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Case Study: California’s Budget Transformation, 2007-08 to 2013-14

Wayne Hsieh / CC / Flickr

Introduction

On January 10, 2013, Governor Brown presented a balanced budget for the coming fiscal year, which will begin on July 1. No proposed budget had purported to be balanced since Governor Schwarzenegger’s 2007-08 budget, which he presented in January 2007.

While both the 2013-14 and 2007-08 proposed budgets purported to be balanced, their overall compositions are quite different. Since 2007-08, some budget areas have fared much better than others, and some much worse.

This brief examines how the state’s expenditures changed between the two budgets. Which areas grew disproportionately, which shrank disproportionately, how have cost burdens shifted, and how has the state’s debt changed?

Our findings include the following:

  • Revenue expected for 2013-14 is $10.8 billion greater than revenue expected for 2007-08. Yet, proposed spending on Social Services, Higher Education, Courts, and Transportation is significantly lower in 2013-14 than in 2007-08 while proposed spending on Health Care Services, Employee Compensation, and Retirement Benefits is significantly higher.
  • Despite the revenue increase, proposed spending on K-12 Education will be no higher than in the 2007-08 proposed budget, and the Parks Department recently survived massive cuts only after outside groups and local governments intervened with additional funding.
  • To compensate for reduced funding by the state, user fees – such as tuition, vehicle registration, park entry, and court filing fees – have risen significantly. General obligation and retirement benefit debt has grown substantially.
Figure 1: Proportions of California State Budget, 2007-08 vs 2013-14 251

Overall Revenues and Expenditures Higher

The taxes and fees imposed by the State of California are collected in the General Fund and Special Funds. As the largest single funding pool, the General Fund tends to receive the most attention but both sources are used to fund state operations. In fact, Special Fund spending now comprises a third of combined General and Special Fund spending and more than 50% of state employee compensation and benefits costs are now allocated to Special Funds.

Figure 2: Proposed General and Special Fund Spending, 2007-08 vs 2013-14

The state projects that its 2013-14 General Fund revenues (derived largely from personal income, corporate, and sales taxes) will be $98.5 billion and that its Special Fund revenues (derived largely from fees such as vehicle registration and licensing fees) will be $40.2 billion, resulting in a $10.8 billion, or 8.5, net increase in proposed revenues compared to 2007-08. Despite a 29% increase in the top income tax rate (from 10.3% to 13.3%) and a 3.45% increase in the state sales tax rate (from 7.25% to 7.5%) approved by voters in 2012, General Fund revenues in 2013-14 are forecasted to be lower than 2007-08’s revenues by 2.7%. But the state’s projected 51.2% increase in Special Fund revenue is expected to more than make up the difference.

Along the same lines, overall spending in the 2013-14 proposed budget is higher than in 2007-08 because the state now spends somewhat less from General Funds and significantly more from Special Funds (Figure 2). The state’s proposed General Fund spending is $97.7 billion, lower by $5.5 billion, while its proposed Special Fund spending is $40.9 billion, higher by $13.2 billion. Combined, 2013-14 proposed General and Special Fund expenditures exceed 2007-08’s proposed expenditures by $7.8 billion, or 5.9%.

Shrinking Slices: Social Services, K-12, and Higher Education

Despite the state’s higher overall revenues and expenditures, some portions of the proposed budget are smaller than they were in 2007-08 (Table 1). For instance, proposed spending for the Department of Social Services (DSS) declined from $8.9 billion to $7.6 billion, a 14.3% decrease. DSS provides services such as Child Welfare Services, foster care services, and CalWorks.

Additionally, education’s slice of the budget shrank. Excluding contributions to the Teacher’s Retirement System (CalSTRS), proposed spending for K-12 Education was $40.2 billion in 2007-08 and $39.8 billion in 2013-14, a 0.6% decline.

Table 1: Proposed Spending (in millions), 2007-08 vs 2013-14

To some extent, Proposition 98 stabilizes K-12 and California Community College (CCC) funding levels by setting their base funding levels to about 40% of the General Fund budget. But General Fund levels are inconsistent because they rely heavily on volatile personal income tax revenue and despite the income and sales tax increases voters approved in November 2012 (Proposition 30), as well as an improving economy, the proposed General Fund is smaller than it was in 2007-08.

Following voters’ approval of Proposition 30, K-12 funding is expected to rise to 2007-08 levels. However, when the state’s larger overall budget is considered, K-12’s proposed share shrank from 30.6% to 28.7%.

