Econ 240 C

Econ 240 C

Lecture 13

2

Part I. CA Budget Crisis

3

CA Budget Crisis

What is Happening to UC?• UC Budget from the state General Fund

4

UC Budget

Econ 240A Lab Four New data for Fiscal Year 2004-05 Governor’s Budget Summary 2004-05

• released January 2004• http://www.dof.ca.gov/

UC Budget in $Millions, 1968-69 through 2004-05

0

500

1000

1500

2000

2500

3000

3500

4000

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

Mill

ions

$

6

CA Budget Crisis

What is happening to the CA economy?• CA personal income

California Personal Income in Billions

0

200

400

600

800

1000

1200

1400

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

Billi

ons

$

California Personal Income in Billions

10

100

1000

10000

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

Billi

ons

$

Log Scale

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

70 75 80 85 90 95 00

LNCAPY

Natural Logarithm of California Personal Income, 68-04

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

70 75 80 85 90 95 00

DLNCAPY

Fractional Change in CA Personal Income, DLNCAPY

11

CA Budget Crisis

How is UC faring relative to the CA economy?

UC Budget Vs. California Personal Income, 68-69 through 04-05

0

0.5

1

1.5

2

2.5

3

3.5

4

0 200 400 600 800 1000 1200 1400

CA Personal Income, $B

UC B

udge

t, $B

13

CA Budget Crisis

What is happening to CA state Government?• General Fund Expenditures?

California Government State General Fund Expenditures

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

$ M

illio

ns

15

CA Budget Crisis

How is CA state government General Fund expenditure faring relative to the CA economy?

CA Size of Govt. Vs. CA Economy, 68-89 through 04-05

0

10

20

30

40

50

60

70

80

90

0 200 400 600 800 1000 1200 1400

CA Personal Income, $ B

CA G

en. F

und

Expe

nditu

res,

$ B

17

Long Run Pattern Analysis

Make use of definitions: UCBudget = (UCBudget/CA Gen Fnd

Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc

UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

18What has happened to UC’s Share of CA General Fund

Expenditures? UC Budget Share = (UC Budget/CA Gen

Fnd Exp)

UC's Share of the California General Fund Expenditure

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

Perc

ent

-1.5

-1.0

-0.5

0.0

0.5

1.0

3

4

5

6

7

8

70 75 80 85 90 95 00

Residual Actual Fitted

UC's declining Budget Share ~ 0.1 % Per Year

22

UC Budget Crisis

UC’s Budget Share goes down about one tenth of one per cent per year• will the legislature continue to lower UC’s

share? • Probably, since competing constituencies such

as prisons, health and K-12 will continue to lobby the legislature.

23What has happened to the size of California Government Expenditure Relative to Personal Income? Relative Size of CA Government = (CA

Gen Fnd Exp/CA Pers Inc)

The Size of California State Government Relative to the Economy

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

Perc

ent

25

California Political History Proposition 13

• approximately 2/3 of CA voters passed Prop. 13 on June 6, 1978 reducing property tax and shifting fiscal responsibility from the local to state level

Gann Inititiative (Prop 4)• In November 1979, the Gann initiative was

passed by the voters, limits real per capita government expenditures

26

CA Budget Crisis

Estimate of the relative size of the CA government: 6.00 %

27CA Budget Crisis: Pattern Estimate of UC Budget UC Budget = UC Budget Share*Relative

Size of CA Government*CA Pers Inc Political trends estimate UC Budget = 0.035*.060*1266.4 $B =$

2.66 B estimate Governor’s proposal in January: $ 2.67 B

28

Econometric Estimates of UCBUD

Linear trend Exponential trend Linear dependence on CAPY Constant elasticity of CAPY

29

Econometric Estimates

Linear Trend Estimate UCBUDB(t) = a + b*t +e(t)

• about 3.0 B• Too optimistic

UC Budget

0

0.5

1

1.5

2

2.5

3

3.5

4

0 5 10 15 20 25 30 35 40

Fiscal year

$ B

illio

ns

31

Econometric Estimates

Logarithmic (exponential trend) lnUCBUDB = a + b*t +e(t) simple exponential trend will over-estimate

