LAO Points to Alternatives to the May Revise

The Legislative Analyst’s Office (LAO) has prepared its analysis of the governor’s May revise proposal. It believes that recent increases in state income tax receipts are more heavily the result of capital gains than the governor does. In the short term, i.e., through the next fiscal year, the source of the revenue doesn’t much matter. However, the LAO believes that in the outyears (beyond 2011-12), less revenue can be expected than the governor’s projection would suggest. LAO provides a similar analysis of the corporate profits tax; it has a less rosy outlook in the outyears than the governor.

The LAO also notes the uncertainty engendered by the governor’s wish to put the tax extensions-resumptions to the voters. LAO point to the difficulty faced by state and local agencies if the plan depends on such a vote. It appears that the LAO would like the legislature to adapt a plan without a vote – something the governor insists should not happen. But it goes on to suggest that if the vote must occur, it would be better to have it later in the fiscal year than sooner. This point is unclear in the report. If voters reject the revenue that, in effect, has already been spent, exactly what occurs at that point? Presumably, LAO is assuming that since the spending cannot be undone at that point, there would simply be a carryover of a negative fund balance in the general fund into the future.

One issue the LAO does not touch is the 2/3 vote that would be needed either to approve tax extensions-resumptions directly in the legislature or for the legislature to put the matter on the ballot. Exactly what happens if no deal is reached by the start of fiscal 2011-12 and the now-usual legislative gridlock takes hold? The governor and some news accounts have suggested that the provision enacted by voters that the legislators do not get paid if there is no budget by the constitutional deadline will force an agreement on something. It is unclear - given that the legislature has passed some elements of a budget already - that the no-pay provision applies in this case, however. (See http://www.latimes.com/news/la-me-legislature-pay-20110520,0,4005654.story)

Finally, the LAO points out in several places in the report that the legislature could pick and choose elements from the governor’s proposal. It has provided similar advice in the past. As this blog has noted, the governor’s added emphasis in the May revise on all the different forms of debt faced by the state tends to undermine his position that it is particularly vital to move the fund balance in the general fund from negative to positive by June 30, 2012. There is still going to be some “kicking the can down the road” even if all of his plan is adopted. So the issue is really how big a can to kick and over what period.

There is no specific analysis in the LAO report of the May revise budget proposal for UC, which is essentially unchanged from what it was back in January.

The full LAO report is at http://lao.ca.gov/reports/2011/bud/may_revise/may_revise_051911.pdf