BILL ANALYSIS
AB 1018
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Date of Hearing: May 20, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 1018 (Hill) - As Introduced: February 27, 2009
Policy Committee:
AppropriationsVote:
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill places added long-term economic and fiscal forecasting
responsibilities on the Department of Finance, treasurer, and
controller. Specifically, the bill requires:
1)The Governor's proposed budget to include, along with the
budget year detail currently provided, detailed estimates of
revenues and expenditures, along with accompanying economic
and caseload related assumptions, for the three subsequent
fiscal years.
2)The Director of Finance to submit revised estimates for the
current fiscal year, budget year, and for the three subsequent
fiscal years on May 14, July 15, and September 15 of each
year. The bill also specifies detailed revenue and
expenditure information to be provided as part of the
forecasts.
3)The treasurer and controller to review the revised estimates,
to jointly submit an assessment of the forecasts and, if
appropriate, to prepare alternative revenue estimates to the
fiscal committees of each house of the Legislature and to the
Director of Finance within about 15 days. The assessments
would include impacts of anticipated changes to state and
federal laws, enrollments, federal mandates, court orders, and
other cost factors affecting the estimates.
FISCAL EFFECT
1)Staffing redirections or increases of two to three positions,
at an annual cost of up to $300,000 to DOF to comply with the
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added forecasting requirements of this bill.
2)Significant annual costs to treasurer and controller, for new
staff or contracts needed to develop detailed forecast reviews
and alternatives, potentially in the range of $250,000 per
year.
COMMENTS
1)Purpose. The author asserts that the development of a sound
budget depends on realistic forecasts of revenue and
expenditures. According to the author, the proposal is
intended to increase the frequency of those forecasts, improve
transparency and credibility of the assumptions that underlie
them, and better equip policymakers for tough fiscal
decisions. The author also indicates the specified forecasts
proposed would be timed to coincide with four critical points
of fiscal decision making: during annual cash-flow borrowing
deliberations (in August), when evaluating departmental
budgeting requests (October), the release of the Governor's
proposed budget (January) and the May Revision.
2)Background . The Department of Finance normally prepares two
public forecasts each year - the January budget and the May
Revision. The department also prepares internal projections in
October of each year, which are used in the initial
development of the proposal to be introduced the following
January. In addition, the administration has periodically
released forecasts at other times during the year, such as in
November 2008 when the governor declared a budget emergency.
These estimates have included somewhat aggregated projections
revenues and expenditures for the subsequent four fiscal years
beyond the budget year.
The Legislative Analyst's office prepares a long term fiscal
forecasts in the November of each year, and forecasts for the
current year, budget year, and subsequent fiscal year in
February and in May.
3)Issues . This proposal raises at least three issues.
a) Is the lack of accurate forecasts really the problem ?
While the financial collapse and severe recession have
caused all forecasters to make major downward revisions,
both the Legislative Analyst's Office and the Department of
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Finance have been proactive in warning about a
deteriorating budget picture and large ongoing structural
deficits during the past two years. It is also well known
that the state faces major long term financial obligations
related to unfunded retiree costs, rising medical expenses,
and prison expenses. The problem has not been a lack of
forecasts, but rather the lack of a political consensus on
how to deal with the enormous shortfalls that have been
projected. More forecasts - even accurate ones - will not
change that reality.
b) Is outside review necessary or even appropriate? The
State Constitution places the responsibility for
development of the budget with the governor, who is
required to propose a balanced spending plan, and the
Legislature, which is charged with passing a balanced
budget and appropriating funds. Currently both of these
two entities have in-house forecasting capabilities, both
seek advice of outside experts, and each can serve as a
check and balance on the other. Given this - and the fact
that no forecaster has been able to accurately predict the
wild fluctuations in the national and state economies - a
key question is whether there is a meaningful benefit
gained by to adding another layer of outside review to what
is principally a budget-related responsibility.
c) Would a strict July forecasting mandate be
counterproductive? While some type of budget update
following the adoption of the budget may be appropriate,
mandating that a full blown forecast be prepared in
mid-July - regardless of the status of budget negotiations
at that time - could be problematic. For years in which
negotiations are still occurring, diverting staff away from
work on key budget proposals to meet a forecasting mandate
could postpone the conclusion of budget negotiations.
4)Less costly alternative. A less-costly proposal that would
address the most significant gaps in the current forecasting
schedule identified by the author would be to:
a) Require that subsequent to adoption of the budget, the
Department of Finance update its short term and long term
projections to take into account the adopted budget (as is
the current practice) as well as other major developments,
such as large differences between estimated and actual cash
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receipts since the May Revision, major economic events, and
known changes in expenditures due to court rulings, or
federal actions, or other factors.
b) Require that the DOF release its October planning
estimate of current law revenues and expenditures to the
legislature, treasurer, and controller.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081