State Budget:
Will Legislature and Governor Use Inflated Revenue Estimate to Give Appearance Budget is Balanced?

Last year, the Legislature claimed that the budget was balanced with optimistic revenue estimates that most observers believed were substantially overstated. As a result, the 2011-12 budget is running a large deficit, the size of which won't be fully known until after July 1. Governor Jerry Brown has passed this off as a revenue-estimating fluke.

With the June 15 deadline for the 2012-13 budget rapidly approaching, will it be, as Yogi Berra once said, "déjà vu all over again"? Will the Legislature again pass a budget based on inflated revenue estimates, to avoid making politically difficult actions to truly bring the budget into balance?

In a May 18 report on the governor's May revision numbers, the legislative analyst forecasted lower revenue that projected by the governor, by a "few hundred million." Since that report, the economy has deteriorated. Consider:

• The analyst's lower forecast is predicated on the price of oil being $113 per barrel. It is now down to $82.89 per barrel (as of early June 8).
• The governor's budget is predicated on $2 billion from the Facebook stock initial public offering, and the analyst's lower estimate is predicated on Facebook shares growing to $45 per share in 6 months. Since the public offering at $38 per share, the price has dropped to $27.22 per share as of early June 8, a 28.2 percent drop.
• One of the assumptions underpinning the governor's May revenue estimate is that the stock market will grow consistent with its January-through-April performance. As of early June 8, the Dow Jones average is 12,513.56, a drop of 5.4 percent from its April 30 closing of 13,228.31.

The state controller is expected to report soon on whether May cash collections met the May estimates, or whether the collections fell short and the carryover deficit is likely to be larger than projected in the May revision.

A balanced budget must be approved by the end of next week. Will legislative leaders continue to use the outdated, overly optimistic revenue estimates, or will they adjust the estimates to reflect more current data?

In his June 8 column, Dan Walters of The Sacramento Bee wrote that legislators "must enact something that either has public credibility or that Brown can massage through line-item vetoes." He added: "If it's another phony budget that isn't worth the paper to print it, like last year's charade, it will be potent ammunition for opponents of new taxes. They could rightfully claim that the Capitol's politicians are so irresponsible that giving them more to spend would be money down a rathole."

June 8, 2012
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