1. Econ 240 C Lecture 13

2. Part I. CA Budget Crisis

3. CA Budget Crisis • What is Happening to UC? • UC Budget from the state General Fund

4. UC Budget • Econ 240A Lab Four • New data for Fiscal Year 2004-05 • Governor’s Budget Summary 2004-05 • released January 2004 • http://www.dof.ca.gov/

6. CA Budget Crisis • What is happening to the CA economy? • CA personal income

8. Log Scale

11. CA Budget Crisis • How is UC faring relative to the CA economy?

13. CA Budget Crisis • What is happening to CA state Government? • General Fund Expenditures?

15. CA Budget Crisis • How is CA state government General Fund expenditure faring relative to the CA economy?

17. Long Run Pattern Analysis • Make use of definitions: • UCBudget = (UCBudget/CA Gen Fnd Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc • UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

18. What has happened to UC’s Share of CA General Fund Expenditures? • UC Budget Share = (UC Budget/CA Gen Fnd Exp)

22. UC Budget Crisis • UC’s Budget Share goes down about one tenth of one per cent per year • will the legislature continue to lower UC’s share? • Probably, since competing constituencies such as prisons, health and K-12 will continue to lobby the legislature.

23. What has happened to the size of California Government Expenditure Relative to Personal Income? • Relative Size of CA Government = (CA Gen Fnd Exp/CA Pers Inc)

25. California Political History • Proposition 13 • approximately 2/3 of CA voters passed Prop. 13 on June 6, 1978 reducing property tax and shifting fiscal responsibility from the local to state level • Gann Inititiative (Prop 4) • In November 1979, the Gann initiative was passed by the voters, limits real per capita government expenditures

26. CA Budget Crisis • Estimate of the relative size of the CA government: 6.00 %

27. CA Budget Crisis: Pattern Estimate of UC Budget • UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc • Political trends estimate • UC Budget = 0.035*.060*1266.4 $B =$ 2.66 B estimate • Governor’s proposal in January: $ 2.67 B

28. Econometric Estimates of UCBUD • Linear trend • Exponential trend • Linear dependence on CAPY • Constant elasticity of CAPY

29. Econometric Estimates • Linear Trend Estimate • UCBUDB(t) = a + b*t +e(t) • about 3.0 B • Too optimistic

31. Econometric Estimates • Logarithmic (exponential trend) • lnUCBUDB = a + b*t +e(t) • simple exponential trend will over-estimate UC Budget by far

34. Econometric Estimate • Dependence of UC Budget on CA Personal Income • UCBUDB(t) = a + b*CAPY(t) + e(t) • looks like a linear dependence on income will overestimate the UC Budget for 2004-05

36. Econometric Estimates • How about a log-log relationship • lnUCBUDB(t) = a + b*lnCAPY(t) + e(t) • Estimated elasticity 0.855 • autocorrelated residual • fitted lnUCBUDB(2004-05) = 1.22342 • $3.40 B • actual (Governor’s Proposal) = 0.98228 • $2.67B

41. Econometric Estimates • Try a distributed lag Model of lnUCBUDB(t) on lnCAPY(t) • clearly lnUCBUDB(t) is trended (evolutionary) so difference to get fractional changes in UC Budget • likewise, need to difference the log of personal income

42. Identify dlnucbudb

45. Identify dlncapy

48. Estimate ARONE Model for dlncapy

49. This is a satisfactory model

50. Estimate ARONE Model for dlncapy(t) • Orthogonalize dlncapy and save residual • need to do transform dlnucbudb • dlnucbudb(t) = h(Z)*dlncapy(y) + resid(t) • dlncapy(t) = 0.714*dlncapy(t-1) + N(t) • [1 - 0.714Z]*dlnucbudb(t) = h(Z)* [1 - 0.714Z]*dlncapy(t) + [1 - 0.714Z]*resid(t) • i.e. w(t) = h(Z)*N(t) + residw(t)