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Unaddressed Challenges in the 2013-14 California Revised Budget

Governor Jerry Brown Credit: Ohad / CC BY Flickr

California’s 2013-14 May revised budget (released earlier this week) presents an uncertain and cautious fiscal outlook for California. For instance, discussing the state’s lack of budgeting flexibility following the release, Governor Jerry Brown told reporters, “Anyone who thinks there’s spare change around here, they haven’t read the budget.” The revised version acknowledges some of the major structural challenges facing the state today and in coming years rising health costs, unfunded pension and retiree healthcare liabilities. However, for the most part, the budget stops at acknowledging these issues and presents no plans of action for addressing them.

Revenues and Spending

The revised budget estimates that total revenues for the coming fiscal year will be $137 billion, $1.7 billion lower than the $138.7 billion estimate in January’s proposed budget. $137 billion in revenues would be a $2.6 billion increase over 2012-13’s expected revenues. Revised revenue estimates from each of the Big Three tax sources are lower as well:

  • Personal Income: Down $983 million to $62 billion, 1.6% decline
  • Sales and Use: Down $409 million to $34 billion, 1.2% decline
  • Corporation: Down $622 million to $8.5 billion, 6.8% decline

Historically, May’s revised revenue estimates have more accurately reflected actual revenues than January’s estimates have. Since 1997-98, actual revenues have been within 2% of January’s projected revenues only two times. By comparison, May’s projections have been within 2% of actual revenues four times. The median error for January’s projections is 4.7%, compared to May’s median error of 1.9%.

Major Changes to the Revised Budget

Overall proposed state spending is $138.3 billion, $278 million lower than the $138.6 billion January estimate. Proposed spending among the budget’s four largest area changed in the following ways:

  • Health and Human Services and Corrections Proposed Spending Increased: Proposed state spending is higher than in January by $1 billion (2.3%) and $124 million (1.1%), respectively.
  • K-12 and Higher Education Proposed Spending Reduced: Proposed state spending is lower than in January by $1.2 billion (2.9%) and $545 million (4.9%), respectively.
  • Higher Education and Corrections Flipped: In the January budget, proposed state spending on Higher Education exceeded spending on Corrections by $77 million. In the revision, however, proposed spending on Corrections exceeds spending on Higher Education by $592 million.

Unaddressed Challenges

Rising Health Costs and California Medicaid

The budget says, Rising health care costs could strain the state budget. Medi-Cal is the budget’s second largest program. As the state implements federal health care reform, budgetary spending will become even more dependent on the rate of health care inflation.

The revised budget proposes increasing state funding for the Department of Health Care Services (DHCS), which mainly administers Medi-Cal, to $24.1 billionSince 2007-08, DHCS spending has increased 62%, 12 times faster than total state spending growth during the period.

Also, despite pending litigation and legislative opposition, the revised budget still includes a 10% cut to Medi-Cal provider reimbursements, which can be applied retroactively to 2011.

Pension Unfunded Liability

The budget also says, Beginning in 2015-16, the state will begin to pay hundreds of millions of dollars more to the California Public Employees Retirement System to help pay down the $38.5 billion unfunded liability for employee pensions.

Yet the budget makes no mention of the fact that the non-partisan Legislative Analyst’s Office (LAO) reported that starting in 2014-15, the California State Teachers Retirement System will require $4.5 billion in additional annual contributions. Underfunding has driven the growth of the system’s $73 billion estimated unfunded liability. CalSTRS’s Deputy Chief Executive stated that the unfunded liability grows by $17 million each day. Thus each year the state does not contribute an additional $4.5 billion to the teachers’ pension fund, the unfunded liability grows by $6.2 billion. The LAO also reported that without corrective action, the fund will be depleted by 2044 and the state would have to pay for all teacher pensions out of its operating budget on a pay-as-you-go basis.

Rising Retiree Health Costs

Finally, the budget says, Between now and 2016-17, the costs for retired stated employees health care is projected to rise by 59 percent. Yet, the state has not set aside significant money to address the $63.8 billion in unfunded liabilities for future obligations. That liability increases by billions of dollars each year.

As the budget acknowledges, the state does not prefund its unfunded retiree healthcare liability, but it has yet to implement any other reform to address the issue. As we have reported previously, other reform options include adjusting benefit structures for benefits not yet earned and buying out retirees benefits.

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