Figure 3: Proposed K-12 Per-Pupil Spending, 2007-08 & 2013-14 (Screen Captures. Source: Proposed Budget Summaries)

It is important to note that when local and federal funding sources are included, total proposed K-12 funding has increased from $68.7 billion to $70.3 billion, a 2.5% increase since 2007-08 (Appendix 3). And per-pupil funding has risen 1.4% from $11,584 to $11,742 (Figure 3).

CCC’s funding increased slightly and it continued to consume 2.7% of the budget. However, the picture is significantly worse for California State University (CSU) and the University of California (UC). State spending for the CSU and UC systems is lower by $871 million, or 13.9%. And their combined share of the proposed budget shrank from 4.8% to 3.9%. In light of the state’s decreased support, the systems have heavily turned to alternative funding sources, most notably students. Annual tuition at CSU has doubled since 2007-08 from $2,772 to approximately $5,500, while UC tuition has more than doubled, increasing from $6,636 to $14,046 during the period (Figure 4).

Figure 4: UC & CSU Tuition Rates, 2007-08 vs 2013-14

Budget Cuts and User Fees: Courts, Parks, and Transportation

Fee payments from citizens now make up a larger portion of revenue for both the state budget and individual department budgets. Similar to CSU’s and UC’s decisions to raise tuition to compensate for state budget cuts, other service areas have instituted fee increases in response to their reduced state funding in recent years. Overall fees paid into special funds have increased $12.6 billion, or 55.6%.

Between the 2007-08 and 2013-14 proposed budgets, funding for the Department of Transportation declined by $1.9 billion, or 31.3%. In that time, gas tax revenues nearly doubled from $3 billion to $5.7 billion amidst record gas prices, and vehicle registration fee revenues increased by $800 million. Standard vehicle registration fees have increased 68.3% since 2007-08. Together, these user fees go to Special Funds and make up a growing share of state funding for Transportation.

Figure 5: User Fees, 2007-08 vs 2013-14

As funding for the judicial branch has declined $597 million, or 16.4%, the fee for filing a complaint in a civil case has increased by as much as 36%, as has the fee for petitioning to legally change one’s name (Figure 5).

The 2013-14 Parks Department’s portion of the budget is the same as it was in 2007-08, but last summer, the department faced a $22 million cut and the closure of 70 state parks before nonprofits, local governments, and private actors intervened to absorb the cuts.
As budget pressure on the Parks Department has increased, park use fees have increased as well. Annual passes now cost park visitors 56% more than they did in 2007-08.

Cost Explosion: Health Care Services

While some departments have seen their budgets shrink, the Department of Health Care Services’s (DHCS) costs have risen dramatically. One of the largest departments in the state, state spending on DHCS increased 62.2% between 2007-08 and 2013-14, rising from $17 billion to $27.6 billion.

Driving up the department’s costs are nationally rising health care costs and increasing enrollment in the state’s Medicaid program, Medi-CAL, which accounts for most of the department’s budget. The 2007-08 proposed budget estimated a MediCAL caseload of 6.7 million enrollees while the proposed budget for 2013-14 estimates 8.7 million enrollees, a 30% increase. That growth does not include additional growth in enrollees expected as a result of Congress’s enactment of the Patient Protection and Affordable Care Act (PPACA).

Combined with rising health care costs, increased Medi-Cal enrollment accounts for most of the program’s additional costs to the state. The federal government matches DHCS’s funding for current enrollees and for a temporary period of time will fund a larger portion of costs arising from new enrollment under PPACA.

Figure 6: Health Care Services Portion of State Budget, 2007-08 vs 2013-14

The department’s $10.6 billion in additional state funding exceeds the state’s net spending increase by $2.8 billion, requiring other service areas to take cuts in order to maintain a balanced budget overall.

On the Rise: Employee Compensation and Retirement Costs

As with health care service costs, employee compensation and retirement benefit costs will consume a much larger share of state spending in 2013-14 when compared to 2007-08. Proposed annual salary spending among the executive, judicial, and legislative branches has increased 15.5%, though spending on legislative salaries has declined slightly.

Figure 7: Employee Salaries and Retirement Benefits

Annual state contributions to retirement benefits – pensions and retiree health care – have increased $1.5 billion, or 24.8% (Appendix 4). In particular, annual retiree health care payments have increased $682 billion, and thus account for nearly half of the retirement cost growth. Furthermore, among annual retirement costs to the state, health care for retired employees and their beneficiaries grew the most – 61.2%. By comparison, annual pension contributions increased $790 million, or 16.4%.

Taken together, proposed annual spending on salary and retirement benefit costs increased $3.6 billion, an 18.4% increase since 2007-08 (Figure 8). That increase amounts to nearly half of the state’s $7.8 billion annual increase in spending across the budget.

