BILL ANALYSIS �
SB 15
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Date of Hearing: July 14, 2011
ASSEMBLY COMMITTEE ON BUDGET
Bob Blumenfield, Chair
SB 15 (DeSaulnier and Wolk) - As Amended: May 19, 2011
SENATE VOTE : 39-0
SUBJECT : State Budget
SUMMARY : Requires the annual submission of a two-year budget
and makes various changes to the information that is required to
be submitted by the Governor to the Legislature as part of the
budget process. Specifically, this bill:
1)Requires the Governor to submit, on or before January 10th of
each year, a budget proposal for both the budget year and the
succeeding fiscal year. If expenditures are expected to
exceed revenues for either or both fiscal years, the Governor
is required to offer proposals to balance the budget for
either or both years. Budgets for both years would be updated
at the May Revision.
2)Requires that any time the budget proposes to create or expand
the scope of an existing state program that would result in
net state costs or reduce a state tax that would result in a
decrease in revenue, that the budget include a statement
identifying the state program and/or source of additional
state revenue that is equal or greater than the net increase
in state costs or net decrease in state revenues.
3)Requires the Governor's budget to provide estimates for
anticipated revenues and expenditures for the three fiscal
years succeeding the budget year when the budget is submitted
on or before January 10th.
4)Stipulates that the Governor submit legislative language needed
to implement budget provisions and the five-year
infrastructure plan when the budget is submitted on or before
January 10th.
5)Requires an estimate of the long-run impact of expenditure and
revenue proposals on the economy of California.
6)Requires, commencing in 2015 or upon appropriation, the
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Department of Finance to provide the Legislature with an
update of the five-year projections of state revenues and
expenditures on or before October 15th.
EXISTING LAW : Article IV, Section 12 of California's
Constitution requires the Governor to submit a balanced budget
to the Legislature by January 10th of each year. Government Code
Section 13308 requires the submission of the budget trailer bill
language by February 1st of each year.
FISCAL EFFECT : Likely costs in the tens of millions associated
with additional workload for the Department of Finance,
agencies, and departments to prepare the required information in
the shortened timeframes provided for in the bill. In addition,
there are likely unknown costs associated with this bill leading
to budget decisions that may worsen economic conditions and
result in lost economic activity and lost tax revenue.
COMMENTS : This bill is well intended with goals of increasing
awareness of the state's long-term economic conditions. The
author's office indicates the goal is to increase information
about the budget but not place new requirements onto the
Legislature.
However, there are significant problems with how this bill
attempts to address perceived shortcomings with the current
budget process. These are outlined below:
1)Long-term budget forecasts are currently available. Under the
current budget process, the following long-term forecasts are
available:
a) Historically, the Legislative Analyst has provided a
five-year budget forecast every November. This forecast
has been helpful in understanding the fiscal direction
toward which the state is heading, and has proved critical
in budget decisions during the budget discussions in the
months that follow. This information is provided on the
Legislative Analyst's website at:
http://www.lao.ca.gov/laoapp/main.aspx?type=2&PubTypeID=5 .
b) Typically, the Department of Finance provides the
Legislature detailed multi-year budget forecast at the time
of the January 10 proposal, as well as at the May Revision.
This information for the 2011-12 enacted budget can be
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found on the Department of Finance's website:
http://www.dof.ca.gov/reports_and_periodicals/documents/MY%2
0at%202011%20BA%20(WebVersion).pdf . This information is
also provided to the following offices:
i) The Legislative Analyst;
ii) The Democratic and Republican Leadership
Offices; and,
iii) The Chair and Vice-Chair of the Budget
Committees.
c) Governor Brown has made multi-year forecasts a
centerpiece of his budget proposals, and has explicitly
provided multi-year information in all the public
supporting documents along with this budget proposals,
including on page 3 of the Budget Summary, page 5 of the
May Revision, and page 5 of the budget signing/veto
document.
2)Long-term forecasts often prove unreliable. Long-term
forecasts are used for understanding the general direction of
the state. However, out-year estimates have historically not
proven particularly accurate due to the dynamic nature of
California's economy and the observable correlation of state
revenue with the national business cycle and financial market
performance. Therefore, while it is important to understand
the direction the state is headed, relying too heavily on the
specific figures can lead to troubling results.
a) For example, in the 2006 Fiscal Outlook, the LAO
projected General Fund revenues of $128 billion for
2011-12. Currently in 2011-12, projections have been
updated to be just $87.3 billion, resulting in the
long-term forecast having been off by over $40 billion,
roughly 46 percent of our actual amount of General Funds
for the year.
b) For a more recent example, in the six months since the
Governor's January 2011 forecast, revenue forecasts have
increased by a total of $11.8 billion over the current and
budget years.
