Dan Walters

Opinion: Revenue forecasts on state budgets are a crapshoot

Marty Block, a state senator from San Diego, recently asked a question in public that many in and around the Capitol have been mulling for years.

Why, Block wanted to know from the professional bean counters sitting before him, do the governor’s Department of Finance and the Legislative Analyst’s Office differ so often and so much on revenue projections?

“Is there a trend as to who’s more accurate?” Block, who was chairing a budget subcommittee, asked experts from both offices.

He asked the question five days after Gov. Jerry Brown unveiled his revised 2015-16 budget, based on a projection that the state would get $6.7 billion more than he had predicted just four months earlier. And it came three days after Legislative Analyst Mac Taylor projected another $3.1 billion on top of Brown’s number.

The collective answer was that while both budget offices generally agree on the direction of California’s $2 trillion economy, they differ on the revenue it will generate, especially taxes on capital gains.

Personal income taxes provide two-thirds of state revenue, and the wealthy pay most of them, especially on capital gains. Thus, the state must try to predict, many months in advance, not only how investments of the rich will fare but how much profit they will take and declare as taxable income.

It’s really an impossible chore, and becomes more difficult each year. And yet, the governor and legislators must base decisions on how much to spend on their assumptions on how much they’ll have to spend.

Generally – and again this year – the LAO’s projections tend to be higher than those of the Department of Finance. And while both insist the differences are legitimately grounded, both serve their bosses’ interests.

Embarrassing deficits may ensue if revenues fall short of projections, so governors like low-ball forecasts because there’s no political downside if they come in higher.

Legislators want to spend money, and higher-revenue projections provide the wherewithal – at least on paper.

True to tradition, the Legislature’s Democrats base their versions of this year’s budget on the LAO’s higher revenue numbers, thereby claiming that there will be enough money to finance the extra health and welfare spending they seek.

Proposition 2, the 2014 ballot measure that requires some unanticipated revenue to flow into reserves and/or debt reduction, also comes into play. Without the LAO’s much-higher revenues, Proposition 2 and the state’s long-standing school finance law would leave very little for “discretionary spending” that Democrats want.

The variations in revenue projections are getting wider, not only between those of the agencies, but from one cycle to the next. And they make state budgeting less an exercise in priority-setting and more a crapshoot whose outcome is determined by esoteric factors completely out of politicians’ control.