Gov. Jerry Brown's May budget revision summary 2012-2013

7/31/2019 Gov. Jerry Brown's May budget revision summary 2012-2013

1/94

Introduction

Ayear ago, the state aced an immediate $26.6 billion budget shortall and uture

estimated annual gaps o $20 billion.The states scal challenges were exacerbatedby an unprecedented level o debts, deerrals, and budgetary obligations accumulated

over the prior decade.

The 2011 Budget Act made substantial progress in returning the state to scal stability,but more work remains.The Governors Budget estimated that the state aced a$9.2 billion budget problem or 201213.The May Revision, however, estimates that theproblem has increased to $15.7 billion as a result o a reduced revenue outlook, higher

costs to und schools, and decisions by the ederal government and courts to block

budget cuts.

The May Revision builds upon the key principles underlying the enacted 201112 Budget

and the Governors Budget protecting education and public saety programs, making

government more ecient and less costly, moving government closer to the people,

and paying down debt.While requiring more dicult cuts than originally anticipated,the May Revision will restore scal balance and make Caliornia more attractive or

business, investment, and the creation o jobs.


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May Revision 2012-13

Introduction

Substantial Progress Has Been Made

The enacted 201112 Budget substantially shrank the states ongoing decit and rejected

the past approach o overrelying on onetime solutions.

The 201112 Budget refected the ollowing:

Passing an ontime budget that avoided the gimmicks o prior budgets.

Closing more than hal o the state's ongoing budget shortall.A year ago, the gapstood at about $20 billion; it is now estimated to have shrunk to about $8 billion.

Realigning public saety programs to bring government closer to the people.

Eliminating redevelopment agencies to increase unding or schools, police, re,

and other core local services.

Making tough cuts across state government to reduce General Fund spending as

a share o the economy to its lowest level since 197273.State SupplementaryPayment grants were reduced to 1983 levels.CalWORKs grants were reduced tobelow 1987 levels.General Fund support or the states universities was cut bynearly 25 percent.General Fund support or the states courts was cut by about20 percent.The Williamson Act subventions were eliminated, and the child care anddependent tax credit was eliminated.

Protecting education, public saety, and other core state services to the

extent possible.

Reducing the states cashfow borrowing, and saving hundreds o millions o dollars

in short and longterm borrowing costs.

Improving management o the states inrastructure projects by committing available

cash to shovelready projects and avoiding unnecessary debt.

Through the budget and executive action, the Administration has ocused on shrinking

state government and making it more ecient.These changes will help the state keep itsbudget balanced or the long term.Progress includes:

Reducing the state workorce by more than 30,000 positions on a permanent basis.The state workorce is at its lowest level as a share o the states population inalmost a decade.Caliornia already had the nations th lowest level o governmentemployment in 2010.


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Introduction


Launching a downsizing plan or the Caliornia Department o Corrections

and Rehabilitation.The plan is a longterm strategy to save billions o dollars,conorm the prison system to postrealignment population changes, satisy

the U.S.Supreme Courts order requiring reduced crowding, end ederal court

oversight in health care and other areas, and improve rehabilitation programs

to reduce recidivism.It will reverse the trend o prison spending consuming agrowing percentage o the General Fund budget rom 11 percent to 7.5 percent.Eliminating 20 boards, commissions, task orces, oces, and departments.The Governors Budget and the May Revision combined propose to eliminate more

than 60 additional entities and programs.

Reorganizing state government to improve the management and coordination

o government activities, acilitate urther eciencies and reduce costs.The Administration submitted its reorganization plan to the Legislature on May 3.The plan cuts the number o state agencies rom 12 to 10 and consolidates and

aligns related programs and departments.

The 2012-13 Budget Shortfall

In January, the budget shortall was estimated to be $9.2 billion.The May Revisionestimates that the gap has increased to $15.7 billion.Absent actions to eliminatethe structural gap between revenues and expenditures, the state would ace about

an $8 billion budget shortall each year.As shown in Figure INT01, the ongoingbudget problem is much smaller than what the state aced just over a year ago.

The May Revision proposes to close the remaining gap.

The $6.5 billion increase in the size o the 201213 budget problem is largely attributable

to three actors:

Prior Revenue Forecast Was Too High ($4.3 billion)Finances January orecastwas too reliant on strong April and June 2011 receipts, which have now been wiped

out by weak nal payments received in April 2012.The May Revision continues toproject a modest economic recovery.

Proposition 98 Spending Increases ($2.4 billion)Proposition 98 unding or K14education relies on yeartoyear changes in revenues.Under the revenue orecast,201112 revenues have decreased ($3.1 billion), and 201213 revenues, while lower

than in January, are increasing by 5.9 percent.The resulting yearoveryear increase


4/94


Introduction

in revenues means the state must pay an additional $1.2 billion or K14 education.In addition, lower property tax estimates have increased General Fund costs.

Federal Government and Courts Blocked Budget Cuts ($1.7 Billion)Theederalgovernment and courts continue to block reasonable measures to reduce thestates spending.These measures include requiring copayments or MediCalservices, an InHome Supportive Services (IHSS)provider ee, and cuts toMediCal providers.By blocking these measures, the ederal government andcourts are orcing the state to pursue even deeper reductions elsewhere.Similarly,urther cuts will be required because the ederal Receiver or prison medical services

overspent his budget by $428 million.

The cost increases are somewhat oset by a net reduction o $1.9 billion rom a variety o

other actors, such as lowerthanexpected caseloads.

-$4.4

-$8.1 -$8.3-$7.7

-$17.2

-$19.2

-$17.4

-$21.5

-$25.0

-$20.0

-$15.0

-$10.0

-$5.0

$0.0

Figure INT-01

Annual Budget Shortfall Reduced by More than Halffrom $20 Billion to $8 Billion

(Dollars in Billions)

2012-13 May Revision Deficit

2011-12 Governor's Budget Deficit

2012-13 2013-14 2014-152011-12


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Introduction


Additional Difficult Spending Cuts Are Necessary

As described above, the 2011 Budget Act made deep cuts in state spending, bringing

General Fund spending as a share o the economy down to its lowest level since 197273.The Governor is seeking additional tax revenues to mitigate the need or deeper cuts

to education and public saety.These revenues, however, will not be sucient to closethe entire budget gap.In January, the Governors Budget proposed dicult spendingreductions across state government.These reductions were proposed to permanentlyreduce spending to a sustainable level and to:

Protect education and public saety to the greatest extent possible.

Provide a basic saety net or the most vulnerable.

Restructure programs to improve outcomes and reduce spending.

Use alternative unding sources where available.

For instance, the Governors Budget proposed reocusing CalWORKs and subsidized child

care by increasing income support to working amilies and reducing assistance to amilies

who are not meeting work requirements.The Governors Budget also proposed to mergethe delivery o services or those who are eligible or both MediCal and Medicare to

reduce costs and improve the coordination o services.

With the larger budget gap, the May Revision proposes $4.1 billion in additional spending

reductions, or a total o $8.3 billion o reductions as summarized in Figure INT02.

These reductions include:

Using local reserves to oset General Fund costs or local trial courts on a onetime

basis and pausing the court construction program or another year.Commensuratewith the oset, the May Revision proposes to evaluate the progress achieved

in meeting the goals o trial court reorm enacted in 1997.While the state hasreduced its General Fund support or courts in recent years, alternative unding

rom increased ees and transers have kept overall court unding relatively stable.(Savings o $544 million with ongoing reductions o $125 million)

Implementing various reductions to hospital and nursing home unding to lowerMediCal costs.(Savings o $396 million)

Reducing IHSS hours by 7 percent.(Savings o $99 million)


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Introduction

Prohibiting colleges and universities that are unable to meet minimum perormance

standards rom participating in the Cal Grant Program, as well as aligning uture

student awards to ederal nancialneed standards.(Savings o $38 million)Reducing the cost o state employee compensation by 5 percent through a reduced

workweek or a commensurate reduction in work hours and pay.(Savings o$402 million)

Expenditure Reductions

Health and Human Services

Medi-Cal $1,219.2

CalWORKs 879.9

In-Home Supportive Services 224.5

Other Health and Human Services Programs 161.0

Education

Proposition 98 1,497.9

Child Care 452.5

Cal Grant Program 291.7

Other Education 64.4

All Other Reductions

Redevelopment Assets 1,405.0

State Mandates 828.3

Judiciary 544.0

Employee Compensation 401.7

Other Reductions 333.4

Expenditure Reductions $8,303.5 50%

Revenues

Temporary Taxes $5,579.8

Other Revenues 339.1

Revenues $5,918.9 35%

Other

Loan Repayment Extensions $1,158.3

Transfers and Loans from Special Funds 612.2

Additional Weight Fee Revenues 385.2

Unemployment Insurance Interest Payment 312.6All Other 49.6

Other $2,517.9 15%

Total $16,740.3

Figure INT-02

Budget Balancing Proposals(Dollars in Millions)


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Introduction


Using proceeds rom the recent National Mortgage Settlement to oset existing

General Fund costs or assisting homeowners and protecting consumers, rather than

creating new programs.(Savings o $292 million)Creating a ramework to transer cash assets previously held by redevelopment

agencies to cities, counties, and special districts to und core public services.Assetstranserred to schools will oset General Fund costs.(Savings o $1.4 billion)Making various adjustments, including using a 201112 overappropriation

o the minimum guarantee to prepay Proposition 98 unding required by a

court settlement.(Savings o $1.5 billion)Under the May Revision, General Fund spending or K14 schools would increase by

16 percent providing $5.2 billion in additional unding.General Fund spending outsideo Proposition 98 would decline by $2.4 billion, or 4.5 percent, excluding a required

repayment o $2.1 billion the state borrowed rom local government in 2009.

