Saturday, October 4, 2008

Brief Analysis of the 1998-99 State Budget (1998)

The Rodda Project: A structural deficit in California budgeting

Although he was no longer at the center of the debate over state finances after 1980, for many years Sen. Rodda remained a keen observer of the annual budget debate at the State Capitol. These brief comments were originally typed up by the Senator himself, probably on the old IBM PC Portable that had finally replaced his trusty typewriter. Although undated, Rodda's budget analysis is clearly from the latter half of 1998, after the enactment of the budget bill.

The Senator's two hand-drawn graphs did not reproduce well (I have pale photocopies rather than originals) so I recreated them in a graphics package, adding a rather jarring modern twist. The reader will see, however, that the issue of the structural deficit in the California budget—the consistent outpacing of revenues by expenditures—is also modern, as true today as it was a decade ago.

This document appears to be the last of Sen. Rodda's budget analyses, as I have nothing more recent in my collection of the Senator's papers.


Brief Analysis of the 1998-99 State Budget (1998)

During the years from 1984-85 to 1989-90 California General Fund Expenditures averaged 6.75% of California Personal Income. The fact of reality today is that the 6.75% no longer prevails.

Personal Income is the dollar income received by the residents of the state in the form of wages, salaries, profits, rent, and interest payments. From these incomes state and local taxes and government agency fees are paid and the balance is available to the recipients for their personal use.

After payments are made for rent, food, clothing, health, transportation and similar basic needs, the income remaining, which is defined as Disposable Income, is the income which the recipients may utilize for the purchase of luxury items, or to save and invest. Only individuals experiencing fairly good incomes will enjoy the advantage of receiving Disposable Income—personal income in excess of that required to pay for necessities and government taxes and fees.

General Fund Revenues as estimated by the Department of Finance in the State Budget Presentation for 1998-99 will amount to $60.36 billion, which includes $2.5 billion carried over from the previous budget.

State Personal Income estimates have been revised and the amount has been increased for the year of 1998 from $900 billion to $918 billion. If General Funds as a percentage of Personal Income were to amount to the 6.75% of the years from 1984 through 1989, California General Fund Revenues would amount approximately to $61.95 billion. That is an amount which is about $4.1 billion greater than the current $57.8 billion projected as state revenues for the next fiscal year.

It is clear that state government revenues, despite the favorable economic situation in California for the past five years, are at a level in relation to Personal Income below that of the late eighties. If, as is probable, the state experiences a period of economic recession in the near future, the fiscal situation for the state will become even more unfavorable.

Given this condition, it seems reasonable for the state to preserve the current fiscal situation with respect to its annual General Fund Budget appropriations. The proposal being made by the Governor to initiate a phase in of a reduction in the Motor Vehicle License Fee would reduce General Fund Revenues in the amount of about $2 billion in 1998-99 and would increase to about $3.5 billion in fiscal year 2002. Such a reduction would impair the state's ability to maintain the current level of public services, which has significantly declined during the past decade, as previously noted, despite the favorable economic conditions the state has experienced during the past five years.

A negative aspect of California's fiscal situation is that General Fund Revenues are less elastic than they were prior to 1990. A revenue source is elastic if it increases annually at a more rapid rate than the annual increase in Personal Income. The current situation is one in which General Fund Revenues are tending toward a condition of inelasticity.

Of all of the state's revenues, the most elastic is the Personal Income Tax. Because of voter approval of Proposition #6, however, which indexed the Personal Income Tax. and because of the enactment of legislation to make the California Personal Income Tax conform more fully to the Federal Income Tax, the California Personal Income Tax has lost a significant amount of its elasticity. Furthermore, the repeal of the Inheritance and Gift Tax Law by voter approval of Proposition #7 has further reduced General Fund Revenue elasticity. These conditions have been aggravated by the impact of the recent enactment of tax reduction legislation.

Unfortunately, despite the improvement in the economic situation in California during the past five years, General Fund Revenues continue to increase annually at a percentage which is less than that of the state's Personal Income.

The fiscal facts are that Personal Income increased over the past seven years in an amount of approximately 64%, but state revenues during the same year increased only 34.4%. Obviously, California's tax base no longer experiences its historic level of elasticity, or an increase comparable or greater than the annual increase in the Personal Income.

The enclosed Charts indicate in a graphic way this change in the fiscal situation of the State of California.

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