Comments on Budget Reserves Brad Williams Testimony to Senate Budget - - PowerPoint PPT Presentation

Comments on Budget Reserves

Brad Williams Testimony to Senate Budget and Fiscal Review Committee February 27, 2014

General Comments

• Goals of the reserve proposal are laudable

– Stabilize program funding. – Avoid over‐commitment of non‐recurring revenues.

• Provisions in Governor’s proposal to create a

Prop 98 reserve and pay down budget debt make sense.

– Multiple approaches needed

• But all reserve/restraint proposals come with

challenges

– Will formulas fit changing circumstances? – Will what makes sense in theory work in practice?

Specific Comments on the Capital Gains Proposal

• Capital gains is a major source of California’s

extraordinary revenue volatility.

• But it is not the only source
• Using it as a benchmark for reserve contributions has

practical challenges:

– Actual capital gains not known for 2 years after the fact. – This has led to major differences in capital gains estimates between LAO and DOF – It also raises the question of who would be responsible for determining whether gains are above or below the threshold.

Historical Revenues From Capital Gains

2 4 6 8 10 12

1990 1995 2000 2005 2010 Billions of Dollars

Comparison Of Volatility With and Without Taxation of Capital Gains

‐25.0% ‐20.0% ‐15.0% ‐10.0% ‐5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

1990 1995 2000 2005 2010 Annual Percent Change

CA Personal Income GF Revenues GF Revenues Excluding Capital Gains

Other Sources of Volatile Revenues

• Stock options, bonuses and other non‐

recurring wage income

• Taxable sales of durable goods and building

materials

• Business income

Practical Problem: What Is the Level of Capital Gains This Year?

10 20 30 40 50 60 70 80

2011 2013

Billions of Dollars

Year of Estimate May Revision Estimates Of (then) Current‐Year Capital Gains DOF LAO

Concluding Observations

• Annual contributions and meaningful controls on

reserve withdrawals are core features of an effective reserve policy

– Both key to building large reserves – Contribution amounts can be based on sliding scale

• Using a more current revenue measure makes sense

for determining supplemental reserve contributions

– For example, total revenues, or major tax revenues, as a percent of personal income

• Monthly revenue collections by tax known immediately.
• The exact source of revenues is not that important – many forms
• f revenues can be viewed as non‐recurring under specific

circumstances.