The May Revise

Here is a preliminary look at Governor Brown’s May revise budget based in part on yours truly watching the media conference at which the May revise was presented and a look at the accompanying documents. For those concerned about UC in particular, there appears to be no change in the net $500 billion reduction previously announced. That reduction consists of a drop in the general fund contribution to UC plus the ending of federal stimulus funds. You can find this information at http://www.dof.ca.gov/budget/historical/2011-12/governors/summary/documents/BS_HED.pdf and http://www.dof.ca.gov/budget/historical/2011-12/governors/documents/May_Revision_2011-12_Summary.pdf

At the more general level, let’s start with the observation that budget terminology in the state budget does not mean what you think. There continues to be the mixing of stocks and flows. (Debt – a stock measure – is mixed with deficit – a flow measure, for example). In some budgetary tables, more than a 12-month period is involved. So let’s go with clearer accounting. Let’s define deficit or surplus to mean inflows into the general fund minus outflows within a fiscal year. The general fund has a “reserve” or “fund balance,” a stock measure, which is supposed to be positive but has been negative of late. You can think of this situation as an overdrawn checking account. Unlike your checking account situation, when the state’s checking account is overdrawn, it can continue to spend by putting IOUs into other special state accounts. But there are limits to how much cash it can obtain that way, as demonstrated in the summer of 2009 when it issued IOUs (registered warrants) to state suppliers and those awaiting tax refunds.

Got that?

When Gov. Brown came into office in January 2011, he thought the general fund was overdrawn by about $5 billion at the start of the current fiscal year 2010-11. (Recall that we were half way through the fiscal year when he took office.) It appeared that if nothing were done, the state would run a deficit in 2010-11 of about $2 billion. So the general fund would be overdrawn by June 30, 2011 by about $7 billion, i.e, $5 + $2 = $7. The governor proposed various cuts and tax extensions that would have turned the deficit of $2 billion for fiscal 2010-11 into a surplus of $2 billion. The general fund would still have been overdrawn at the end of 2010-11, but by “only” $3 billion instead of $7 billion.

Things looked worse for fiscal 2011-12. Largely because of the lapsing of temporary taxes passed in Feb. 2009, there would have been a deficit of $17 billion. So the general fund would have been overdrawn by something like $24 billion at the end of 2011-12. (Negative $7 billion at the start of the year plus negative $17 billion = negative $24 billion.) With his proposed tax extensions back in January, instead of a $17 billion deficit for 2011-12, he proposed a $5 billion surplus. That would have brought the reserve in the general fund into positive territory to the tune of about $2 billion by the end of fiscal 2011-12.

Now, you have all heard about the finding that more revenue came in so far this year than expected. What you did not hear about was that it turned out – based on the governor’s May revise documents – that the general fund was more overdrawn at the start of the current year than had been thought by about $1.6 billion. But politics being what it is, the bad news was overshadowed by the good. So the governor felt he should not be asking for the same old tax extensions he did back in January. Now he would like to let the income tax surcharge lapse this calendar year and then resume this coming January. So there would be 4 years of income tax extension, not 5 as proposed in January. But the other taxes would be extended the full 5 years.

The governor wants to run a surplus this coming year, i.e., fiscal 2011-12, of about $5 billion. That would give the general fund a positive reserve at the end of that year of around $2 billion.

Note that his strategy still raises an issue noted in earlier posts on this blog and, perhaps more significantly, by the Legislative Analyst. The governor wants to deal with his overdrawn general fund between now and the end of the next fiscal year. No more “kicking the can down the road” as the previous governor used to say. However, he also devoted a good deal of time in the media conference presenting the May revise to talking about a “wall of debt” the state has.

That wall included such things as unfunded pension liability (the UC pension is explicitly listed on a table) and other eventual liabilities. So even if everything the governor proposed were enacted, we still are kicking the can down the road. Really, the question, then, is how big a can do we want to kick, not whether we will be kicking a can. The Legislative Analyst will do an analysis of the May revise soon. If he says what he said in January, it will include what amounts to consideration of the option of a more gradual working out of the current problem than what the governor proposes.

A final problem, of course, is that the governor remains pledged to have his tax extensions (or resumptions) approved by voters. To do that, he has to get Republican votes or do it by initiative, i.e., by gathering signatures. So what he wants is to enact a budget that assumes the tax extensions-resumptions but then ask voters retroactively if they approve. If they don’t, he would have to propose an all-cuts budget mid-way into the fiscal year. The governor suggested at his media conference that he believes from polling that voters will go along. If he can’t get some GOP voters to put something on the ballot legislatively, he better start collecting signatures pretty soon.

What if there were a voter rejection? You can be sure that UC would be hit. Making reductions within a fiscal year is difficult. School boards, etc., would have already planned their budget years based on the budget with the extensions-resumptions, for example. So would UC, but we have the tuition lever to pull and school districts don’t.

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UPDATE: President Yudof's statement on the May revise:

In the past several months, we at the University of California have been preparing — through cutbacks, layoffs, efficiencies, financial strategies and other measures — to brace for the $500 million in cuts contained in the governor's initial budget proposal.

Today, in issuing a May revision of his budget proposal, the governor also described reductions that would be proposed should the state adopt an "all-cuts" budget in lieu of extending certain temporary taxes.

The governor in his budget document asserted that, in an all-cuts budget, reductions in state funding for the University of California would be doubled, to $1 billion in cuts.

A cut of this magnitude would be unconscionable — to the university, its students and families, and to the state that it has served for nearly a century and a half.

Doubling the cut would reduce the state's contribution to the university's core funds — monies that pay professors and staff members, light the libraries, maintain the campuses, and all the rest — to roughly $2 billion. State funding of UC at this diminished level has not been seen since the early 1990s, a time when the university enrolled 80,000 fewer students.

This is not the first round of cuts we've faced in the ongoing fiscal crisis. We have been engaged in a three-year exercise in coping with wholesale cutbacks, and by now the magic bullets all have been spent. What this reduction most likely would mean, as the governor noted, is the need to yet again raise tuition.

That will be a decision which rests with our regents. I would say now, only this: An all-cuts budget, as described by the governor, would represent a dire challenge to the university and a retreat by the state from its historic support of higher public education in California.

The university has extraordinary talent and resources spread across its 10-campus system, and it will survive. In the end, it is California that would stand at risk. As the governor stated in his budget document, referring to higher education: "Reductions of this magnitude would significantly impair the universities' critical role in training the state's work force and encouraging innovation."

California was given only one great gold rush. It was through innovation and hard work and, most important, through the dedicated pursuit of a common good and common purpose that this state grew to be regarded around the world as a beacon of opportunity.

Now is not the time to abandon what has been the key catalyst for making California such an exceptional place — a commitment to providing, as a common good, an affordable, world-class higher education for all who earn a spot at our public universities and colleges.

From his Facebook page http://www.facebook.com/notes/mark-g-yudof/president-yudofs-statement-on-may-revision-of-state-budget/10150178726078379