LAO Says Budget Shortfall Will Require Automatic Cuts, But Brown Administration May Have Final Say

The annual fiscal forecast of the Legislative Analyst's Office is always interesting to budget wonks, but never so consequential to the services used by millions of Californians as it is this year.

That forecast, released yesterday, projects the state will take in $3.7 billion less revenue than the budget signed by Governor Jerry Brown, thus paving the way for potential automatic cuts of almost $2 billion to K-12 schools, higher education, and social services.

"The remaining work of eliminating the state's persistent, annual deficit will require more difficult cuts in expenditures and/or increases in revenues," says the report prepared by Legislative Analyst Mac Taylor and his staff.

Unlike most years, the LAO finding of an overly optimistic state budget doesn't just put pressure on legislators to search for more solutions in the new year. This time, under a provision largely demanded by Brown, that missing of the mark may lead to automatic cuts of about $2 billion.

The list includes $100 million each from the UC and CSU systems; $100 million each from the Department of Developmental Services and the In-Home Supportive Services (IHSS) programs; a cut to K-12 schools and community colleges; and more.

Of course, the key phrase is "may lead to automatic cuts." The budget bill that lays out this scenario makes it clear that the so-called 'trigger cuts' are based on the higher of the two annual revenue forecasts: one conducted by the LAO, and next month's forecast from Brown's Department of Finance.

Might the governor's budget team have a more rosy assessment of the state's economy and revenue stream? Sure. The question, though, is how much more rosy; after all, $3.7 billion is a big gap and the automatic cuts begin to kick in even after just $1 billion in missed projections.

Governor Brown and others, most notably Treasurer Bill Lockyer, lauded the 'trigger cuts' provision as a way to help convince investors in California debt offerings that the budget was credible. In a June letter to Brown and legislative leaders (PDF) Lockyer called the trigger mechanism "a strong contingency plan in the event of revenue shortfalls."

Few who have followed the monthly revenue reports of the state are surprised that the budget's plan is coming up short. Today's sober assessment from the LAO will also reignite debate over how the budget deal finally came together in those last few days of June. After all, it was the quick -- and relatively unexplained -- pronouncement of additional $4 billion in revenue that brought Brown and Democratic leaders in the Legislature to shake hands on a deal, just days after the governor vetoed the first budget sent to his desk.

That $4 billion was never fully placed into context; in other words, it wasn't allocated using the traditional process of revenue estimates and predictions. As such, it's remained a lingering sore point with some budget watchers -- a hard-to-justify bump in revenues that ended a tense standoff between the Democratic governor and Democratic legislators.

And things aren't likely to get better soon. "The latest evidence," writes the LAO, "suggests that the state and national economies continue a slow, arduous recovery from this staggering economic drop-off."

Update Reaction is already coming in from those who would be impacted by the trigger cuts. From Karen Keeslar, executive director of the California Association of Public Authorities, which helps those on IHSS: "Approximately 250,000 seniors and people with disabilities are expected to be hit with the full 20% cut to service hours." Keeslar's email says that the average IHSS consumer now receives approximately 86 hours of care a month and those impacted by the budget trigger would lose approximately 23 hours of monthly care.

Update 2: Assembly Speaker John Perez takes cautious approach to LAO forecast, issuing a statement calling it "indicative, but not determinative" of trigger cuts... Assembly Budget Chairman Bob Blumenfield (D-San Fernando Valley) says the LAO revenue projection "validates the need to raise revenues to finish what we started"... Assemblymember Jim Nielsen (R-Gerber) says it's proof more cuts are needed; "Government has changed very little in how it conducts its business in the last three years," says his statement... Senator Ellen Corbett (D-San Leandro) says the trigger cuts need to be rethought. "The Legislature and governor should explore all of our available options," she said in a written statement.

Update 3: In his press conference with reporters, Legislative Analyst Mac Taylor said the projection of a pulled budget trigger reflects a June budget revenue forecast that lawmakers "knew was risky." He also pointed out that the only sure bet now is that the full $2.5 billion trigger won't be pulled; that's because the only forecast that counts between his LAO projection and one soon to come from the Department of Finance is the one that's higher -- thus, even if the DOF data is worse, the trigger would be limited to about $2 billion in cuts.

Meantime, more reaction... Senate GOP leader Bob Dutton: "the Democrats' 'Hope without Change' budget was built on false assumptions and gimmicks. It's unfortunate that our prediction in July that there would be a $13 billion shortfall was right on target"... Dean Vogel, president of the California Teachers Association: "It's time to put a fair and equitable tax system in place so that our students and the most vulnerable Californians don’t have to continue to do without."

But the most important reaction, at least in terms of what happens next, comes from Governor Brown's budget director, Ana Matasantos. She's the one who releases the administration's economic forecast on December 15 and would then pull the budget cut trigger. "The budget the governor signed recognized that economic uncertainty could force the trigger cuts to take effect," said Matasantos in a written statement. "Some level of trigger cuts will likely occur, but the exact amount will be known in December."