Celebrating the Tenth Anniversary of Forecasted Operating Deficits

Fred Silva
Senior Fiscal Policy Advisor, California Forward

Once again the Legislative Analyst has pulled back the curtain on California’s budgeting practices, announcing last week that the state is likely to have a $3 billion deficit at the end of this fiscal year. This means we can expect significant mid-year cuts to education and social services programs under the budget “trigger” mechanism. That trigger automatically cuts various programs if revenue targets are not met.

The next fiscal year that begins on July 1, 2012 looks no better. The LAO forecast shows a gap between revenues and expenditures of about $10 billion, which brings the total imbalance for this year and next to $13 billion.

One of the benefits of the Legislative Analyst’s forecast is that it focuses our attention on program requirements and revenues over the next five years.  Even though our current budgeting process looks only at one fiscal year at a time, it is important to extend our horizon and view the state’s fiscal condition from the prospective of our current budget priorities and the tax system that supports those priorities.

This is the tenth year of forecasted operating deficits. An operating deficit reflects our inability to match tax revenue with spending priorities. Every budget passed during this time has failed to significantly reduce the operating deficit. Instead, lawmakers have made a habit of spending more than the tax dollars available, and opted to close the expenditure-revenue gap by borrowing money or using one-time changes and accounting gimmicks.

Sadly, little progress has been made in the last 10 years to heed the warning of the Legislative Analyst and take sufficient steps to actually close the gap.

The most recent forecast does show moderate revenue growth through 2016-17 and assumes a slow but steady growing economy. But, the structural deficit remains six-to-eight-percent of state spending.

In 2001, fiscal pundits declared the situation of operating deficits unsustainable. Ten years later we’re saying the same thing. But, no action has been taken to address this continuing declaration.

Maybe it is time to set up a budgeting process that requires policy makers to face the inevitable: require the development and adoption of multi-year budgeting system, require expenditures and revenues to meet, and focus on improving state programs and setting goals, so they can achieve results.

Happy Anniversary.

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