Temporary Taxes to Protect

Education and Public Safety

The May Revision assumes the passage o the Governors proposed initiative at the

November election.This measure temporarily increases the personal income taxon the states wealthiest taxpayers or seven years and increases the sales tax by

onequarter percent or our years.The measure guarantees these new revenuesto schools.The measure will generate an estimated $8.5 billion through the budget year.These revenues will enable the state to meet its existing Proposition 98 obligation andto increase unding or schools and community colleges by an additional $2.9 billion.The measure will provide a net benet to the General Fund o $5.6 billion.In addition,the measure constitutionally guarantees the 2011 Realignment unds or local

public saety.The measure will prevent deeper cuts to schools, protect local public saetyunding, and assist in balancing the budget.

The May Revision reverses years o cuts in unding or schools and community colleges.As shown in Figure INT03, K14 education unding would increase by $17.3 billion, or

37 percent, and per pupil unding would increase by over $2,500 in the next our years.The May Revision dedicates these increased unds to restore cuts, to increase fexible

unding or schools, to better meet the needs o lowincome students and English

language learners, and to pay o deerrals.The proposed weighted student ormula,


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Introduction

as modied, would make school unding more transparent and would give local decision

makers greater fexibility.

Alternative to Revenues Is Deeper CutsThe Caliornia Constitution requires that the annual state budget be balanced.To paythe states bills on time, the budget must be credible and nanceable.Ater more thana decade o putting o dealing with its budget problems, the state must restore a

longterm balance between its revenues and spending.Consequently, the May Revisionproposes a backup plan i the ballot measure is not approved.

To balance the budget in an ongoing manner, the deep reductions enacted last year and

proposed this year must be made and maintained.Without additional revenues, deepercuts will be required.As education spending accounts or 53 percent o General Fundspending and the May Revision substantially increases K14 spending and protects the

University o Caliornia and Caliornia State University rom deeper cuts, schools and

universities would be most aected without the additional revenues.

$2.9$3.1

$3.2

$3.5

$40.0

$45.0

$50.0

$55.0

$60.0

$65.0

$70.0

2011-12 2012-13 2013-14 2014-15 2015-16

Figure INT-03

K-14 Funding Increases by $17 Billion Over 4 Years(Dollars in billions)

Proposition 98 Baseline Funding

Initiative Funding Increase

$64.3

$53.7$55.0

$61.3

$47.0


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Introduction


The ballot trigger cuts totaling $6.1 billion,

as summarized in Figure INT04, would

go into eect on January 1, 2013:

Funding or schools and community

colleges would be reduced by

$5.5 billion.A reduction o thismagnitude would result in a unding

decrease equivalent to the cost o

three weeks o instruction.It wouldalso continue to provide 20 percent

o program unds a year in arrears.

The University o Caliornia and

Caliornia State University wouldeach be reduced by $250 million.

The state would reduce unding or a variety o public saety programs.The numbero the states public saety ocers in the departments o Parks and Recreation

(park rangers)and Fish and Game (wardens)would be reduced, and the state wouldno longer sta its beaches with lieguards.Grants to local law enorcement or watersaety patrol would be eliminated.The Department o Forestry and Fire Protectionsreghting capabilities would be reduced.Flood control programs in the Departmento Water Resources would be cut, which would reduce channel and levee

maintenance and foodplain mapping.The Department o Justices law enorcementprograms would be reduced.

Restoring and Maintaining Fiscal Stability

The May Revision proposes $16.7 billion in budgetbalancing measures to address

the states immediate budget problem and build a prudent $1 billion reserve.Equallyimportant, under current projections, the budget would be balanced on an ongoing basis.In uture years, the state would have the capacity to pay down the $33 billion in

outstanding budgetary borrowing that was accumulated over the past decade.With diligent scal management, the May Revision would reduce this outstanding debt to

$6.6 billion by the end o 201516.

Even with the balanced budget plan proposed by the May Revision, risks to the

budget remain.Potential cost increases associated with actions to reduce the ederal

Expenditure Reductions 2012-13Proposition 98 $5,493.6

University of California1/ 250.0

California State University1/ 250.0

Developmental Services 50.0

Local Water Safety Patrol 10.6

Department of Forestry and Fire Protection 10.0

Flood Control 6.6

Fish and Game: Non-Warden Programs 2.5

Park Lifeguards 1.4

Fish and Game: Wardens 1.0

Department of Justice 1.0

Park Rangers 0.1

Total $6,076.8

Ballot Trigger Reductions(Dollars in Millions)

Figure INT-04

1/ This level of savings may be offset by Cal Grant increases if the universities

raise tuition.


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Introduction

10

decit, ederal government and court decisions, the pace o the economic recovery,

an aging population, and rising health care costs all threaten the ability o the state to

achieve and maintain a balanced budget over the long term.In addition, the exact level ocapital gains and income growth or top earners remains uncertain.

The scope o these

risks and uncertainties underscores the need to take actions now that improve the states

nances on an ongoing basis.


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Summary Charts

11May Revision 2012-13

This section provides various statewide budget charts and tables.

Summary Charts


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Summary Charts

1

2011-12 2012-13

Prior Year Balance -$2,844 -$2,535

Revenues and Transfers $86,809 $95,689

Total Resources Available $83,965 $93,154

Non-Proposition 98 Expenditures $53,988 $53,658

Proposition 98 Expenditures $32,512 $37,729

Total Expenditures $86,500 $91,387

Fund Balance -$2,535 $1,767

Reserve for Liquidation of Encumbrances $719 $719

Special Fund for Economic Uncertainties -$3,254 $1,048

Budget Stabilization Account - -

Total Available Reserve -$3,254 $1,048

Figure SUM-01

2012-13 May RevisionGeneral Fund Budget Summary

(Dollars in Millions)

Balanced Budget

2011-12 2012-13

Prior Year Balance -$2,508 -$6,879

Revenues and Transfers $83,238 $88,137

Total Resources Available $80,730 $81,258

Non-Proposition 98 Expenditures $54,195 $59,074

Proposition 98 Expenditures $33,414 $37,157

Total Expenditures $87,609 $96,231

Fund Balance -$6,879 -$14,973

Reserve for Liquidation of Encumbrances $719 $719

Special Fund for Economic Uncertainties -$7,598 -$15,692

Budget Stabilization Account - -

Total Available Reserve -$7,598 -$15,692

Figure SUM-02

2012-13 May Revision

General Fund Budget Summary


Problem Definition


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Summary Charts


2011-12 2012-13

Dollar

Change

Percent

Change

Personal Income Tax $52,958 $60,268 $7,310 13.8%

Sales and Use Tax 18,921 20,605 1,684 8.9%

Corporation Tax 8,208 8,488 280 3.4%

Motor Vehicle Fees 92 27 -65 -70.7%

Insurance Tax 2,148 2,089 -59 -2.7%

Estate Taxes - 45 45 -

Liquor Tax 331 337 6 1.8%

Tobacco Taxes 93 90 -3 -3.2%

Other 4,058 3,740 -318 -7.8%

Total $86,809 $95,689 $8,880 10.2%

Note: Numbers may not add due to rounding.

