May Revision

Why Did The Deficit Grow?

By The Numbers

On May 14th, the Governor released the May Revision of his proposed 2012-13 budget.  The May Revision will be the starting point for final negotiations on the budget due by June 15th.  Among the highlights of the May Revision:

  •    The deficit has grown from $9.2 billion to $15.7 billion.  This increase was a function of $1.7 billion in spending increases since the adopted 2011-12 budget, a failure of $4 billion of "phantom revenue" to materialize and increased spending proposed for 2012-13.
  •   The Governor's office projects that revenues will  grow $4.9 billion before the Governor's tax increase.  Unfortunately,  absent proposed spending cuts and fund shifts, spending would grow 9.8%.  Total state spending (from all funding sources) will reach a new historic high of nearly $225 billion in 2012-13.  This is $12 billion higher than the 2011-12 (current year) budget and $30 billion higher than 2007-08, before the recession.
  •   The Governor's proposed tax increase is estimated to raise $8.5 billion.  Schools would only get a portion of this new funding, approximately $2.9 billion, even though the language of the initiative suggests that the tax increase is dedicated to school funding.  The language of the initiative allows the state to reduce state support for schools and use those funds  for fast growing health and welfare programs. 

Why Did the Deficit Grow?

The Governor's office announced that the deficit had risen from the $9.2 billion projected in January to $15.7 billion.1  The deficit is a combination of a carryover deficit from the current fiscal year and the difference between forecasted revenue and expenditures in the 2012-13 fiscal year.

 2011-12 Carryover Deficit

In January, the Governor assumed that the 2011-12 carryover deficit, or the portion of the deficit that carries over from the 2011-12 budget to 2012-13, would be $4.1 billion.2  The Governor's May Revision assumes that the carryover deficit will be $7.6 billion absent his proposed budget solutions.3  This dramatic change in the carryover deficit is the result of  at least $1.7 billion in increased spending since the adoption of the 2011-12 budget, $400 million from the failure of the legislature to adopt targeted reductions by March, as the Governor asked, and the failure of the $4 billion in "phantom funding" used to close the budget in 2011-12 to materialize.  "Phantom" funding was the tax revenue that the Governor projected above the amount of funding anticipated by the non-partisan Legislative Analyst.  The Governor relied on this "phantom funding" to avoid additional spending cuts. 

 Spending In The May Revise-Spending Is Up

  Spending in 2011-12 and in the 2012-13 budget is up dramatically.  In 2011-12, spending was $1.7 billion more than the adopted budget.4  This increase in spending was primarily in health and welfare spending increases.  Education funding was reduced as part of the Governor's 2011-12 trigger cut.  (AB 121, Chapter 41, 2011-12).  Spending in the Governor's 2012-13 budget is projected to grow by $4.9 billion or 5.6percent5 but only if the Governor's reductions are enacted.  However, if the Legislature rejects the Governor's proposed cuts, spending is slated to grow by $9.7 billion or 9.8%.6 

 Revenues In The May Revise Grow Before Tax Increase

The Governor predicts that revenues will continue to grow 4.5% before his tax increase.   (from $83.2 billion to $88.1 billion).  This healthy growth rate is not enough to pay for the carryover deficit and the proposed $4.9 billion in spending increases in the Governor's budget. To cover this shortfall, the Governor proposes an $8.5 billion tax increase that will be voted on by the voters in November.  This "temporary tax" measure is expected to raise $45 billion over the 7 years of the life of the tax increase.  The Governor's initiative raises California's highest Personal Income Tax rate by up to 30%.  California's personal tax rate will be the highest in the nation, 21% higher than the nearest state, raising concerns about California's ability to compete for high-paying jobs.

 The Governor's tax initiative specifies that all of the revenue raised by the proposed tax increase shall be directed to schools.  However, the initiative goes on to specify that even though the estimated annual $8.5 billion in increased taxes are sent directly to schools, the taxes shall be counted as "General Fund proceeds of taxes"  for purposes of calculating the Proposition 98 minimum guarantee to schools.7 This is a loophole that will allow the state to reduce its ongoing contribution to schools, while allowing the majority party to fund fast growing non-education programs, such as welfare.8 

 Trigger Cuts

  The Governor's budget includes a trigger cut of $6.1 billion if the voters reject his $8.5 billion tax increase.  Schools are targeted for 99% of those trigger cuts.9  This cut happens to schools even if revenues increase because the economy improves.  The cut would take effect as of January 1, 2013, in the middle of the fiscal year. 

Conclusion - Up, Up, Up

  California taxpayers have learned three things this week from the release of the Governor's May Revision - the deficit is up, spending is up and the Governor is proposing that taxes also go up.

 Click here to read past issues of "Budget Fact Check."