In their report released today, “California’s Fiscal Outlook: LAO Projections, 2005-06 Through 2010-11”, the Legislative Analyst’s Office (LAO) presents a relatively upbeat picture on the state budget for 2006-07. The LAO projects the K-12 statutory COLA for 2006-07 to be 5.2%. At the same time, the LAO projects that a strict adherence to the minimum Proposition 98 calculation would limit funding for schools to an amount less than is needed to provide cost-of-living adjustments (COLA) and funding for enrollment growth, as required by statute.

 In other key findings, the LAO projects that, absent legislative action, Proposition 49 will become operative in 2006-07 and require the state to appropriate $428 million in state funding for after-school programs.

 For the period 2007-08 through 2010-11, the LAO projects that Proposition 98 will require funding “far in excess of the amounts needed to maintain the base program. These funds could be used to pay off current obligations to schools (such as deferrals and mandate costs) and still allow for significant program expansions.”

 Excerpts from the LAO report follow. The full text of the report may be obtained at: http://www.lao.ca.gov/.

 Proposition 98 Funding

“Our estimates assume that Proposition 98 is funded at the minimum guarantee in 2006-07 (including the added spending required by Proposition 49) and all subsequent years. While over the long term the guarantee grows significantly faster than enrollment and inflation, this is not the case in 2006-07. This is because of an unusually small increase in the “Test 2” growth factor for the guarantee and an unusually large increase in the statutory cost-of-living adjustment (COLA) for K-12 apportionments. As a result of these factors, the minimum guarantee will rise by $731 million less than the amount needed to fully fund enrollment and COLAs for K-14 education programs in 2006-07.

 “We discuss several options for covering this shortfall in order to maintain the current-services level of funding. One of these options would be to appropriate above the guarantee. If the Legislature were to choose this option, total Proposition 98 spending in 2006-07 would be $731 million higher than otherwise, and the resulting yearend General Fund budgetary reserve would be reduced by a like amount, to $470 million.”

 Overall State Budget Condition

“The budget outlook for 2006-07 and beyond has improved considerably over the past year.” 

• “The current year will end with a reserve of about $5.2 billion, up by nearly $4 billion from the 2005-06 Budget Act estimate.
• “This large carryover reserve will be more than sufficient to keep the state’s budget in balance in 2006-07 without any new program reductions or added revenues—even though current-law projected expenditures exceed projected revenues by $4 billion during that year.”

 “Revenues Up Sharply. We estimate that General Fund revenues exceeded the budget estimate by over $1 billion in 2004-05 and prior years combined, and will exceed the budget estimate by $2.8 billion in 2005-06. This combined $3.9 billion increase is primarily related to the personal income tax, but also reflects a significant gain in the corporation tax (CT) and a modest increase in the sales and use tax.”

 Ongoing Budget Shortfalls

The state is projected to “continue to face significant operating shortfalls over the forecast period, peaking at $4.3 billion in 2007-08, before declining to $3 billion in 2008-09, $1.7 billion by 2009-10, and $600 million in 2010-11. The operating shortfalls in 2007-08 and 2008-09 each include well over $1 billion in scheduled repayments of loans from transportation and other special funds. Thus, by the end of the forecast period the state would have just about grown its way out of its structural shortfalls. In the meantime, however, the state would have to take corrective actions to address its yearly shortfalls.”

 Teri Burns
Birdsall & Associates
916-441-3302
tburns@edlobby.com