Chancellor’s Budget Workshop State Economic and Fiscal Forecast

1. Chancellor’s Budget WorkshopState Economic and Fiscal Forecast Presented by: Ron Bennett, President and CEO John Gray, Executive Vice President

2. Economic Overview • The U.S. economy fell into recession in December 2007, the most severe since the Great Depression • This recession was “declared” over in July 2009, three years ago, and yet many believe that hard times are continuing • While the private sector may be adding jobs, the public sector – including schools – continues to shrink • In order for education to see a turnaround, private sector employment must rebound more strongly, which in turn will generate additional tax revenues to fund various public services • In California, the Legislature and the Governor should be laying the groundwork for future growth • Human capital investment – K-12 education and higher education • Infrastructure investment – roads, bridges, communications

3. The National Economy • Little has changed since the May Revision • The economy is growing, but very slowly • Little progress has been made on employment, with only 80,000 jobs added in June • Threats from the European Union remain, but a bail-out package for Spain has been crafted • Gross Domestic Product (GDP) for the first quarter of 2012 has been revised downward from 2.2% to 1.9% • For 2010, first quarter growth was 3.9% and for 2011, it was 0.4% • Unfortunately, last summer the brakes were applied as Congress fumbled the debate on the debt ceiling, Standard and Poor’s downgraded U.S. debt, and Japan was hit by a tsunami • A fiscal “train wreck” could occur if Congress doesn’t extend the Bush-era tax cuts and reach agreement on scheduled federal spending reductions

4. The National Economy Source: U.S. Bureau of Economic Analysis, June 2012

5. Public Section andPrivate Sector Job Growth

6. California’s Economy • The California economy is growing slowly, held down largely by the home foreclosure problem • The real estate market, however, may have turned the corner, with May showing the third consecutive month of rising home prices, breaking the $300,000 barrier for the first time since October 2010 • The state’s 10.8% unemployment rate is the third highest in the nation Source: UCLA Anderson Forecast, June 2012

7. California’s Economy • Just before recessing, the Legislature approved issuing $4.6 billion in state bonds to begin the high speed rail project estimated to cost $68 billion • $3.3 billion in federal funds were an inducement to move forward • However, a University of California, Los Angeles (UCLA) study of Japan’s bullet train concluded that the project did not stimulate the local economy • Japan’s high speed train did lead to urban/suburban sprawl • Claims that California’s high speed rail will lead to 450,000 jobs “are not likely to be realized” Source: UCLA Anderson Forecast, June 2012

8. California’s Business Environment • California continues to be ranked the worst state (50th) for business • While California ranked high for living environment, the rankings for workforce quality, taxation, and business regulations dragged it to the bottom • “California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are ‘necessary evils’ that provide the funds to enable pursuit of their misguided agendas.” • CEO Magazine, June 2012 Source: CEO Magazine, June 2012

9. Comparing the Forecasts – Personal Income

10. The Value of Education • Education, especially K-12, is critical to the economic success of individuals and our state as a whole • Personal income accounts for more than half of state General Fund revenues • Educational attainment affects earnings

11. Comparing the Forecasts – Employment

12. Comparing the Forecasts – Inflation

13. General Fund Budget Summary The $948 million reserve represents just 1% of revenues and transfers $95.9 billion in 2012-13 revenues and transfers assumes $8.5 billion in voter-approved taxes Expenditures are increasing almost 5% even after all of the cuts Source: 2012-13 Budget Act

14. Is the Budget Credible? ??? ??? -$4,144 -$3,601 -$3,181 -$1,976 -$7,342 -$6,842 -$5,429 -$4,458 • The 2012-13 Budget Act contains a $948 million reserve • Is this credible? • You decide!

16. General Fund Revenues The Governor’s Plan $92.5 $88.6 $8.5 Billion New Taxes $5.9 billion cutto Proposition 98if taxes fail $84.6 $4.0 Billion 2011-12 Adopted Budget $84.0 Actual 2011-12 Revenues State Revenues(In Billions) $78.0 May Revision 2011 Base Revenues 2011-12 2012-13

17. Risks to the State Budget • The Governor’s tax initiative is the biggest risk to the State Budget, with $8.5 billion at stake for the current year • The latest Field Poll puts the initiative at 54% in support and 38% opposed • The Legislature’s approval of the high speed rail project could threaten the tax initiative, with nearly one in three voters polled saying they would be less inclined to support raising taxes if the Legislature funds the project • The already anemic economic recovery could stall, as consumer confidence wanes and spending slows • The sovereign debt crisis in the European Union could drag down U.S. exports • Disruptions in the supply of oil could spike energy prices

18. Risks to the State Budget • Federal law could trigger a recession unless Congress acts first • Bush-era tax cuts are set to expire in January 2013 • Automatic federal spending cuts could take place, per last year’s Budget agreement • Like prior years, the courts or the federal government could disallow Budget solutions enacted by the Legislature • Medi-Cal reductions have previously been disallowed • The state’s corrections system is under federal receivership • Reductions to safety net programs such as State Supplemental Payments (SSP) and child care are vulnerable to court challenge • The state revenue forecasts could be flawed • The Legislative Analyst’s Office (LAO) has called into question the Department of Finance’s (DOF) assumptions regarding capital gains income

20. Proposition 98 – The Promise Painting: Leonardo da Vinci, “Mona Lisa” • Proposition 98, enacted by voters in 1988, was intended to: • Provide a source of stable and adequate resources for K-14 public schools • Reduce class sizes to no more than 20:1 in all grades K-12 • Establish a minimum base of funding from which resources could grow to match the top ten states in the nation • Simply put, it was the picture of hope, and the promise of a bright future for schools

21. Proposition 98 – The Picture Today Extensive manipulation of Proposition 98 has distorted the initiative’s original vision Proposition 98 is routinely adjusted, both legislatively and administratively, so that it achieves the K-14 funding targets desired by the Legislature and the Governor Zero year-over-year change in K-12 funding for 2012-13 is the state’s budgetary goal, if new taxes are approved by voters . . . . . . even though Proposition 98 is touted to increase by more than 14% Painting: Edvard Munch, “The Scream of Nature”

22. Proposition 98 (Projected) (Projected)

23. Majority Vote Budget – Proposition 25 • Proposition 25 meant that State Budget spending plans could be passed by a simple majority instead of a two-thirds super majority • Has resulted in two on-time budgets • But, do on-time budgets mean balanced budgets? • After the Governor vetoed the first enacted Budget last year, the State Controller withheld lawmaker salaries • A recent court decision said the State Controller is not empowered to decide the “acceptability” of a Budget enacted by the Legislature – the State Controller has appealed • What’s the future of State Budgets under Proposition 25? • On-time Budgets, but also midyear trigger cuts • More manipulation of Proposition 98 • “Two-Budget” scenarios – the optimistic, passable Budget with midyear cuts triggered if reality doesn’t fit the optimistic picture

24. Negotiations Process Flow Chart

25. Negotiations Process Timeline

26. Thank you for attending!