Figure SUM-03

General Fund Revenue Sources(Dollars in Millions)

Change from2011-12

Change

General Special From

Fund Funds Total 2011-12

Personal Income Tax $60,268 $1,338 $61,606 $7,569

Sales and Use Tax 20,605 10,390 30,995 2,338

Corporation Tax 8,488 - 8,488 280

Highway Users Taxes - 5,670 5,670 39

Motor Vehicle Fees 27 5,705 5,732 -158

Insurance Tax 2,089 436 2,525 112

Estate Taxes 45 - 45 45

Liquor Tax 337 - 337 6

Tobacco Taxes 90 757 847 -29

Other 3,740 12,718 16,458 1,495Total $95,689 $37,014 $132,703 $11,697


2012-13 Revenue Sources(Dollars in Millions)

Figure SUM-04


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Summary Charts

1

General Fund Special Funds Bond Funds Totals

Legislative, Judicial, Executive $2,074 $2,920 $220 $5,214

State and Consumer Services 689 716 14 1,419

Business, Transportation & Housing 448 7,694 7,644 15,786

Natural Resources 1,921 2,499 864 5,284

Environmental Protection 46 1,043 213 1,302

Health and Human Services 25,963 18,805 159 44,927

Corrections and Rehabilitation 8,889 31 1 8,921

K-12 Education 38,540 87 948 39,575

Higher Education 9,516 40 496 10,052

Labor and Workforce Development 342 397 - 739

General Government:

Non-Agency Departments 485 1,672 3 2,160

Tax Relief/Local Government 2,531 1,715 - 4,246

Statewide Expenditures -57 2,332 - 2,275Total $91,387 $39,951 $10,562 $141,900


2012-13 Total Expenditures by Agency


Figure SUM-05

2011-12 2012-13 Change %Legislative, Judicial, Executive $2,541 $2,074 -$467 -18.4%

State and Consumer Services 619 689 70 11.3%

Business, Transportation & Housing 573 448 -125 -21.8%

Natural Resources 1,933 1,921 -12 -0.6%

Environmental Protection 51 46 -5 -9.8%Health and Human Services 26,772 25,963 -809 -3.0%

Corrections and Rehabilitation 8,082 8,889 807 10.0%

K-12 Education 34,038 38,540 4,502 13.2%

Higher Education 9,770 9,516 -254 -2.6%

Labor and Workforce Development 354 342 -12 -3.4%

General Government:

Non-Agency Departments 443 485 42 9.5%

Tax Relief/Local Government 544 2,531 1,987 365.3%

Statewide Expenditures 780 -57 -837 -107.3%

Total $86,500 $91,387 $4,887 5.6%


General Fund Expenditures by Agency


Figure SUM-06


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Economic Outlook


The Caliornia and national economies are recovering at a modest pace.The economic outlook has improved slightly since the Governors Budget.Labor

markets made higher gains in the latter hal o 2011, but growth moderated in the early

months o 2012.Consumer attitudes and spending and business investment havebeen improving.Gross Domestic Product (GDP)growth is projected at a higher levelor 2012 (Figure ECO01).The risks to recovery are now projected to be much lower.However, real estate conditions and unemployment rates continue to limit growth.

The biggest change in the Caliornia outlook stems rom incorporating assumptions about

the impact o the initial public oering o Facebook stock.It may turn out to be one othe largest initial oerings in U.S.history and ar larger than all o the recent oerings inthe internet sector.Since the company, its ounder, principal employees, and many o itsinitial investors reside in Caliornia, it is projected to have a signicant positive impact on

Caliornia personal income in the latter hal o 2012, increasing it by 1.7 percent.

The Nation

The national economy is recovering at a slow, yet steady pace.Labor market conditionsare gradually improving.Despite some volatility that was likely caused by an unusuallywarm winter in many areas o the country, payroll job growth has strengthened.

Economic Outlook


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Economic Outlook

1

Nonarm employment expanded by 201,000 per month on average during the rstour months o 2012, compared to growing 153,000 per month in 2011, and 86,000

per month in 2010.

The national unemployment rate, while still high at 8.1 percent in April, has been

gradually improving since August 2011.

Initial and continuing claims or unemployment benets continued a twoyear decline

during the early months o 2012.

Better employment conditions are translating into rising incomes, better consumer

sentiment, and more consumption expenditures.

Personal income in March 2012 was 3.2 percent above its level o one year ago,

while wages and salaries grew 4.4 percent rom a year earlier.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2009:Q1 2009:Q4 2010:Q3 2011:Q2 2012:Q1 2012:Q4 2013:Q3

Figure ECO-01

National Real GDPQuarter-to-Quarter Growth, Annualized

Source: U.S. Bureau of Economic Analysis; CA Department of Finance May Revision Forecast

Forecast


17/94

Economic Outlook


During the rst quarter o 2012, consumer sentiment had ully recovered rom the

mid2011 slump.

In February 2012, consumer spending saw its largest gain since July 2011, led by a

900,000unit increase in vehicle sales.Consumer spending contributed more than2 percentage points to real GDP growth in the rst quarter o 2012.

In addition to consumer spending, rising capital investment has been a signicant

driver o recent economic growth.Businesses are lling equipment upgrade andreplacement needs postponed during the recession.Business spending on equipmentand sotware expanded over 10 percent in 2011 outpacing the growth o all other GDPspending categories.

Rising global demand or U.S.goods and services has been an important component othe recovery.

Exports slowed sharply during the recession beore rebounding when the

recovery began.They grew by more than 11 percent in 2010 and 6.7 percent in 2011. However, the appreciation o the dollar and spreading weakness in the Eurozone will

dampen export growth going orward.

The absence o a recovery in real estate markets has been the main drag on the recovery.However, tentative signs have emerged that housing markets may have stabilized.

In February 2012, the S&P/CaseShiller 20City Home Price Index posted its rst

gain since March 2011.

The volume o home sales has been on a modest rising trend since the middle o

2011, largely supported by investor purchases.

The value o homebuilding activity in March was up over 7 percent rom a year

earlier, with nearly all o the gains coming rom multiamily construction.

California

Caliornia regions that are home to hightechnology, highwage, and/or exportdriven

industries are doing relatively well.The remaining areas o the state are still aected byweak housing markets and public sector nancial troubles.

Caliornia is beneting rom its attractiveness to venture capitalists.In 2011, Caliorniaaccounted or more than hal o the entire nations venturebacked investment or theourth consecutive year led by sotware and biotechnology.A substantial portiono the states recent jobs gains stemmed rom hiring in highwage industries such as


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Economic Outlook

1

computer design, semiconductor manuacturing, inormation technologies, and scientic

and technical research.This ocus on hightechnology industries has boostedCaliornia incomes.For example, the Facebook IPO could result in about $12 billion oadditional income or Caliornia residents in the latter hal o 2012.

Caliornia continued to benet rom strong export growth.Ater a 19percent gain in2010, Caliornia exports rose 11 percent in 2011.Computers, electronics, electronicmachinery, and transportation equipment accounted or over 30 percent o this growth.Among recipients, Mexico accounted or nearly 32 percent o the 2011 export gains.

In contrast, labor markets are making slower and less consistent progress.Ateraccelerating in the second hal o 2011, nonarm employment growth slowed at the

beginning o 2012 rom an average monthly gain o 37,000 jobs during the lastve months o 2011 to 19,000 on average during the rst three months o 2012

(Figure ECO02).The astest growing industry sectors included inormation; proessional,scientic, and technical services; and private educational services.

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

Jobs

Figure ECO-02

California Nonfarm Payroll EmploymentMonth-over-Month Change

Source: Employment Development Department, Labor Market Information Division


19/94

Economic Outlook


Caliornias housing markets appear to have reached their low points and are

recovering slowly.

Driven to a large extent by investors, home sales have increased rom the

469,000unit pace in the middle o 2011 to a 517,000unit pace in the rst quarter o

2012.

Although still much higher than historic levels, notices o deault have declined to

257,700 in 2011 rom their peak o 456,300 in 2009.

The $268,300 median sales price o existing singleamily homes sold in

January 2012 was up 8.4 percent rom the lowest price recorded during the

recession $247,600 in February 2009.

The Forecast

The outlooks or the nation and Caliornia are slightly higher than the Governors

Budget orecast.Both economies are expected to continue to make slow butsteady progress.The recovery is on rmer ground, with a much smaller risk o slippinginto another recession.As shown in Figure ECO03, Caliornia is orecast to recover the

-1,400

-1,200

-1,000

-800

-600

-400

-200

02007 2008 2009 2010 2011 2012 2013 2014 2015

Jobs

LostinT

housands

Year

Figure ECO-03

Jobs Lost During Recession Not Recovered Until 2015


20/94


Economic Outlook

0

2011

(Est.)

2012

(Projected)

2013

(Projected)

Real gross domestic product, (2005 dollar) (Percent change) 1.7 2.2 2.4

Personal consumption expenditures 2.2 2.1 2.2

Gross private domestic investment 4.8 9.0 7.0

Government purchases of goods and services -2.1 -1.6 -1.8

GDP deflator (2005=100) (Percent change) 2.1 1.4 1.4

Federal funds rate (Percent) 0.10 0.10 0.10

Personal income (Percent change) 5.1 3.7 4.2

Corporate profits before taxes (Percent change) 7.9 1.1 0.2

Nonfarm wage and salary employment (Millions) 131.4 133.5 135.7

(Percent change) 1.2 1.6 1.7

Unemployment rate (Percent) 9.0 8.2 7.9

Housing starts (Millions) 0.61 0.74 1.01


New car and light truck sales (Millions) 12.7 14.2 14.9


Consumer price index (1982-84=100) 224.9 229.7 234.3


Forecast based on data available as of April 2012.

Percent changes calculated from unrounded data.

Selected U.S. Economic IndicatorsFigure ECO-04

nonarm jobs lost during the Great Recession in the ourth quarter o 2015, rather than in

the second quarter o 2016 as was previously orecast.

