Friday, May 13, 2016

May Revise

The governor released his May Revise budget proposal earlier today, live-streamed on the web. We noted in a prior post that the news conference would feature various charts on easels. And as the images above suggest, if you like charts, you would not have been disappointed. As usual, the event was split between the governor and his finance director (for technical questions from reporters).

As in prior such events, the governor emphasized volatility in tax receipts – mainly due to the income tax and capital gains – and the possible danger of some future recession. He took no position on a ballot initiative that would extend Prop 30’s top-bracket income tax increase. 

There appear to be no changes in the January proposals for UC’s budget in the coming fiscal year (2016-17).

Understanding of the budget situation is now made more difficult because of the presence of the “regular” reserve in the general fund and the creation – under Prop 2 – of a rainy day fund. Under Prop 2, some revenue that would otherwise go into the general fund is siphoned off into the rainy day fund. So a full understanding of the overall budget situation requires addition of the two funds. It is the sum of the two that describes the condition.

Thus, it is possible for the general fund to be said to have a deficit and yet the overall budget can be in surplus if the growth in the rainy day fund exceeds the decline in the regular reserve. Below we provide the numbers, assuming everything happens according to the governor’s estimates, projections, and spending desires. The documentation is at

The general fund next year has a deficit of $2.1 billion but the rainy day fund rises by $3.3 billion. So the overall budget is in surplus by a modest $1.2 billion. Total reserves (regular + rainy day) rise from 7.1% of spending to 7.7% of spending. It is nonetheless true that a recession could easily wipe out the total reserves in a short period of time.

                                    Change in
$millions    2015-16     2016-17     Reserves
Reserve       $3,444      $4,829      +$1,385

Revenue*     117,000     120,080
Spending     115,615     122,155

Surplus or
Deficit in
Reserve**     +1,385      -2,075   

Reserve        4,829       2,754       -2,075
Rainy Day
Fund           3,421       6,713       +3,292  
Sum of
Reserves       8,250       9,467       +1,217
  As % of
  Spending      7.1%        7.7%
*Revenue = revenue and transfers
**Revenue (and transfers) minus spending 
Budget Director Michael Cohen

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