan?  The governor, as blog readers will know, has shown no enthusiasm for new taxes or for extension of the Prop 30 temporary taxes when they expire.  Whenever there is a call for new spending on some program – not just UC – he talks about the state living within its means.  He wants some committee to explore cost saving at UC, but does he really think over the long haul, given the constraints (importantly including his own) that UC can go along without tuition increases?

The numbers won’t sustain that view.  So, indeed, create a committee.  And – a suggestion! - perhaps Anne Gust Brown ought to be on the committee proposed by the governor.  She is a past corporate executive.  Corporate executives are not big on the notion of paying people via “psychic income.”  She doesn’t have the governor’s longstanding personal “issues” with UC which go back to his first iteration as governor in the 1970s and 80s.  But the governor clearly listens to her views.

Of course, Mrs. Brown might also notice that the big bucks that really need to be looked at within the university are in the capital projects which the Regents have little capacity to analyze.  That’s an area that the governor has yet to notice, despite his frequent attendance at Regents meetings.  Are the folks at UCOP willing to let capital projects – which now are effectively rubber stamped by the Regents on the say-so of university management – be subject to some outside scrutiny?  We're talking about pet projects that often run in the tens of millions of dollar and sometimes the hundreds. Just asking.

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