Weak housing markets and job growth have made this the slowest recovery in the

postWorld War II era.Barring serious disruptions, job and wage growth will lead to abalanced expansion.The national economy is orecast or real GDP growth in 2012 and2013 o 2.2 percent and 2.4 percent, respectively, while 3.4 percent is projected or 2014.The risks to economic recovery are rom instability in Europe and the Middle East, as well

as potential changes to address the ederal decit.

See Figure ECO04 and Figure ECO05 or highlights o the national and

Caliornia orecasts.


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Economic Outlook


Percent Percent Percent

2011 change 2012 change 2013 change

Personal income ($ billions) 1,685.8 6.0% 1,769.0 4.9% 1,830.0 3.4%

Nonfarm W&S employment (thousands) 14,085.2 1.1% 14,284.6 1.4% 14,550.9 1.9%

Mining and logging 28.4 5.8% 29.4 3.5% 30.7 4.6%

Construction 559.7 -0.1% 573.9 2.5% 608.5 6.0%

Manufacturing 1,244.6 0.3% 1,255.2 0.8% 1,285.6 2.4%

High technology 345.9 0.7% 348.3 0.7% 359.0 3.1%

Trade, transportation, & utilities 2,661.6 1.5% 2,701.3 1.5% 2,742.3 1.5%

Information 430.2 0.6% 434.0 0.9% 442.0 1.8%

Financial activities 763.1 0.4% 767.7 0.6% 774.7 0.9%

Professional and business services 2,133.8 2.9% 2,212.1 3.7% 2,272.6 2.7%

High technology 334.2 4.7% 348.8 4.4% 363.3 4.2%

Educational and health services 1,834.6 2.6% 1,872.0 2.0% 1,914.9 2.3%

Leisure and hospitality 1,538.3 2.5% 1,568.1 1.9% 1,594.8 1.7%

Other services 492.7 1.6% 500.8 1.7% 513.4 2.5%

Government 2,398.3 -2.0% 2,370.1 -1.2% 2,371.4 0.1%

Unemployment rate (annual average) 11.8% 10.9% 10.4%

Housing permits (thousands of units) 47 6.2% 53 12.1% 81 53.5%

Consumer price index (1982-84=100) 232.9 2.6% 237.7 2.0% 242.5 2.0%

Forecast based on data available as of April 2012.

Percent changes calculated from unrounded data.

Selected California Economic Indicators

Projected

Figure ECO-05


22/94

Tis page intentionally blank to facilitate double-sided printing.


23/94

Revenue Estimates


The May Revision orecasts that baseline General Fund revenues will be lower than

at the Governors Budget by $3.1 billion in 201112 and by $1.2 billion in 201213. Figure REV01 shows the baseline revenue orecasts, by source, in the Governors

Budget and the May Revision.The May Revision, beore refecting the related increase inProposition 98 expenditures, includes a total o $3.6 billion o revenue changes in 201112

and $7.6 billion in 201213.Ater taking into account the increase in Proposition 98expenditures, the net benet to the budget is $4.6 billion in 201213.These changesare shown in Figure REV02.Total May Revision revenue is expected to be $86.8 billionor 201112 and $95.7 billion or 201213.Figure REV03 compares, by source,the Governors Budget and May Revision revenues.

Accurately orecasting tax revenue or a large and diverse economy like Caliornias has

always been a challenging task.That task has become even more challenging in recentyears because o several actors.First, the economy is still recovering rom the largestrecession since the Great Depression.The recovery pattern does not conorm to thepatterns o other recent economic recoveries.Second, the increasing concentrationo income has made tax revenues dependent to a greater degree on the income and

decisions o a relatively small population o taxpayers.Third, the use o tax credits anddeductions has increased in unpredictable ways.Finally, recent changes to tax laws aecthow much tax is owed and when taxes are paid making it increasingly dicult to make

accurate predictions based on cash receipts at any point in time.

Revenue Estimates


24/94


Revenue Estimates

Source

Governor's

BudgetMay Revision

Fiscal 10-11: Personal Income Tax $49,491 $49,445 -$46 -0.1%Sales & Use Tax 26,983 26,983 $0 0.0%Corporation Tax 9,614 9,614 0 0.0%Insurance Tax 2,077 2,077 $0 0.0%Vehicle License Fees 1,330 1,330 $0 0.0%Estate Tax 0 0 $0 ---

Alcoholic Beverage 334 334 $0 0.1%Cigarette 96 96 0 0.0%Other revenues 2,076 2,076 $0 0.0%Transfers 1,488 1,488 -$0 0.0%Total $93,489 $93,443 -46 0.0%

Fiscal 11-12 Personal Income Tax $51,937 $49,803 -$2,134 -4.1%Sales & Use Tax 18,777 18,921 144 0.8%Corporation Tax 9,479 8,208 -$1,271 -13.4%Insurance Tax 2,042 2,148 $106 5.2%Vehicle License Fees 80 70 -$10 -12.5%Estate Tax 0 0 $0 ---

Alcoholic Beverage 323 331 $8 2.5%Cigarette 93 93 $0 0.0%Other revenues 2,192 2,274 $82 3.7%Transfers 1,386 1,390 $4 0.3%Total $86,309 $83,238 -3,071 -3.6%Change from Fiscal 10-11 -$7,180 -$10,205% Change from Fiscal 10-11 -7.7% -10.9%

Fiscal 12-13 Personal Income Tax $56,025 $55,495 -$530 -0.9%

Sales & Use Tax 19,595 19,997 $402 2.1%Corporation Tax 9,342 8,488 - 854 -9.1%Insurance Tax 2,179 2,089 -$90 -4.1%Vehicle License Fees 5 3 -$2 -40.0%Estate Tax 45 45 $0 0.0%

Alcoholic Beverage 329 337 $8 2.4%Cigarette 90 90 0 0.0%Other revenues 2,240 2,146 -$94 -4.2%Transfers -529 -554 -$25 4.7%Total $89,321 $88,136 -1,185 -1.3%Change from Fiscal 11-12 $3,012 $4,898% Change from Fiscal 11-12 3.5% 5.9%

Three-Year Total -$4,302

Figure REV-012012-13 May Revision

General Fund Revenue ForecastBaseline

Change



25/94

Revenue Estimates


From December 2010 through April 2011, revenues were running well ahead o

the 201112 Governors Budget orecast released in January 2011.For example,PIT estimated payments in April 2011 showed a 23.6 percent increase over the prior year.This increase in revenue led to an increase in the overall revenue orecast in the 2011

May Revision.Ater the release o the May Revision, cash receipts or Personal IncomeTax (PIT), Corporation Tax (CT), and Sales and Use Tax (SUT)continued to come inwell above orecast in May and June.In June, PIT estimated payments were up overthe prior year by 20.4 percent.CT payments in June were up 20 percent over theprior year, in spite o a $1 billion corporation tax reduction that took eect or the 2011

tax year.Receipts were so strong that an additional $4 billion o revenue (beyond whatwas orecast in the May Revision orecast)was assumed in the budget.The $4 billionadditional revenue assumption was adopted along with a set o spending cuts that wouldbe triggered in case the higher revenue did not materialize.

2011-12 2012-13

Direct General Fund Impact

Governor's initiative: Temporarily add three new PIT tax brackets for taxable incomes

beginning at $500,000 joint with rates of 10.3 percent, 11.3 percent, and 12.3 percent

and a 1/4 percent sales tax

$3,139 $5,340

Extend the Finanical Institution Records Match to Employment Development

Department and the Board of Equilization4 11

Changes to FTB wage garnishment authority 11 27

Penalty for filing a fraudulent income tax claim for refund 1 3

Other Revenue Solutions 21 128

Increase in Proposition 98 Expenditures Associated with Major Tax Changes - (2,908)

Transfer and Loan Solutions 395 2,043

General Fund Revenue Solutions $3,571 $4,644

Other Special Fund Revenues That Offset General Fund Costs

Extend the Managed Care Organization Taxes for Medi-Cal and Healthy Families - $168

Total Net Benefit Of Revenue Solutions $3,571 $4,812

Changes in Revenues

Figure REV-02

(Benefit to General Fund - Dollars in Millions)


26/94


Revenue Estimates

Source

Governor's

BudgetMay Revision

Fiscal 10-11: Personal Income Tax $49,491 $49,445 -$46 -0.1%Sales & Use Tax 26,983 26,983 $0 0.0%Corporation Tax 9,614 9,614 $0 0.0%Insurance Tax 2,077 2,077 $0 0.0%Vehicle License Fees 1,330 1,330 $0 0.0%Estate Tax 0 0 $0 ---

Alcoholic Beverage 334 334 $0 0.1%Cigarette 96 96 $0 0.0%Other revenues 2,076 2,076 0 0.0%Transfers 1,488 1,488 -$0 0.0%Total $93,489 $93,443 -46 0.0%

