The state’s nonpartisan Legislative Analyst’s Office (LAO) issued its 5-year “fiscal outlook” report yesterday, and the outlook is grim. The report outlines the budget situation that we will face in the current fiscal year, as well as the new fiscal year which will begin in July 2011, and the subsequent years. The LAO’s report is important because it is the first opportunity for us to see how big our budget dilemma will be for later this year. The LAO looked at how much revenue we will likely have, and at what state expenditures would be under current law, absent any corrective action.
The LAO’s conclusion is that the situation–in the words of Senate budget director Craig Cornett–is “daunting.” The LAO identifies shortfall in the current fiscal year of $6.1 billion, and a shortfall for next year’s budget of $19.3 billion. This means that we will have to bridge a total budget gap of $25.4 billion between now and June 2011.
The $6 billion current-year shortfall is mostly the result of projected receipt of less federal funds than we anticipated (and the fact that additional federal funds seem more remote, given the Congressional elections), as well as some lower-than-expected tax revenues, and some of our recent budget solutions that came up short (not entirely surprisingly). The $19 billion problem for the budget-year primarily reflects loss of the 2009 tax increases (which will sunset in 2011), plus our stubborn, ongoing annual operating deficit.
In a nutshell, the state is taking in roughly $80+ billion in revenues, but our expenditure commitments under existing law are around $100 billion. And even though we have enacted billions of dollars in budget savings in recent years, many of the savings have not remained in the budget “trend line” for various reasons including: “federal fund offsets to spending that are going away, court cases that have halted budget savings, savings that were one-time in nature, short-term savings from 2009 that result in costs in 2011, savings assumed that can’t be fully achieved because of things both inside and outside of legislative control.”
Obviously, this means another difficult year of budget-balancing. To put the situation in perspective, if we eliminated the entire prison system and all of state’s higher education system (UC and CSU), we would only get about $16 billion of the $25 billion we would need. Alternatively, if we eliminated all of Medi-Cal and the court system, we would only get about $20 billion. The constraints imposed by Proposition 26 have yet to be completely assessed but will almost certainly have impacts on non-General Fund programs in the energy, environmental, and public health areas.
To put it bluntly, this is a fiscal dilemma for California at the magnitude of the BP oil spill plus a major earthquake. It will dominate the attention of all of California’s elected leaders over the next several months. There are no simple or short term solutions. This budget crisis will present enormous challenges for governance and will put huge pressure on environmental policies.
However, this crisis may also present opportunities for dramatic and visionary efforts by the next governor and the legislature to stimulate a green economy that can begin to fill some of this enormous budget hole. Governor-elect Jerry Brown, the legislature and the NGO community will need to be smarter, more creative, and more efficient than ever in looking at budget resources, state government, and the potential for the clean energy sector to rejuvenate our state’s economy.
In doing so, they will deliver on what Californians demanded in the recent election. Voters endorsed a clean energy future for the state in overwhelmingly rejecting Proposition 23, which would have repealed our landmark climate and clean energy law. Fixing the state’s budget crisis will be difficult, but our state’s leaders must go about it in a way that keeps California on the right path of protecting our public health and environment and creating the jobs of the future.
