LAO

Budget, Pensions, and ERAF

Legislative Analyst’s Office

September 24, 2012

www.lao.ca.gov

LAO

Today

2012-13 State Budget Pension Changes Issues Related to ERAF

• Insufficient• Excess• Negative• All at the same time . . .

2

LAO

LAO Staff

Chas Alamo Property and sales tax forecasts

Brian Uhler Property tax allocation, RDA, and local government issues

3

LAO

What Is the LAO?

Created in 1941 Nonpartisan, Independent Staff to the

Legislature Provides Fiscal and Policy Analysis—

Particularly on Budget-Related Matters

4

LAO

May Revision 2012

DOF: 2011-12 to End in Deficit• Fourth Year In a Row

State Faced $15.7 Budget Gap for 2012-13• Total State 2011-12 Revenues $86 Billion

5

LAO

Why Do Deficits Reappear Each Year?

6

An Overreliance on Temporary Solutions

LAO

Basic Contributors

Poor Budgeting Practices Impact of Great Recession Volatile Revenue Structure

7

LAO

The State’s General Fund:2012-13 Revenues

8

LAO

Actions to Close the 2012-13 Budget Gap

9

(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 2016-17

Revenues Could Change Significantly From Year to Year

10

LAO

“Trigger” Reductions If Proposition 30 Not in Effect

11

(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 30 Proposition 38

Taxes affected PIT and sales PIT

Highest PIT rate increase 3% 2.2%

Revenues raised (in billions, full year)

$6 $10 - $11

2012-13 trigger cuts if measure takes effect?

No Yes

Operative time period 7 years (2012-18) 12 years (2013-24)

12

LAO

Key Things to Watch: Risks in 2012-13 Budget Plan

Proposition 30—$8.5 billion RDA funds—$3.2 Billion Revenues

13

LAO

November LAO Fiscal Forecast

Forecast Revenues for Five Years Forecast Expenditures for Five Years Subtract

14

LAO

A Christmas Carolby Charles Dickens

15

LAO

Pensions — AB 340

Moved Fast• Proposed August 28th

• Approved by Legislature on August 31st • Amended by AB 197 on August 31st

“The outline of the changes is clear. Many details are not.”

16

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

17

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

18

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

19

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

20

LAO

Graceful Pause For Questions

Or to Turn Microphone Over to Brian Uhler to Talk About ERAF

21

LAO

May 2012 Unrealistic Assumptions K-14 Redevelopment Funds

22

(In Millions)

LAO

ERAF Madness

Legislative Analyst’s Office

www.lao.ca.gov

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?

24

LAO

Background: ERAF

Established in 1992. $7.3 billion annual revenues. Repurposed to pay for VLF swap and triple

flip.

25

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.

26

LAO

Background: RDA Dissolution

Former RDA property tax revenues and assets distributed to local governments.

State’s 2012-13 budget assumes state savings of $3.2 billion.

27

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.

28

LAO

Example: Excess ERAF Calculation

29

LAO

RDA Dissolution Will Increase Excess ERAF

Distributions of RDA resources to schools will decrease need for ERAF funding.

Excess ERAF distributions will increase.

30

LAO

Example: Excess ERAF Calculation After RDA Dissolution

31

LAO

Implications for State Budget

Increase in excess ERAF distributions reduces state savings.

State budget does not account for these lost savings.

32

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 1484.• Awaiting Governor’s signature/veto.

33

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.

34

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.

35

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

2012-13 only.

Yearly allocations in state budget currently the only remedy for insufficient ERAF.

36

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.

37