Fiscal 11-12

Personal Income Tax $54,186 $52,958 -$1,228 -2.3%Sales & Use Tax $18,777 18,921 $144 0.8%Corporation Tax 9,479 8,208 - 1,271 -13.4%Insurance Tax $2,042 2,148 $106 5.2%Vehicle License Fees $80 70 -$10 -12.5%Estate Tax $0 0 $0 ---

Alcoholic Beverage $323 331 $8 2.5%Cigarette $93 93 $0 0.0%Other revenues $2,213 2,295 $82 3.7%Transfers 1,413 1,784 $371 26.3%Total $88,606 $86,809 -1,797 -2.0%Change from Fiscal 10-11 -$4,883 -$6,634% Change from Fiscal 10-11 -5.2% -7.1%

Fiscal 12-13 Personal Income Tax $59,552 $60,268 $716 1.2%Sales & Use Tax $20,769 20,605 -$164 -0.8%

Corporation Tax $9,342 8,488 -$854 -9.1%Insurance Tax 2,179 2,089 - 90 -4.1%Vehicle License Fees $5 3 -$2 -40.0%Estate Tax $45 45 $0 0.0%

Alcoholic Beverage $329 337 $8 2.4%Cigarette $90 90 $0 0.0%Other revenues 2,237 2,275 38 1.7%Transfers 841 1,489 $648 77.1%Total $95,389 $95,689 300 0.3%Change from Fiscal 11-12 $6,783 $8,880% Change from Fiscal 11-12 7.7% 10.2%

Three-Year Total -$1,543

Figure REV-032012-13 May Revision

General Fund Revenue Forecast

Change



27/94

Revenue Estimates


By the time the 201213 Governors Budget revenue orecast was developed, receipts

or the three largest tax sources (PIT, SUT, and CT)had continued to come in at or abovelevels projected in the May Revision orecast through November 2011.PIT Septemberpayments were up over 8 percent, even though taxpayers are no longer required to makeestimated payments in September.Historically, when cash payments come in higher thanorecast, it is an indication that there is underlying strength in the revenue source above

the level that had been orecast.

Just ater the 201213 Governors Budget orecast was developed, PIT and CT receipts

started to all o dramatically.Although receipts or the rst 11 months o 2011 hadshown strong growth, receipts or the months o December 2011 through April 2012

showed declines (particularly or PIT and CT)relative to the prior year.December CTestimated payments were down by 12 percent, and December/January PIT estimated

payments were down by 13 percent.The drop o in tax receipts, which continuedthrough April, led to a baseline 201213 May Revision orecast or 201112 that is

$3.1 billion lower than the Governors Budget baseline orecast.

The 201213 May Revision Budget orecast or PIT and CT has dropped signicantly

rom the Governors Budget.Because o the reduced PIT receipts, the May Revisionorecast or capital gains growth or 2011 has dropped rom a 15 percent increase in

January to a 5 percent decline at the May Revision.A yearoveryear decline in capitalgains is very atypical, other than in recessionary periods.Additionally, new 2010 taxreturn data suggest that the orecast or business income reported on PIT returns was

somewhat optimistic.The reduction in those income items or 2010 leads to a drop inthe orecast or these income items or 2011 and later years.Osetting these declinesin income are the revenues expected to be generated through the Facebook initial

public oering.

For the CT, receipts have lagged signicantly behind the projected and actual levels o

corporate prots.It is likely that this decline is signicantly due to increased usage otax credits.The May Revision orecast or CT is down by $1.3 billion in 201112 and by$854 million in 201213 to refect the weaker receipts.

The May Revision is based on the assumed passage o the Governors tax initiative.The Governors proposal temporarily increases tax rates on the highest income

Caliornians, and temporarily increases the Sales and Use Tax rate by 0.25 percent. These two provisions result in a revenue increase o $8.5 billion.The Governors


28/94


Revenue Estimates

initiative will replace some o the revenues lost in the recession as the states economy

slowly recovers.

Solutions and Policy Proposals

The May Revision proposes the ollowing new policy changes that will aect

General Fund revenue:

Change rules regarding Franchise Tax Board (FTB)wage garnishment The May Revision proposes to allow the FTB to issue a wage garnishment against

a delinquent income tax debt without requiring FTB to record a tax lien.This providesa benet to individuals with outstanding tax debts because it removes an incentive

or FTB to record the lien.This change is expected to generate $11 millionGeneral Fund revenue in 201112 and $27 million General Fund revenue in 201213.

Penalty or raudulent claim or reund Consistent with current ederal law,the May Revision Budget would create a penalty or ling a raudulent claim

or reund.This penalty is intended to deter taxpayers rom ling amended returnsthat claim credits that are not substantiated.This program is expected to generate$1 million General Fund revenue in 201112 and $3 million General Fund revenue in

201213.

Long-Term Forecast

Figure REV04 shows the orecast or the largest three general und revenues rom201011 through 201516.Total General Fund revenue rom these sources is expected togrow rom $86 billion in 201011 to $107.7 billion in 201516.The average yearoveryeargrowth rate over this period is 4.8 percent.

The May Revision economic orecast refects modest but steady growth over the

next ve years.The projected average growth rate in GDP over the next ve years is2.8 percent, a slightly slower rate than normal or an economic expansion.With theexception o a decrease in the orecast o proprietors income and national corporate

prots, most key drivers o the May Revision orecast, such as total personal income,

unemployment rate, wages, and the S&P 500, are projected to be slightly improvedin both the short and long term over their projected levels or the Governors

Budget orecast.


29/94

Revenue Estimates


The total revenue generated by these three sources has grown at an average annual rate

o 5 percent since 1987.This orecast estimates a decline in General Fund revenue o

7 percent in 201112, ollowed by growth o 11.6 percent in 201213.Growth in 201314is expected to be 3.1 percent, ollowed by 10.4 percent growth in 201415. This choppyyeartoyear growth pattern, in part, refects the expiration o temporary taxes,

the dedication o sales tax to realignment in 201112 and the potential behavioral impact

o ederal tax law changes.The ederal Economic Growth and Tax Relie ReconciliationAct o 2001 reduced taxes or dividend income, capital gains, and other income.Thesetax reductions were set to expire ater 2010.However, late in 2010 they were extendedthrough 2012.In addition a 3.8percent surtax on specied unearned income will go intoeect on January 1, 2013, as part o ederal health care nancing.As was done in theGovernors Budget, the May Revision orecast assumes that in 2012 some taxpayerswill respond to these rate increases by accelerating 20 percent o 2013 capital gains to

2012.It is also assumed that 10 percent o 2013 dividends and 1.1 percent o wages willbe accelerated to 2012.These income shits push revenue into 201213 rom 201314,and distort the growth rate in 201415.

Corporate tax revenue has substantial longterm declines rom the Governors

Budget orecast.This is due in part to a lower estimate o national prots both in theshort and longterm along with a signicant and unexpected increase in the use o

tax credits.

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

averageyear over

year growth

Personal Income Tax $49.4 $53.0 $60.3 $60.2 $67.4 $71.4 7.7%

Sales and Use Tax $27.0 $18.9 $20.6 $23.0 $24.9 $26.2 0.8%

Corporation Tax $9.6 $8.2 $8.5 $8.9 $9.6 $10.1 1.3%

Total $86.0 $80.1 $89.4 $92.2 $101.8 $107.7 4.8%

Growth -- -6.9% 11.6% 3.1% 10.4% 5.8%

Figure REV-04

Long-Term Revenue Forecast - Three Largest Sources

(General Fund Revenue - Dollars in Billions)


30/94


Revenue Estimates

0

Personal Income Tax

The PIT orecast has been reduced by $1.2 billion in 201112 and increased by

$716 million in 201213.Through April, currentyear PIT receipts were down $2.8 billionrom the Governors Budget orecast.Aprils receipts provide a clearer picture o the 2011tax year.Based on these receipts and the overall economic orecast, it now appears thatthe Governors Budget orecast overestimated the strength o capital gains income or the

2011 tax year.Because o this, the orecast growth in capital gains income or 2011 hasbeen decreased rom 15 percent growth to a 5 percent decline.Capital gains reported bytaxpayers plunged 48.9 percent in 2009 and nal data or the 2010 tax year shows that

gains in 2010 increased 92 percent.

Osetting the base revenue declines are an estimated $283 million in 201112 and

$1.2 billion in 201213 rom the Facebook Initial Public Oering.

This orecast also refects the assumed passage o the Governors tax initiative.Theserevenue estimates include $3.1 billion in 201112 and $4.7 billion in 201213 rom the

assumed addition o three tax brackets or taxable incomes beginning at $500,000 or

joint households ($250,000 or single lers)with rates o 10.3 percent, 11.3 percent, and12.3 percent or seven years.

Sales and Use Tax

The Sales and Use Tax (SUT)orecast includes a baseline increase o $144 million in201112 and $402 million in 201213.

For the current year, the SUT orecast is increased by $144 million due to receipts

through April and a stronger orecast o economic indicators, most notably lower

expected unemployment rates and an uptick in expected infation rom the Governors

Budget estimates.