Long-Term Debt: Retirement Liabilities and Bond Debt

In the 2007-08 proposed budget, the state’s annual debt payment was $4.7 billion. For 2013-14, debt service is expected to equal $5.8 billion, a 23.7% increase. But the state’s outstanding general obligation bond debt increased $28.2 billion to $79.6 billion during that period, a 54.8% increase, portending growing spending on debt service going forward.

Figure 8: Retirement Benefit Unfunded Actuarial Accrued Liabilities, 2007-08 vs 2013-14

Note: Unfunded pension liabilities includes figures for all employers included in the Public Employees Retirement Fund (PERF) – the State of California, schools, and other public agencies.

Similarly, unfunded pension and retiree health care liabilities pose both increasing short term and long term costs. Annual retirement benefit spending increased $1.5 billion, or 24.8%, while unfunded retirement benefit liabilities nearly doubled, increasing $100 billion (Table 2, Figure 9).

Specifically, the officially reported unfunded pension liability for state workers through the California Public Employees Retirement System (CalPERS) grew from $31.7 billion to $57.2 billion, an 80.1% increase. The officially reported unfunded pension liability for teachers through the California State Teachers Retirement System (CalSTRS) grew from $18.7 billion to $63.8 billion, a 241% increase. (Using the methodologies employed by financial economists and rating agencies such as Moody’s, both liabilities grew by even larger dollar amounts.) Officially reported unfunded retiree health care costs grew from $60.4 billion to $78.1 billion, a 29.2% increase.

Though these unfunded retirement benefit liabilities are long-term obligations, as they continue to grow, so too will the annual payments required to fund them. Together, these short-term payment and long-term funding obligations will continue to exert growing pressure on other areas of the annual budget.

Conclusion

Despite a larger overall budget, since 2007-08, some parts of the budget have grown as others have shrank. As Health Care Services, Employee Compensation, and Retirement Benefits have begun to consume increasing portions of the budget, Higher Education, Social Services, Courts, and Transportation budgets have taken cuts. And to make up the difference, taxes have risen and students, park users, and other citizens using public services have had to pay higher fees for state services. Because health care and retirement costs to the state are expected to continue rising, budget pressure on the other areas is also likely to continue rising as it has in the last half-decade.

Note: The Appendix is available in the Full PDF version of the report. A link to the PDF is included at the bottom of this page.

Works Cited [+ Expand]



