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HaPPy 4th of July to you, calcowgirl!

FRom the LAO’s May Revision for 2007-2008 budget

http://www.lao.ca.gov/2007/may_revise/may_revise_051507.aspx

Additional Risks Warrant More Caution

Every annual state budget has some legal uncertainties, potentially higher costs, and revenue estimates subject to downward adjustments. Yet, even after accounting for the overly optimistic assumptions discussed above, there are other risks and pressures contained within the administration’s proposed 2007-08 budget plan which—if occur—would put it out of balance.

- Legal Issues. Since January, the state prevailed at the appeals court level for a case involving California Work Opportunity and Responsibility to Kids (CalWORKs) grants. However, the case has been appealed to the California Supreme Court. In addition, the state faces a number of other court cases with sizable fiscal liabilities. For instance, the state is currently on the losing end of cases involving the constitutionality of a fee on limited liability corporations, the manner in which the state handles unclaimed property, and the state’s reduction of a required payment to a fund for retired school teachers. In total, these legal risks could exceed $2 billion (primarily of a one-time nature). In addition, the state is currently dealing with a variety of federal lawsuits related to the correctional health care system. While the budget plan includes many costs associated with these lawsuits, the full magnitude of the associated costs remains unknown.

- Revenue Assumptions. As discussed in the education section of this report, the lower-than-expected 2005-06 property tax receipts by school districts is not yet fully understood. If this reduction continues in the current and budget years, the state would be exposed to $660 million in additional costs. This amount is in addition to our lower property tax forecast based on the real estate outlook. In addition, as noted earlier, the level of revenues that would be received by the proposed sale of EdFund is subject to uncertainty.

- Retiree Health Unfunded Liabilities. Like the vast majority of governments across the country, the state has not funded the estimated costs of future retiree health benefits as they accrue. Instead, the state uses a “pay-as-you-go” funding system where costs are paid as benefits are used by retirees. As a result, the state has a large unfunded liability for the benefits that are earned now but will be paid for later. On May 7, 2007, the State Controller released the state’s first actuarial valuation which identified this unfunded liability as totaling $47.9 billion. In order to fully fund retirees’ future benefits and eliminate this liability over the next three decades, the state would have to begin setting aside an additional $1.2 billion annually. These amounts will grow each year that the state continues its pay-as-you-go approach. Our estimates do not account for these higher costs that will need to be paid at a future date.