Overall strength in the orecast continues through 201213, with baseline revenues or

the year up $402 million rom the Governors Budget.This orecast assumes passageo the Governors initiative that increases the sales tax rate by 0.25 percent rom

January 1, 2013, to December 31, 2016.


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Revenue Estimates


Corporation Tax

The CT orecast has been decreased by $1.3 billion in the current year and by $854 million

in the budget year.

The decline in CT revenues in 201112, and 201213 since the Governors Budget orecast

are attributable to lower tax receipts in the current year, a lower estimate o taxable

prots resulting rom a lower estimate o national prots, the increased use o credits,

and minor technical changes in the orecast.

Despite the act that the May Revision economic orecast or corporate prots has been

revised downward relative to the Governors Budget orecast, national corporate prots

are still expected to see healthy growth o 7.9 percent in 2011, and 1.1 percent in 2012. This growth in corporate prots does not translate to increased CT revenues in Caliornia,

largely due to increased usage o credits, as well as the recently enacted legislationallowing the sharing o credits among members o the same unitary group, and allowing

the elective use o single sales actor apportionment.Additionally, temporary limitationson the use o tax credits and net operating losses that were enacted in 2008 and 2010

have ended as o the 2010 and 2012 tax years respectively.

Insurance Tax

The insurance tax orecast has been increased by $106 million in the current year and

decreased by $90 million in the budget year.The revenue changes are due in large partto a delay in reunds associated with a previous Board o Equalization decision on theaccounting method used by insurers.

Other Revenues and Transfers

The May Revision refects a $56.7 million increase in current year receipts rom

unclaimed property.The $56.7 million consists o increased receipts in December 2011,coupled with decreased payments or claims or the same period, as compared to the

estimates in the Governors Budget.Including the unclaimed property revenue increase,the May Revision includes $21 million in minor revenue solutions or 201112 and

$128 million or 201213.The May Revision proposes an increase in loan and transerbudget solutions o $367 million in 201112 and $673 million in 201213, which includes

new transers and extensions o repayment dates or loans.In total, the May Revisionincludes $395 million in loan and transer solutions or 201112 and $2 billion or 201213.


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Revenue Estimates

2011 Realignment Revenues

The 2011 Realignment is unded by a portion o the SUT rate as well as by a portion o

the Vehicle License Fee (VLF).The May Revision orecasts that the 1.0625% o theSUT rate that is dedicated to the 2011 Local Revenue Fund will contribute $5.2 billion in

201112 and $5.4 billion in 201213.The 2011 Realignment portion o the VLF is estimatedat $462 million or 201112 and $496 million or 201213.The sales tax estimates areincreased by $46 million in 201112 and $115 million in 201213 above the Governors

Budget levels.

Property Tax

Article XIIIA o the State Constitution (Proposition 13)provides that property is assessedat its 1975 air market value until it changes ownership.When ownership changes,the assessed value is redetermined based on the propertys current market value.New construction is assessed at air market value when construction is completed.A propertys base year value may be increased by an infation actor, not to exceed

2 percent annually.

Although the property tax is a local revenue source, the amount o property tax generated

each year has a substantial impact on the state budget because local property tax

revenues allocated to K14 schools typically oset General Fund expenditures.Assessedvalue growth is estimated based on twiceyearly surveys o county assessors and

evaluation o real estate trends.Declines in sales volumes and prices in 2010, coupledwith declines in property values and ailures to remit property tax payments as a result o

mortgage deaults and oreclosures, negatively impacted assessed values and property

tax levies in 201112 to an extent that was greater than anticipated at Governors Budget.While those trends moderated somewhat in 2011, the declines in sales volumes and

prices were still signicant enough to reduce the estimated 201213 growth rate rom the

level estimated in the all.Property tax collections are estimated to decrease 0.4 percentrom 201011 to 201112, which is a decline rom the positive 0.5 percent growth rate

orecast at Governors Budget.The 201213 property tax growth rate is estimatedat 0.5 percent, which is down rom the 0.7 percent estimated in the all.


33/94

K thru 12 Education


The May Revision includes total unding o $67.5 billion ($38.2 billion General Fund

and $29.3 billion other unds)or all K12 Education programs.Proposition 98

A voterapproved constitutional amendment, Proposition 98, guarantees minimum

unding levels or K12 schools and community colleges.The guarantee, which went intoeect in the 198889 scal year, determines unding levels according to multiple actors

including the level o unding in 198687, General Fund revenues, per capita personal

income and school attendance growth or decline.

The May Revision continues to address the several most signicant issues acing schools.Over time, it restores the $9.6 billion in reductions that have been made to Proposition 98

unding since 200708, reduces the wall o debt by eliminating deerrals, and restores

the decit actor reductions to general purpose school revenue limit unding in the same

manner in which the reductions were made.The May Revision will increase unding toschools by more than $15 billion over our years, an increase o over $2,500 per pupil. Ater restoring cuts to revenue limits, increased unds will be allocated based on

students needs.The May Revision also replaces the current complex, administrativelycostly and imbalanced school nance system with a simpler, more transparent unding

ormula that removes the various spending restrictions that prevent schools rom

eectively and eciently managing their unds based on local educational priorities.

K thru 12 Education


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K thru 12 Education

For 201213, the Proposition 98 Guarantee is $53.7 billion.Although revenues are,in aggregate, down rom the Governors Budget level in both years, the dierence

between 201112 and 201213 is larger than it was in the Governors Budget and this

results in a $1.2 billion higher calculation or the Proposition 98 minimum guarantee.

The May Revision proposes to maintain level Proposition 98 unding or every school

district, reduce the wall o debt by reducing the payments to schools that are deerred

each year rom $10.4 billion to $7.6 billion, and to und the Quality Education Investment

Act (QEIA)program within the Proposition 98 guarantee.The May Revision assumes passage o the Governors tax initiative, which increases

Proposition 98 unding by $2.9 billion in 201213.This builds on the Governors Budgetproposal to begin restoring the signicant reductions imposed on K12 schools and

community colleges since 200708.In 201314, more than $4 billion in additional undingwill be available or allocation to schools, o which hal will und COLA and restore the

decit actor reduction to general purpose revenue limit unding and the other hal will

urther reduce the payment deerrals.By 201516, Proposition 98 is projected to growby more than $17 billion higher than the 201112 level, the payment deerrals will have

been ully restored, and the decit actor reductions will be close to ully restored.(See Figure K1201).

$2.9$3.1

$3.2

$3.5

$40.0

$45.0

$50.0

$55.0

$60.0

$65.0

$70.0

2011-12 2012-13 2013-14 2014-15 2015-16

Figure K12-01

K-14 Funding Increases by $17 Billion Over 4 Years(Dollars in billions)

Proposition 98 Baseline Funding

Initiative Funding Increase

$64.3

$53.7$55.0

$61.3

$47.0


35/94

K thru 12 Education


The May Revision outlines the reductions that would be necessary to restore balance

i the November initiative is not approved by the voters.Specically, $5.5 billion inreductions to schools would be triggered in 201213.A reduction o this magnitudewould result in a unding decrease equivalent to the cost o three weeks o instruction.

It will also continue to provide 20 percent o program unds a year in arrears.(See Figure K1202).

The May Revision continues to provide signicant and permanent additional fexibility

to schools by consolidating the vast majority o categorical programs and revenue limit

unding into a weighted student ormula that provides unding to schools based on

the needs o their students.The new unding ormula will ensure that the billions inadditional unding schools will receive within the next ew years can be used or locally

determined priorities.In addition, the existing decit actor reductions to revenue limitswill be restored beore the ormula is ully implemented and COLAs will be provided

on both revenue limits and the new ormula.As structured, this proposal holds school

$53.7

$48.2

$30.0

$35.0

$40.0

$45.0

$50.0

$55.0

$60.0

2012-13 as Proposed 2012-13 with Trigger Reductions

Figure K12-02

Proposition 98 as Proposed and with Trigger Reductions2012-13 May Revision

(Dollars in Billions)


36/94


K thru 12 Education

districts harmless next year, ully restores cuts to revenue limits, and distributes increased

unds based on the needs o students.

The sections that ollow provide an overview o K12 unding adjustments, while

the Higher Education section contains the Proposition 98 adjustments or the

Community Colleges.

K-12 Budget Adjustments

Proposals to Balance the Budget:

Redevelopment Agency Asset Liquidation An increase o $1.2 billion inosetting local property taxes or 201213 to refect the distribution o cash assets

previously held by redevelopment agencies.The increase in local revenue reducesProposition 98 General Fund by an identical amount.An additional $90.9 millionin property tax unds will be retained by school districts and county oces

o education.

Proposition 98 Adjustments A decrease o $558.6 million, refecting the eliminationo the holdharmless adjustment provided to schools rom the elimination o the

sales tax on gasoline in 201011, maintaining the rebenching methodology used

in the 2011 Budget Act or mental health services or children and Child Care,

and using the traditional 198687 look back methodology or the ongoing shit o

Redevelopment Agency property tax revenues to schools.The May Revision alsoredesignates a $785.3 million overappropration o the guarantee in 201112 towards

existing settle up debt owed to schools and the Caliornia Teachers Association v.