California Public Employees Retirement System (CalPERS). “CalPERS Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2012.” Page 78. .
State Controller’s Office. “State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2008.” Page 154. .
University of California. “University of California Annual Financial Report, Retirement System.” Page 154. .
California State Teachers Retirement System. “CalSTRS: Building Financial Growth.” Page 75. .
Public Employee Post-Employment Benefits Commission. “Funding Pensions & Retiree Health Care for Public Employees.” Page 22. .
California Department of Finance. “Unfunded Retirement Liabilities.” California 2013-14 Proposed Budget, Page 7. .
State Controller’s Office. “State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2010.” Page 174. .
Proportion of salary spending from Special Funds based on proportion of pension contributions paid from Special Funds.
California Department of Finance. “Schedule 1: General Budget Summary.” California 2007-08 Proposed State Budget Summary, Appendix 4. . California Department of Finance. “Schedule 1: General Budget Summary.” California 2013-14 Proposed State Budget Summary, Appendix 5. .
“Schedule 9: Comparative Statement of Expenditures.” California 2007-08 Proposed State Budget Summary, Appendix 28. “Schedule 9: Comparative Statement of Expenditures.” California 2013-14 Proposed State Budget Summary, Appendix 28.
The California State University. “2007-08 Academic Year State University Fees.” CSU Budget Office. 2007-08. .
The California State University. “2012-13 Schedule of Systemwide Fees.” CSU Budget Office. 2012-13. .
University of California. “UC Regents approve 2007-08 student fees.” Office of the President. 2007-08. . University of California, Irvine. “Undergraduate Student Fees 2012-13” University Registrar. 2012-13. .
Includes Major Taxes and Licenses and Regulatory Taxes and Licenses. “Schedule 8: Comparative Statement of Revenues.” California 2007-08 Proposed State Budget Summary, Appendix 14-15. “Schedule 8: Comparative Statement of Revenues.” California 2013-14 Proposed State Budget Summary, Appendix 14-15.
“Schedule 9: Comparative Statement of Expenditures.” California 2007-08 Proposed State Budget Summary, Appendix 22. “Schedule 9: Comparative Statement of Expenditures.” California 2013-14 Proposed State Budget Summary, Appendix 22.
“Schedule 8: Comparative Statement of Revenues.” California 2007-08 Proposed State Budget Summary, Appendix 14-14. “Schedule 8: Comparative Statement of Revenues.” California 2013-14 Proposed State Budget Summary, Appendix 14-14.
Including original registration/renewals and California Highway Patrol Fee. California Department of Motor Vehicles. “Registration Related Fees.” July 2007. .
California Department of Motor Vehicles. “Registration Related Fees.” January 2013. .
California Department of Finance. “Department of Transportation Budget.” California 2007-08 Proposed Budget, Page 23, 26. .
California Department of Finance. “Department of Transportation Budget.” California 2013-14 Proposed Budget, Page 31, 34. .
“Schedule 9: Comparative Statement of Expenditures.” California 2007-08 Proposed State Budget Summary, Appendix 19.
“Schedule 9: Comparative Statement of Expenditures.” California 2013-14 Proposed State Budget Summary, Appendix 19.
Superior Court of California. “Statewide Civil Fee Schedule.” January 2008, Page 1. .
Superior Court of California. “Statewide Civil Fee Schedule.” June 2012, Page 1. .
Dearen, Jason. “California State Parks Closure: 65 Of 70 Slated To Close Will Stay Open.” Huffington Post. June 28, 2012.
.
California State Parks. “Pass Fee Schedule.” July 2007. .
California State Parks. “Pass Fee Schedule.” January 2013. .
California Department of Finance. “Department of Health Care Services Budget.” California 2007-08 Proposed Budget, Page 1-2. .
California Department of Finance. “Department of Health Care Services Budget.” California 2013-14 Proposed Budget, Page 1-2.
“Major Health and Human Services Program Caseloads.” California 2007-08 Proposed State Budget Summary, Page 139.
“Major Health and Human Services Program Caseloads.” California 2013-14 Proposed State Budget Summary, Page 59.
“Schedule 4: Personnel Years and Salary Cost Estimates.” California 2007-08 Proposed State Budget Summary, Appendix 8.
“Schedule 4: Personnel Years and Salary Cost Estimates.” California 2013-14 Proposed State Budget Summary, Appendix 8.
Most figures can be found in the state’s retirement benefit chart (Appendix 4), however, beginning in 2012-13, the state excluded California State University’s (CSU) pension and retiree health payments from the figures in the chart. This report’s 2013-14 $4.0 billion total CalPERS pension contribution includes CSU’s 2013-14 $469.9 million in pension contributions, which is included on Page 5 of the 2013-14 Public Employee’s Retirement System Budget, . And this report’s 2013-14 $1.8 billion retiree health care contribution includes CSU’s 2013-14 $278.9 million in retiree health benefit payments, which is included on Page 94 of the California 2013-14 Proposed State Budget Summary, .
“The California Strategic Growth Plan.” California 2007-08 Proposed State Budget Summary, Page 76.
“Infrastructure: Debt Service.” California 2013-14 Proposed State Budget Summary, Page 91.
“Schedule 11: Statement of General Obligation Bond & commercial Paper Debt of the State of California.” December 31, 2007. .
“Schedule 11: Statement of General Obligation Bond & Commercial Paper Debt of the State of California.” December 31, 2012. .
“State Retirement Contributions.” California 2013-14 Proposed State Budget Summary, Page 94.
California Public Employees Retirement System (CalPERS). “CalPERS Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2012.” Page 78. .
Chiang, John. “Public Retirement System Annual Report: Fiscal Year Ended June 30, 2007.” California State Controller’s Office.
“University of California Annual Financial Report, Retirement System.” http://finreports.universityofcalifornia.edu/index.php?file=ucrs/ar12ucrs.pdf
California State Teachers Retirement System. “CalSTRS: Building Financial Growth.” Page 75. .
State Controller’s Office. “State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2010.” Page 174. .
State Controller’s Office. “State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2011.” Page 174. .
“Unfunded Retirement Liabilities.” California 2013-14 Proposed Budget, Page 7.
Public Employee Post-Employment Benefits Commission. “Funding Pensions & Retiree Health Care for Public Employees.” Page 22. .
State Controller’s Office. “State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2012.” Page 78. .
“CalSTRS: Building Financial Growth.” Page 75.
“Funding Pensions & Retiree Health Care for Public Employees.” Page 22.
“Unfunded Retirement Liabilities.” California 2013-14 Proposed Budget, Page 7.
“State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2010.” Page 174.
“State of California Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2011.” Page 174.

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