LAO Budget, Pensions, and ERAF Legislative Analyst’s Office September 24,

LAO Today  State Budget  Pension Changes  Issues Related to ERAF Insufficient Excess Negative All at the same time... 1

LAO LAO Staff Chas Alamo Property and sales tax forecasts Brian Uhler Property tax allocation, RDA, and local government issues 2

LAO What Is the LAO?  Created in 1941  Nonpartisan, Independent Staff to the Legislature  Provides Fiscal and Policy Analysis— Particularly on Budget-Related Matters 3

LAO May Revision 2012  DOF: to End in Deficit Fourth Year In a Row  State Faced $15.7 Budget Gap for Total State Revenues $86 Billion 4

LAO Why Do Deficits Reappear Each Year? 5  An Overreliance on Temporary Solutions

LAO Basic Contributors  Poor Budgeting Practices  Impact of Great Recession  Volatile Revenue Structure 6

LAO The State’s General Fund: Revenues 7

LAO Actions to Close the Budget Gap 8 (In Billions) Amount Tax Revenues From Proposition 30$8.5 Related Proposition 98 Increase -2.9 Other Revenues 0.4 Expenditure Actions 4.6 Borrowing/Funding Shifts/One-Time Revenues 5.8 Total Solutions $16.4

LAO New State Tax Revenues  $6 Billion Average Annual Revenues Through  Revenues Could Change Significantly From Year to Year 9

LAO “Trigger” Reductions If Proposition 30 Not in Effect 10 (In Billions) Amount Proposition 98$5.4 University of California/California State University 0.5 Other Reductions 0.1

LAO Comparison of Two Tax Initiatives Proposition 30Proposition 38 Taxes affectedPIT and salesPIT Highest PIT rate increase3%2.2% Revenues raised (in billions, full year) $6$10 - $ trigger cuts if measure takes effect? NoYes Operative time period7 years ( )12 years ( ) 11

LAO Key Things to Watch: Risks in Budget Plan  Proposition 30—$8.5 billion  RDA funds—$3.2 Billion  Revenues 12

LAO November LAO Fiscal Forecast  Forecast Revenues for Five Years  Forecast Expenditures for Five Years  Subtract 13

LAO A Christmas Carol by Charles Dickens 14

LAO Pensions — AB 340  Moved Fast Proposed August 28 th Approved by Legislature on August 31 st Amended by AB 197 on August 31 st  “The outline of the changes is clear. Many details are not.” 15

LAO AB 340 Applies to  Most State Employees Except UC and Judges  Most Local Employees Including All in PERS or a 1937 Act System  Excludes Charter Cities In an Independent Retirement System Such as Los Angeles, San Diego and San Francisco 16

LAO Major Provisions  Current Employees Increases Contributions  Future Employees Reduces Benefits Caps Benefits for High Income Employees  Employer Prohibits Certain Practices That Have Increased Unfunded Pension Liabilities 17

LAO Current Employees  50/50 Cost Split “Standard” Most state employees meet standard  In 2018, Allows Local CalPERS and 1937 Act Employers (After Bargaining) Imposes additional employee cost obligations Caps may limit ability to reach 50/50 standard  No Purchase of Airtime 18

LAO Future Employees Must Work Longer to Receive Same Benefits  Example—Future Local Safety Workers Many currently retire at age 54 after 25 years and get 75 percent of final pay Under AB 340, must work to age 57 to receive same pension  Most Differentials: 3 to 5 Years  Final Comp Based on 3 Years of Base Pay With Income Cap 19

LAO Graceful Pause For Questions  Or to Turn Microphone Over to Brian Uhler to Talk About ERAF 20

LAO May 2012 Unrealistic Assumptions K-14 Redevelopment Funds 21 (In Millions)

LAO ERAF Madness Legislative Analyst’s Office September 24, 2012

LAO Topics Covered  What is meant by excess ERAF and insufficient ERAF?  How might excess and insufficient ERAF be affected by RDA dissolution?  Why do we care? 23

LAO Background: ERAF  Established in  $7.3 billion annual revenues.  Repurposed to pay for VLF swap and triple flip. 24

LAO Background: VLF Swap and Triple Flip  State changes to local government VLF and sales taxes created need for backfill.  Additional property taxes backfill for lost VLF and sales tax revenues.  Backfill is paid from ERAF and school district property taxes. 25

LAO Background: RDA Dissolution  Former RDA property tax revenues and assets distributed to local governments.  State’s budget assumes state savings of $3.2 billion. 26

LAO What Is Excess ERAF?  ERAF revenues may exceed local school district funding needs.  Excess ERAF revenues are returned to contributing local governments.  Distributions of excess ERAF are made before VLF swap and triple flip. 27

LAO Example: Excess ERAF Calculation 28

LAO RDA Dissolution Will Increase Excess ERAF  Distributions of RDA resources to schools will decrease need for ERAF funding.  Excess ERAF distributions will increase. 29

LAO Example: Excess ERAF Calculation After RDA Dissolution 30

LAO Implications for State Budget  Increase in excess ERAF distributions reduces state savings.  State budget does not account for these lost savings. 31

LAO Legislative Action on Excess ERAF  AB 1484 Included a provision that prohibited growth in excess ERAF due to RDA dissolution.  SB 1030 Repealed the above mentioned provision of AB Awaiting Governor’s signature/veto. 32

LAO What Is Insufficient ERAF?  Property taxes designated for VLF swap and triple flip backfill may be inadequate.  No mechanism in place to provide additional funding.  Ratio of basic aid to non-basic aid school districts a primary factor. 33

LAO RDA Dissolution Could Increase Instances of Insufficient ERAF  More schools likely to become basic aid with distribution of RDA resources.  Large increase in basic aid school districts could result in insufficient ERAF. 34

LAO Legislative Actions on Insufficient ERAF  Amador County Most school districts are basic aid, inadequate funding for VLF swap and triple flip. State provided funding of $1.5 million in only.  Yearly allocations in state budget currently the only remedy for insufficient ERAF. 35

LAO Issues to Be Addressed Going Forward  Limited capacity at the state level to predict new cases: Uncertainty surrounding RDA dissolution. Lack of firsthand knowledge of local conditions. Data limitations.  No ongoing policy regarding insufficient ERAF. 36