Schwarzeneggersettlement agreement payment requirement or 201213.The cumulative eect o these changes is $931.8 million in Proposition 98 savings

or 201213.

Quality Education Investment Act A decrease o $450 million General Fund or201213.The overappropriation in 201112 will be used prepay the $450 millionrequired to be provided on top o the minimum guarantee in 201213 pursuant

to the Caliornia Teachers Association v.Schwarzeneggersettlement agreement.The program will be unded within the guarantee to achieve onetime savings o

$450 million or 201213.


37/94

K thru 12 Education


Other Signicant Adjustments:

K12 Deerrals An increase o $392.9 million Proposition 98 General Fund, or atotal o $2.6 billion, to reduce interyear budgetary deerrals rom $9.5 billion to

$6.9 billion.

Transitional Kindergarten A decrease o $132.2 million in projected savingsassociated with the proposed elimination o transitional kindergarten requirements.The projected erosion in savings is attributable to anticipated declining enrollment

costs as well as an expected increase in twoyear kindergarten costs.The remainingprojected savings o $91.5 million rom the elimination o transitional kindergarten

requirements will be used to restore reductions to Preschool included in the

Governors Budget and support the expansion o preschool enrollment as discussed

in the Child Care section below.

Charter Schools An increase o $3.4 million Proposition 98 General Fund orcharter school categorical programs due to charter school growth.

Local Property Tax Adjustments An increase o $459 million in 201112 and anincrease o $398 million in 201213 or school district and county oce o education

revenue limits as a result o lower osetting property tax revenues.

Average Daily Attendance (ADA) An increase o $122 million in 201112 and anincrease o $169 million in 201213 or school district and county oce o education

revenue limits as a result o an increase projected ADA in both years.

Ballot Trigger Reductions:

I new revenues are not achieved, the potential trigger reduction or K14 programs

is $5.5 billion, an increase o $656.7 million over the $4.8 billion trigger reduction

proposed at the Governors Budget.I this trigger reduction is implemented,the $2.8 billion repayment o deerrals in 201213 will not occur.The remaining$2.7 billion will be a reduction in programmatic unding or schools.Schools willbe provided fexibility to reduce the school year by a combined total o 15 days in

201213 and 201314.This will allow schools to use a combination o reserves,reductions in the school year and other savings options to absorb this cut over a two

year period.


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K thru 12 Education

Signicant Other General Fund Policy Issues:

Weighted Pupil Funding Formula The Governors Budget proposed implementinga weighted student unding ormula to replace Caliornias complex, administratively

costly and imbalanced school nance system.The Governors Budget alsoproposed that school districts and charter schools receive signicant and permanent

fexibility to expend the majority o their educational unds on any locally determined

educational purpose.The May Revision addresses concerns raised by the Educationcommunity with the ollowing modications to the proposed weighted student

unding ormula:

Increase the Base Grant to the Revenue Limit Level The base grant portiono the weighted student ormula will be approximately $5,421, instead o the

$4,920 level proposed in the Governors Budget.This will set the base grantportion o the weighted student ormula equal to, or slightly higher, than thecurrent average revenue limit or unied school districts (which is $5,203).In addition, COLAs will be provided on both revenue limits and the new ormula.

Repay Defcit Factor The proposal will require that the existing decit actorreduction to revenue limits be restored beore the weighted student ormula

is ully implemented.Also, the phase in period is increased rom ve years toseven years.Further, implementation will be contingent on school unding beingat the levels proposed in the May Revision.

Add Grade Span Adjustments Base grants, supplemental grants,

and concentration grants are revised to provide grade span dierentials to refectthe cost o educating students in grades K3, 46, 78 and 912, respectively.

Supplemental and Concentration Grant Weights School districts and charterschools will receive a supplemental grant actor equal to 20 percent o the base

grant or lowincome and English learner students, with concentration grants

adjusted accordingly.The concentration grant actor or charter schools will becapped at the districtwide average.In addition, school districts will be requiredto spend the unding provided by the supplemental and concentration grants or

the benet o the lowincome and English learner students or which the district

received the unding.

Fund Add On Programs The current HomeToSchool Transportation andTargeted Instructional Improvement Grant program unding ormula allocations


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K thru 12 Education


are continued as weighted student ormula addon programs.However,the unding will be fexible.

Make Contingent on Accountability System Changes Continued phasein othe ormula in 201314 will be contingent on legislation identiying additional

indicators o district and school success such as proessional development

opportunities or teachers, college enrollment and employment rates or

students, and provision o the necessary conditions or learning, which would be

linked to incentive unding.

Mandates Block Grant The Governors Budget proposed to eliminate nearly hal othe existing K12 and community college mandates and provide $200 million to und

a mandates block grant incentive program to reimburse K12 schools and community

colleges or all remaining mandated activities.The May Revision proposes theollowing changes to the block grant program:

Distribute Funding Equally on a PerStudent Basis The block grant woulddistribute unding to school districts, county oces o education, charter

schools, and community colleges equally based on average daily attendance or

K12 schools and unded ulltime equivalent students or community colleges.O the $200 million proposed or the block grant, $166.6 million would be

available or K12 schools and $33.4 million would be available or community

colleges, providing a uniorm unding rate o approximately $28 per student.

Eliminate the Existing Mandates Claiming Process The existing claimingprocess would be eliminated as an option or K12 schools and community

colleges to seek reimbursement or the mandates unded in the block grant.Eliminating this option will ensure that K12 schools and community colleges are

reimbursed at the same rate or perorming the same mandated activities.

Repeal HighCost Mandates The six highest cost mandates would bepermanently repealed.These programs include Graduation Requirements(Second Science Course), Behavioral Intervention Plans; Habitual Truants;

Notication o Truancy; Notication to Teachers and Pupil Discipline Records;

and Pupil Suspensions, Expulsions, and Expulsion Appeals.The remainingmandates slated or elimination will be suspended in 201213 until subsequent

legislation is introduced to permanently repeal those activities.

Charter School Reorms Charter schools receive less per average daily attendanceunding than traditional public schools and are not eligible or reimbursement


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K thru 12 Education

0

o statemandated costs.In addition, they have limited access to educationalacilities, limited options or borrowing unds at aordable interest rates and cannot

issue bonds.The May Revision proposes the ollowing modications to the charterschool trailer bill legislation included in the Governors Budget:

Allow Surplus Property Conveyance Under Specifc Conditions The GovernorsBudget proposed requiring school districts to convey surplus property to any

charter school opting to claim that property.It also provided school districts withan incentive to sell property to charter schools without having to declare the

property surplus and without losing eligibility or the school acilities program.The May Revision limits the surplus property conveyance requirement to

acilities with an educational purpose that were purchased with state unds.

Eliminate the State Funding Determination Process or NonClassroomBased

Charters The Governors Budget proposed to allow all new and existingnonclassroombased charter schools to receive ull unding without needing

State Board o Education review and approval.The proposal continuesto eliminate the State Board o Education unding determination process,

but will grandather in the existing unding levels or all nonclassroombased

charter schools, including those currently receiving a reduced unding level.Nonclassroombased charter schools currently receiving a reduced unding

level will only be allowed to receive ull unding upon renewal o their charter

ater 201213.This is a costneutral modication that will remove an overlyburdensome and unnecessary process at the state level.

Increase Financial Assistance to Charters County treasurers will be authorizedto lend to charter schools.Also charter schools, as a condition o directlyapplying to the state or a deerral exemption, will be required to provide a copy

o their application or a deerral exemption to their charter authorizer.

Child Care and State Preschool

Subsidized Child Care includes a variety o programs that are designed to support

lowincome amilies so they may remain gainully employed.These programsare primarily administered by the State Department o Education (SDE)throughnonProposition 98 unding and the annual ederal Child Care and Development Fund(CCDF)grant.Additionally, partday preschool programs, unded through Proposition 98,meet a child care need, but are also designed as an educational program to help ensure

children develop the skills needed or success in school.The SDE and the Department


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K thru 12 Education


o Social Services (DSS)also jointly administer the threestage CalWORKs child caresystem to meet the needs or child care o recipients o aid while they participate in work

activities and as they transition o o cash aid.Families can access services throughcenters that contract directly with the SDE (Title 5 centers), or by receiving vouchers romcounty welare departments or alternative payment program providers.

Proposals to Balance the Budget:

Reduce Child Care Costs: TheMay Revision refects total child care savings o

$452.5 million in NonProposition 98 General Fund (including CalWORKs Stage

1 unded in the DSS budget), and the elimination o 29,600 child care slots.The Governors Budget proposed a decrease o $452.2 million and the elimination o

54,800 slots to align eligibility and need criteria or lowincome working amily child

care services with ederal income eligibility rules and welaretowork participation

requirements, consistent with the Administrations proposal to restructureCalWORKs, and to reduce reimbursement rates.Concerns were raised that byeliminating child care services or noncashaided amilies who are engaged in

education or training, amilies will not be able to achieve their employment goals.The May Revision proposes the ollowing major adjustments to address these

concerns, while maintaining the level o savings refected in the Governors Budget.

