NOVEMBER 14, 2007

LAO Report -- What a difference a year makes

Today the Legislative Analyst's Office (LAO) released the annual report on estimated state revenues and expenditures for the current and next four years. Last year's report was upbeat and cheerful as the LAO estimated moderate state revenue growth, moderate annual COLAs, moderate declining enrollment, and healthy local property tax revenue growth. These factors combined to result in a prediction that Proposition 98 funding would be more than sufficient to fund annual COLAs, while also providing significant additional Proposition 98 revenues that could be used for program improvement. Those predictions have been significantly reversed in this new report.  In fact, the LAO reports that, without corrective action, the state faces a $1.9 billion deficit for the current fiscal year, resulting largely from lower than anticipated revenues.

This year the LAO is significantly less optimistic than it was at this time last year and, in fact, is direly pessimistic.

For the current year, the LAO predicts that the Proposition 98 minimum guarantee is $400 million less, and the guarantee will be calculated under Test 3.  But first the good news, the LAO is predicting a 4.81 percent COLA for 2008-2009.  Additionally, the LAO continues to predict Test 1 funding commencing in 2011-2012.

Unfortunately, there is also bad news.  Specifically, in addition to the $400 million decline for the current year, the LAO predicts that there needs to be $3.6 billion in new ongoing Proposition 98 money to full fund the 2008-2009 COLA and current programs.  The Proposition 98 guarantee, however, is predicted to grow by only $2.1 billion.  Consequently, the LAO is predicting a $1.5 billion hole in being able to full fund current programs and COLA in 2008-2009.

Finally, the LAO predicts that, after funding COLA and existing programs in 2009-2010, there would be a slight Proposition 98 surplus.  What the projections emphasize is the volatile nature of state revenues and expenditures.  At this point in time, all projections are risky because of that volatility.  Just as we moved from a positive projection last year to a negative projection this year, that could change as we move into 2008-2009 if the economy starts to improve at a moderate pace.

Please contact me if you have any questions at 916.441.3300 or dwalrath@m-w-h.com.

~Dave Walrath