UC Budget by far

UC Budget

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0 5 10 15 20 25 30 35 40

Fiscal year

$ B

illio

ns

33

34

Econometric Estimate

Dependence of UC Budget on CA Personal Income

UCBUDB(t) = a + b*CAPY(t) + e(t) looks like a linear dependence on income

will overestimate the UC Budget for 2004-05

UC Budget Vs. California Personal Income, 68-69 through 04-05

0

0.5

1

1.5

2

2.5

3

3.5

4

0 200 400 600 800 1000 1200 1400

CA Personal Income, $B

UC B

udge

t, $B

36

Econometric Estimates

How about a log-log relationship lnUCBUDB(t) = a + b*lnCAPY(t) + e(t) Estimated elasticity 0.855 autocorrelated residual fitted lnUCBUDB(2004-05) = 1.22342

• $3.40 B actual (Governor’s Proposal) = 0.98228

• $2.67B

37

38

39

40

41

Econometric Estimates

Try a distributed lag Model of lnUCBUDB(t) on lnCAPY(t)• clearly lnUCBUDB(t) is trended (evolutionary)

so difference to get fractional changes in UC Budget

• likewise, need to difference the log of personal income

42Identify dlnucbudb

43

44

45Identify dlncapy

46

47

48Estimate ARONE Model for dlncapy

49This is a satisfactory model

50Estimate ARONE Model for

dlncapy(t) Orthogonalize dlncapy and save residual need to do transform dlnucbudb dlnucbudb(t) = h(Z)*dlncapy(y) + resid(t) dlncapy(t) = 0.714*dlncapy(t-1) + N(t) [1 - 0.714Z]*dlnucbudb(t) = h(Z)* [1 -

0.714Z]*dlncapy(t) + [1 - 0.714Z]*resid(t) i.e. w(t) = h(Z)*N(t) + residw(t)

51

Distributed Lag Model

Having saved resid as res[N(t)] from ARONE model for dlncapy

and having correspondingly transformed dlnucbud to w

cross-correlate w and res

52

53

Distributed lag model

There is contemporary correlation and maybe something at lag one

specify dlnucbud(t) = h0 *dlncapy(t) + h1

*dlncapy(t-1) + resid(t)

54

55

56

57Try an ARONE residual fo dlnucbudb

58

59

60

61

Try a dummy for 1992-93, the last recession, this is the once and for all decline in UCBudget mentioned by Granfield

There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem

Look at the same regression in differences

62

63

64

65

66

Distributed lag Model

dlnucbud(t) = h0 *dlncapy(t) + h1

*dlncapy(t-1) + dummy (1992-93) + resid(t)

67

68

69

Try an artwo residual instead of arone

70

71

Note the fitted tends to be higher than the residualFor the past three years suggesting UC is taking a bath

72

73Correlogram of the residuals: try an ar(1) or an ma(1)

74

75

76Correlogram of the residuals

77Fitted fractional change in UC Budget is –0.025 (-2.5%)versusGovernor’s proposal of -0.086 (-8.6%)

78Conclusions Governors proposed cut in UC Budget of

8.6% is greater than expected from various Box-Jenkins models, controlling for income

The UC Budget growth path ratcheted down in the recession beginning July 1990

The UC Budget growth path looks like it is ratcheting down again in the recession beginning March 2001

Logarithm of UC Budget: Changes in Growth Paths

-1.5

-1

-0.5

0

0.5

1

1.5

68-69

70-71

72-73

74-75

76-77

78-79

80-81

82-83

84-85

86-87

88-89

90-91

92-93

94-95

96-97

98-99

00-01

02-03

04-05

Fiscal Year

lnuc

budb

Fitted through 91-92lnucbudb

80

Try estimating the model in levels

81

82Correlogram of residuals: add an ARONE

83

84

85Correlogram of the residuals

86dlucbud c dlncapy(-1) dummy for 1992-93 dummy2for 2003-04 ma(7)

87dlnucbud c dlncapy dummy for 1992-93 dummy2for 2003-04