California

Public finance

California has the largest state budget in the nation, and in 2003 it was facing the country's largest projected state deficit in both absolute ($38.2 billion) and relative (almost 50% of the state's budget) terms. (The budget deficit was the main issue in the recall vote to remove the governor, also unprecedented, scheduled for October 2003.) Most analysts would agree on three major contributors to California's budget debacle: voter initiatives that rigidly limited the state's ability to raise taxes while establishing equally rigid expenditure mandates; the highly progressive income tax schedule, with the country's highest threshold for taxable income ($35,000 for a family of four; and the impact of the collapse of the dot.com boom, resulting in taxes on capital gains and stock options fall from $18 billion in 2000 to $8 billion in 2001. The shortfalls in projected revenue in the face of the economic downturn in 2001, and continued sluggishness into 2002 and 2003, rapidly snowballed into an overwhelming deficit.

The Governor's Budget is prepared by the Department of Finance (DOF) and presented by the governor to the legislature for approval. The state's fiscal year begins 1 July and ends 30 June. The Governor's Budget is the result of a process that begins more than one year before the budget becomes law. When presented to the legislature by 10 January of each year, the Governor's Budget incorporates revenue and expenditure estimates based upon the most current information available through late December. The DOF proposes adjustments to the Governor's Budget through "Finance Letters" in March. These adjustments are to update proposals made in January or to submit any new proposal of significant importance that has arisen since the fall process. By 14 May, the DOF submits revised expenditure and revenue estimates for both the current and budget years to the legislature. This revision, known as the May Revision, incorporates changes in enrollment, caseload, and population estimates. The constitution requires that the governor submit a balanced budget and it is a statutory requirement that the governor sign a balanced budget. The legislature is supposed to adopt a budget by June 15, but California law requires a twothirds supermajority to pass the budget. A 2003/04 budget was not adopted until 29 July 2003. The governor signed it into law 2 August 2003.

The 2000/01 budget forecast total general fund revenue of over $68 billion from taxes, or an increase of 4.7% from 1999/00. These increases occurred despite a general fund tax relief program, partly because of tobacco company litigation that brought in over $500 million in 1999/00. Strong employment growth and increased income also contributed to the growth in revenues. California entered 2001/02 with a balance of $9.4 billion with revenues of $71.4 billion; Total resources of $80.8 billion were available for general fund expenditures of about $78 billion. In 2002/03, however, as total revenues fell $5.4 billion below forecasts, the general fund went from a beginning balance of over $2.35 billion to a deficit of –$2.13 billion, which include $1.4 billion held in an emergency reserve fund plus $1.4 billion transferred from the Special Fund for Economic Uncertainties, California's rainy day fund. Cuts made in expenditures made after the 2002/03 budget had been enacted totaled nearly $1.9 billion, and many general fund costs were shifted to other funds, loans, debt restructuring, and transfers. In 2003/04, the hole in the general fund deepened to –$4.45 billion.

The California State Budget for 2003/04 calls for general fund expenditures to fall to $71.1 billion from $78.1 billion in 2001/02. The $38.2 billion budget gap is to be met by expenditure cuts and savings (44.6%), fund shifts (11.1%); increased revenues from increases in the cigarette tax, vehicle license fee, and various court fees; loans and borrowing (5.9%); and deficit financing (27.1%). General Fund expenditures include 41.2% for K-12 education, 32.9% for health and human services, 12.2% for higher education, and 7.9% for corrections.

The following table from the US Census Bureau contains information on revenues, expenditures, indebtedness, and cash/securities for 2001.

California

  ($000) PERCENT PER CAPITA
Population (thousands, 2001) 34,600 (X) (X)
Total Revenue 176,080,892 100.00 5,089.04
General revenue 148,976,786 85.31 4,305.69
Utility revenue 1,772,519 1.01 51.23
Liquor store revenue
Insurance trust revenue 25,331,587 14.51 732.13
Exhibit: Salaries and wages 17,936,089 10.52 518.38
Total expenditure 170,470,259 100.00 4,926.89
General expenditure 145,582,238 85.40 4,207.58
Education 54,115,884 31.75 1,564.04
Public welfare 37,251,330 21.85 1,076.63
Hospitals 4,121,426 2.42 119.12
Health 6,522,891 3.83 188.52
Highways 6,339,813 3.72 183.23
Police protection 1,324,682 0.78 38.29
Correction 5,313,697 3.12 153.58
Natural resources 2,702,532 1.59 78.11
Parks and recreation 561,500 0.33 16.23
Government administration 5,961,869 3.50 172.31
Interest on general debt 2,758,540 1.62 79.73
Other and unallocable 18,608,074 10.92 537.81
Utility expenditure 7,918,662 4.65 228.86
Liquor store expenditure
Insurance trust expenditure 16,969,359 9.95 490.44
Debt at end of fiscal year 62,343,083 100.00 1,801.82
Cash and security holdings 324,515,571 100.00 9,379.06