Allow Families Engaged in Education or Training to Receive Child Care ServicesAnincrease o $180.1 million to allow amilies who are engaged in education

or training to receive child care services on that basis or up to two years.

Reduce Reimbursement Rates or VoucherBased ProgramsAdecreaseo $184.2 million by reducing reimbursement rate ceilings or licensed

voucherbased providers rom the 85th percentile to the 40th percentile o

the private pay market, based on the 2005 Regional Market Rate (RMR)survey data.Licenseexempt providers will be reimbursed based upon71 percent o the lowered licensed ceilings.

Signicant Adjustments:

Restructure Administration o Child Care: TheGovernors Budget proposed to shit

the eligibility and payment unctions or child care services rom the alternative

payment programs and Title 5 centers to the county welare departments, beginning

in 201314.All eligible amilies, including those currently enrolled in Title 5 centers,will receive a voucher or payment to a provider o their own choice.Concerns wereraised that shiting to a voucheronly child care system administered by the counties


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K thru 12 Education

will reduce access to higher quality Title 5 centers.In addition, concerns were raisedthat noncashaided amilies will not be able to access services because unding

associated with child care services will be capped at the appropriation level and

prioritized or cashaided amilies.The May Revision proposes the ollowing policy

changes to address these concerns:

Establish a County Child Care Block GrantAchild care block grant will becreated, separate rom the county single allocation, to ensure that eligible

lowincome working amilies can continue to access child care services.

Preserve Title 5 Center InrastructureCounty welare departments willcontract with Title 5 centers, based on the allocation o Title 5 center slots in

201213, as a condition o receiving child care block grant unds.Counties willbe provided fexibility to deviate rom this allocation up to 10 percent.Ater aspecied period o time, counties will be allowed to reallocate Title 5 center

slots to voucherbased providers within the county to align service needs with

available resources.A Title 5 center will be required to maintain its designationthrough SDE, primarily through submitting an annual assessment o its

educational program.

Facilitate Transition o Child Care Services to County Welare DepartmentsSomeunding will be shited rom SDE to DSS to und state operations

costs associated with the transition o child care services to the county welare

departments, and to enable counties that are prepared to assume responsibility

or these services to implement the transition in 201213.

State Plan or Quality ActivitiesTheDSS will develop a plan in 201213,in consultation with SDE, that outlines the quality activities to be unded in

201314.The plan would require that DSS conduct quality activities to promotethe health and saety o children in care, and that SDE conduct activities to

promote early learning and readiness or school.The plan would also refect anallocation to county welare departments to target quality unds to local needs

and priorities.

PartDay Preschool Programs: TheMay Revision redirects $91.5 million in savings

rom the proposed elimination o transitional kindergarten to: (1)restore the10percent reduction to the Standard Reimbursement Rate or partday preschoolprograms included in the Governors Budget ($34.1 million), and (2)to expand accessto partday preschool or 15,500 children rom lowincome amilies ($57.5 million).


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Higher Education


Higher Education includes the University o Caliornia (UC), the Caliornia State

University (CSU), the Caliornia Community Colleges, the Caliornia Student Aid

Commission (CSAC)and several other entities.The May Revision builds upon the longterm vision or higher education in the

Governors Budget.This vision is rooted in the belie that higher education should beaordable and student success can be improved.The signicant components includethe ollowing:

Aordability The objective is to curtail tuition and ee increases and to lessen thepressure or students to take out burdensome loans.

Student Success The state will make annual General Fund augmentationscontingent upon each institution achieving the Administrations priorities, including

improvements in specic accountability metrics.

Stable Funding Source The state will increase its General Fund contribution toeach institutions prioryear base, contingent upon the passage o the Governors

tax initiative.

Fiscal Incentives The shit o retirement costs and bond debt service appropriationsinto each institutions budget will encourage the institutions to actor these costs into

their overall scal outlook and decisionmaking process.

Higher Education


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Higher Education

The May Revision includes total unding o $23 billion ($11.6 billion General Fund and

$11.4 billion other unds)or all programs included in these agencies.University of California

Drawing rom the top 12.5 percent o the states high school graduates, UC educates

approximately 237,800 undergraduate and graduate students at its ten campuses

and is the primary institution authorized to independently award doctoral degrees

and proessional degrees in law, medicine, business, dentistry, veterinary medicine,

and other programs.UC manages one U.S.Department o Energy national laboratory andpartners with private industry to manage two others.UC also and operates ve medicalcenters that support the clinical teaching programs o the UCs medical and health

sciences schools that handle more than 3.8 million patient visits each year.

Proposal to Balance the Budget:

Partial Delay o Operating Budget Needs A decrease o $38 million to the$90 million augmentation included in the Governors Budget or base operating costs

that could be used to address costs related to UCs retirement program contributions

or other needs.This revised proposal will provide $52 million in 201213, whichmatches the Governors Budget augmentation or CSU retirement contributions,

and delays the remaining $38 million augmentation until 201314.

California State UniversityDrawing students rom the top onethird o the states high school graduates, as well as

transer students who have successully completed specied college work, CSU provides

undergraduate degrees in a broad range o disciplines and graduate instruction through

masters degrees and independently awards doctoral degrees in education, nursing

practice, and physical therapy, or jointly with UC or private institutions in other elds

o study.The CSU has 23 campuses and approximately 426,400 students.The CSUgrants more than onehal o the states bachelors degrees and onethird o the states

masters degrees.It also produces over 50 percent o Caliornias teachers.Signicant Adjustments:

Continue to Provide Adjustments or Retirement Costs The Governors Budgetproposed that CSU no longer receive annual budget adjustments or CSUs


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Higher Education


retirement costs beginning in 201314.However, recognizing that certain costs aredetermined by Caliornia Public Employees Retirement System over which CSU has

no control, the May Revision modies that proposal so that CSU will receive annual

budget adjustments associated with the ununded liability portion o its retirementcosts, as outlined by CalPERS.The May Revision will also adjust CSUs base budgetto refect incremental changes or 201213 employer contribution rates.

Provide CSU the Authority to Negotiate and Set Employee Health Benefts with

Represented and NonRepresented Employees The Administration proposestrailer bill language that will provide CSU the same statutory authority to negotiate

or set employee health care benets that is provided to the Department o

Personnel Administration (DPA)in setting such policies or other state employees.Currently, CSU pays 100 percent o the health care premiums or its employees and

90 percent or employees amily members.For most state employees, the statepays either 80 or 85 percent o employees health care premiums and 80 percent oramily members.State law species contribution rates or state and CSU employerpayments or employee health care premiums.In 1991, state law provided DPA theability to negotiate employer shares or health benets or state employees, but a

similar statutory change was not provided to CSU.This proposal will provide CSU atool to better manage and negotiate the entirety o its personnel costs.

California Community Colleges

The Caliornia Community Colleges are publicly supported local educational agencies

that provide educational, vocational, and transer programs to approximately2.6 million students.The Community College system is the largest system o highereducation in the world, with 72 districts, 112 campuses, and 71 educational centers.By providing education, training, and services, the Community Colleges contribute to

continuous workorce improvement.The Community Colleges also provide remedialinstruction or hundreds o thousands o adults across the state through basic skills

courses and adult noncredit instruction.

Signicant Adjustments:

Mandates Block GrantTheGovernors Budget proposed to eliminate nearly halo the existing K14 mandates and provide $200 million to und a mandates block

grant incentive program to reimburse K12 schools and community colleges or all

remaining mandated activities.The May Revision proposes the ollowing changes tothe block grant program:


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Higher Education

Distribute Funding Equally on a PerStudent Basis The May Revisionproposes to distribute block grant unding to school districts, county oces

o education, charter schools, and community colleges equally based on

average daily attendance or K12 schools and unded ulltime equivalentstudents or community colleges.O the $200 million proposed or the blockgrant, $166.6 million would be available or K12 schools and $33.4 million

would be available or community colleges, providing a uniorm unding rate o

approximately $28 per student.

Eliminate the Existing Mandates Claiming Process The proposal eliminates theclaiming process as an option or K12 schools and community colleges to seek

reimbursement or the mandates unded in the block grant.Eliminating thisoption will ensure that K12 schools and community colleges are reimbursed at

the same rate or perorming the same mandated activities.

Add Mandates to Block Grant and Suspension ListTheCommissionon State Mandates recently determined that signicant portions o the

Minimum Conditions or State Aid, Community College Construction,

and Discrimination Complaint Procedures test claims contained reimbursable

statemandated activities.The May Revision proposes to add the MinimumConditions or State Aid and Community College Construction mandates to

the list o eligible mandates to be unded rom the block grant while the state

reviews the policy a

Gov. Jerry Brown's May budget revision summary 2012-2013

Documents