3)Unreliable long-term forecasts can encourage over-spending as
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well as unnecessary, harmful cuts.
a) California has experienced years of negative economic
conditions, however a time may come again when the economy
portends, and projections therefore support, large out-year
surpluses. In this hypothetical positive economic
circumstance, policy makers will be pressured to cut
long-term taxes and increase long-term spending. If a
Governor is forced to make an official two-year budget
proposal, it is likely to include proposals to "spend-down"
the out-year surpluses through tax cuts and spending
increases. But just as past forecasts have been wrong, the
future forecasts will assuredly be inaccurate as well,
leaving the state unable to afford the tax cuts or spending
increases, and the budget out of balance. Relying on
out-year projections for a two-year budget assures
decisions that will need to shift as corrections are
detected, raising the question of what benefit a two-year
budget can provide.
b) The equal and opposite tenet applies when projections
are negative on a prolonged basis given out-year estimates.
This is evidenced in our recent budget history, when the
Legislature cut too deeply in the March budget action given
the projections at the time. A portion of these cuts were
restored in the final budget to avoid some of the most
devastating economic impacts of the most problematic cuts.
4)Limits chances of "balanced solutions." Under this bill, the
Governor would be required to make budget proposals to balance
the budget the year after the upcoming budget year.
a) As stated above, long-term forecasts are not reliable,
and therefore the Governor would be required to make
proposals for a year based on information that is highly
likely to be out of date by the time that year arrives.
Therefore, a Governor would likely be reluctant to propose
tax increases for the second year if it is very uncertain
that tax increases are not required.
b) As a result of the above, the Governor would likely
propose balancing the budget in Year Two with spending
reductions only. Once Year Two arrives, and the situation
develops that tax increases are in fact the preferred
option to address the budget shortfall, the Governor would
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have to reverse him/herself and pull back a portion of
previously proposed spending cuts and replace them with tax
increases. The political considerations of such a
turnaround very likely inhibit the development of a
"balanced solution," which generally provides for the least
harmful economic impacts of difficult budget solutions.
5)Cost reconciliation requirement raises critical questions.
a) This bill will cost millions to implement, but
ironically, does not identify other spending cuts or tax
increases to cover the costs, despite the bill requiring
the Governor to do so should he/she propose new spending.
b) Since the Governor must submit, and sign, a balanced
budget in aggregate, requiring incremental justification
for every small program expansion may make the overall
budget process more complicated and confusing.
c) This provision of the bill could also force the
Department of Finance to have to artificially link two
completely unrelated policy proposals to comply-for example
linking the increased costs mandated by the federal-court
appointed prison receiver with an offset from the
reductions to parks and higher education contained in the
budget.
6)Changes to timelines raise critical questions.
a) This bill requires shortens the timeframe for the
Department of Finance to produce draft trailer bill
language for legislative changes necessary to implement the
January budget and for the issuance of the five-year
infrastructure plan. In both cases, this bill requires the
submission of this information with the January budget, on
or before January 10th. Current law allows trailer bill
language be submitted by February 1st of each year and is
silent on a deadline for the submission of the five-year
infrastructure plan, but it was typically submitted later
in the annual budget process.
b) The acceleration of these timeline would likely result
in additional costs for both the Department of Finance,
Legislative Counsel, and agencies and departments that
would have to produce these extra deliverables during their
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busiest time of the year. It is not clear what benefit
would be gleaned from having these documents available so
early in the process, given the costs associated with the
expedited delivery.
1)Settling of already adopted reforms still taking place.
a) Proposition 25 provides historic improvements to the
budget process and additional tinkering with the budget
process should wait until the full impacts of Proposition
25 play out and are fully understood.
2)Alternatives available without legislation.
a) If the Legislature desires additional long-term
information or to make such information more public, then
the best way to accomplish that would be to share the
information that exists today or perhaps request the
Legislative Analyst to update their long-term forecast more
than once a year.
b) This could be done at no cost to taxpayers and without
resulting in negative long-term consequences for the state.
REGISTERED SUPPORT / OPPOSITION :
Support
California Forward (co-source)
AARP
American Association of University Women
American Federation of State, County and Municipal Employees
Bay Area Council
Brocade Communications Systems, Inc.
Business Council of San Joaquin County
California Alliance of Child and Family Services
California Church IMPACT
California Partnership for the San Joaquin Valley
California Senior Advocates League
California State Student Association
Contra Costa Council
Fresno Business Council
Greenlining Institute
Half Moon Bay Coastside Chamber of Commerce
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Huntington Beach Chamber of Commerce
Kern County Taxpayers Association
Los Angeles Area Chamber of Commerce
Marin Builders' Association
MoSys Inc.
Proofpoint Systems Inc.
San Francisco Chamber of Commerce
San Gabriel Valley Economic Partnership
San Mateo County Economic Development Association
Santa Clara and San Benito Counties Building and Construction
Trades Council
Santa Cruz County Medical Society
Saving California Communities
State Building and Construction Trades Council of California
State Controller John Chiang
Silicon Valley Leadership Group
Valley Industry and Commerce Association
WELL Network
Opposition
None on File.
Analysis Prepared by : Christian Griffith / BUDGET / (916)
319-2099