State Budget and Pension Changes: LAO Analysis and Recommendations

1. Budget, Pensions, and ERAF Legislative Analyst’s Office September 24, 2012 www.lao.ca.gov

2. Today • 2012-13 State Budget • Pension Changes • Issues Related to ERAF • Insufficient • Excess • Negative • All at the same time . . .

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

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

5. 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

6. Why Do Deficits Reappear Each Year? • An Overreliance on Temporary Solutions

7. Basic Contributors • Poor Budgeting Practices • Impact of Great Recession • Volatile Revenue Structure

8. The State’s General Fund:2012-13 Revenues

9. Actions to Close the 2012-13 Budget Gap (In Billions)

10. New State Tax Revenues • $6 Billion Average Annual Revenues Through 2016-17 • Revenues Could Change Significantly From Year to Year

11. “Trigger” Reductions If Proposition 30 Not in Effect (In Billions)

12. Comparison of Two Tax Initiatives

13. Key Things to Watch: Risks in 2012-13 Budget Plan • Proposition 30—$8.5 billion • RDA funds—$3.2 Billion • Revenues

14. November LAO Fiscal Forecast • Forecast Revenues for Five Years • Forecast Expenditures for Five Years • Subtract

15. A Christmas Carolby Charles Dickens

16. 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.”

17. 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

18. 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

19. 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

20. 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

21. Graceful Pause For Questions • Or to Turn Microphone Over to Brian Uhler to Talk About ERAF

22. May 2012 Unrealistic Assumptions K-14 Redevelopment Funds (In Millions)

23. ERAF Madness Legislative Analyst’s Office September 24, 2012 www.lao.ca.gov

24. 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?

25. Background: ERAF • Established in 1992. • $7.3 billion annual revenues. • Repurposed to pay for VLF swap and triple flip.

26. 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.

27. 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.

28. 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.

29. Example: Excess ERAF Calculation

30. RDA Dissolution Will Increase Excess ERAF • Distributions of RDA resources to schools will decrease need for ERAF funding. • Excess ERAF distributions will increase.

31. Example: Excess ERAF Calculation After RDA Dissolution

32. Implications for State Budget • Increase in excess ERAF distributions reduces state savings. • State budget does not account for these lost savings.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.