Legislative Analyst’s Office released its annual Fiscal Outlook
Published: November 2, 2016
Today, the Legislative Analyst’s Office released its annual Fiscal Outlook, assessing California’s economy and offering predictions about what the 2017-18 state budget (and future years) might look like. While expectations should be tempered regarding new money for education, the news is positive overall for the state and for the Prop 98 guarantee, assuming there is no national or state economic slowdown.
Click here to view and download “California’s Fiscal Outlook.”
Key findings from the LAO:
Overall Outlook – The LAO states that it has “reasonable confidence” in its projections for 2017, but is much less able to accurately predict the years that follow due to several uncertainties in economic conditions; this outlook mirrors the cautionary outlook offered by Gov. Brown and his Department of Finance earlier this year. The LAO projects the state will end 2017-18 with more than $128 billion in total revenues (up 6.8 percent from 2016-17) and $11.5 billion in total reserves (of which $2.8 billion are discretionary), with $126.1 billion in projected spending (up 3.4 percent). The LAO assumes no programmatic or policy changes at the state or federal level, although it is noted that after the outcome of the Nov. 8 election, federal changes may be forthcoming.
Proposition 98 (Page 24) – The LAO predicts a total Prop 98 guarantee in 2017-18 of about $74.5 billion, up $2.6 billion (3.6 percent) from the 2016-17 guarantee. An estimated $2.8 billion would be available for 2017-18 Prop 98 priorities, due to the amount of money allocated to one-time funding in 2016-17. The LAO also estimates that the 2017-18 guarantee is “moderately sensitive” to declines in state revenue.
Of note: the report estimates that local property taxes are growing faster than the Proposition 98 guarantee; 5.3 percent versus 3.6 percent. However, property tax growth serves only to relieve the state General Fund on a dollar-for-dollar basis of its share of funding the guarantee.
The report also notes that voter approval of
Proposition 55, which extends the income tax increases on the highest wage earners, was factored into the forecast period.
LCFF – If the state’s investment in LCFF follows its patterns of recent years, LCFF could be at 99 percent of full implementation in 2017-18, with the state spending an estimated $2.5 billion to close the remaining funding gap. Assuming the growth scenario in this report, full funding of LCFF could be reached in 2018-19, two years ahead of schedule.
The LAO also estimates that K-12 attendance will decline 0.2 percent per year in 2016–17 and 2017–18 and by 0.3 percent per year later in the period. It is also estimated that COLA’s are likely to remain low, but that the state could see COLA growth once LCFF hits full funding.
Moderate growth versus mild recession (Page 28) – Over the forecast period from the current year through 2020-21, the LAO assumes moderate economic growth averaging 3.8 percent annually. That growth would keep the Proposition 98 guarantee fluctuating between Tests 2 and 3. However, the report also looks at what a mild recession in 2018-19 might do to that annual growth and to which Test the guarantee will land in. Under a mild recession scenario, the LAO estimates average annual growth through 2020-21 at 2.1 percent with an actual decline in 2018-19. Under that scenario, Test 1 could come into play in the 2019-20 and 2020-21 fiscal years. In terms of the school district reserve cap, being in a Test 1 year is the key piece that would need to be in place for the reserve cap trigger to be pulled. While the report does not address the reserve cap trigger specifically, that is a potential implication of any slight dip in the economy followed by moderate gains.
CalSTRS and CalPERS (Page 30) - Also included in the report is recognition of rising pension costs as it notes that school districts and county offices of education face an ongoing annual increase of some $6 billion which has been ramping up annually since 2013-14 and will be at the full amount by 2020-21. The report notes that given the moderate growth scenario, these costs will consume about 25 percent of the cumulative growth through 2020-21. With a mild recession, pension costs could consume one-third or more of those increases. And given how LCFF funds LEAs differently, some school districts and county offices will see little or no net gain in funding through 2020-21 solely because of rising employer contributions; and that is without considering any other rising costs or changes in state or federal funding.
The LAO Fiscal Outlook is the first official look at the current year budget and projections into the next couple of fiscal years. “Budget season” will start in January when the Governor releases his initial budget proposal.