Governor Brown Predicts Increased Deficit

Governor Brown, in an interview on the Bay Area talk radio station KGO 810 last week, was quoted as saying the deficit is "probably bigger now" than the $9.2 billion he estimated earlier this year.  This edition of Budget Fact Check looks at what is driving the increase in the deficit.

Summary of Findings:

  • As of March, General Fund spending is up $2.1 billion over the adopted 2011-12 budget.  A significant contributor to that spending increase is health and welfare spending.  Education spending is down from the adopted 2011-12 budget due to the trigger cuts adopted as part of the majority vote budget. 
  • The Assembly has rejected close to $2 billion of the Governor's proposed spending cuts this year.  In addition, the Governor asked for certain spending reductions to begin in May.  But the Legislature has failed to act,  adding millions more to the deficit.i
  • According to the Department of Finance, revenues are down about a billion dollars from the adopted 2011-12 budget, as of the end of March.   Important April tax return data may show a further erosion of projected revenues. 

What Does the 2012-13 Deficit Include?

The 2012-13 deficit will include the 2011-12 carryover deficit, plus any difference between revenue and statutory obligations in the 2012-13 budget year.  A quick cursory look at the 2012-13 projected deficit shows that the carryover deficit from 2011-12 will be at least $3.4 billion, despite the fact that revenues are up $8 billion more than what was anticipated in January 2011.  This carryover deficit is a function of spending increases and the 2011-12 budget relying on overly-optimistic revenue growth. 

2011-12 Spending:

The adopted 2011-12 budget pegged General Fund spending at $86 billion.ii  This spending level was essentially flat year over year.iii  Since the enactment of the budget, the trigger cuts were partially-pulled, resulting in $700 million in cuts to education programs.  Despite this reduction in spending for education, the Controller's Office indicates overall spending is up by $2.1 billion more than the adopted budget.  That spending increase reflects the fact that the state's health and welfare programs continue to grow. 

The Governor's 2012-13 budget identified this trend, but assumed that this growth in spending would be controlled because the Legislature would have made current year budget reductions by March.  In fact, the Governor's January proposal assumed only a $500 million growth in spending in the 2011-12 budget if spending reductions were adopted by March.  However, the Legislature has rejected many of the Governor's proposed current year reductions, which has driven spending up.  Education spending has not grown.

2011-12 Revenues:

The adopted 2011-12 budget assumed there would be $88.5 billion in revenues.iv  This was up $11.8 billion from where the Governor projected revenues would be if the 2009 tax package was not extended.v To date, the Governor only projects revenues to grow by $8.3 billion above the no-tax increase January budget projections from last year.  This leaves a projected revenue deficit of $3.5 billion. 

The new 2011-12 Carryover Deficit:

The estimated 2011-12 carryover deficit is a combination of increased General Fund spending and actual revenue shortfall.  The Governor's January 2012-13 budget assumed a $3.4 billion carryover deficit.  Based on spending and revenue trends, the revised carryover deficit could be $5.6 billion, $2.2 billion more than the Governor's deficit projection in January. 

Deficit is Driven by Growth in Spending

As previous editions of Budget Fact Check have illustrated, revenue grew in 2011-12 and continues to grow, although not as much as was forecasted.  However, this growth in revenue is routinely outpaced by spending increases, particularly spending on the fastest growing programs such as health and welfare.  With spending increases of $2.1 billion (even while education spending continues to be cut), rejections of proposed spending cuts of nearly $2 billion, and revenues being less robust than expected, deficits are likely to continue growing along with California's budget woes.

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

i Finance Bulletin, April 2012

iiLAO: The Adopted 2011-12 Budget Package, Page 1.

iii The prior year's General Fund spending level was $91.5 billion.  However, that baseline spending included the $5.1 billion in realignment spending that was shifted to local agencies.  Realignment spending continues but is no longer counted as General Fund spending.  This is not a true spending cut since the spending continues but has just become special fund spending.

iv DOF: California State Budget 2011-12, Page 8.

v LAO: The Adopted 2011-12 Budget Package, Page 3.  The increased revenues are scored as "additional baseline revenues" in the chart.