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[JANUARY 2013 BOG DAY 2]00:00:03 DANNY HAWKINS Item 4.2 ah, presentation on California's
economic outcome. Ah, leg-legislative analyst. Welcome. And Jerry we can't hear um, Chancellor.
We don't? No. Okay, this seems to be working. Ah, President Baca, Vice President Baum, Chancellor
Harris, members of the board. Good morning. Ah, as you know, later this week the governor
will ah, introduce his proposal for the budget for the 13-14 fiscal year. And ah, that tends
to ah, create a, a one-year scramble where we look at just that one year budget trying
to get our priorities ah, ah, fixed into the language for that year. Ah, I, I think prior
to taking that kind of short-term perspective it's helpful for the board and for the ah,
community, our community to ah, take a broader look at ah, the economic conditions over the
next few years so that we can ah, consider our priorities and how the ah, ongoing ah,
Prop. 98 revenues are likely to support ah, a sustainable budget goals ah, for our system.
[JANUARY 2013 BOG DAY 2]00:01:25 DANNY HAWKINS (CONTINUED)
Ah, annually each November the legis-legislative analyst office ah, releases the ah, a five-year
fiscal forecast that does just that. It takes a look at the broader economic trends, what
that is likely to mean for our revenue picture over the next few years and for ah, of most
interest to community colleges. That's the prop position 98 ah, revenues as well. Ah,
so ah, with that ah, I'd, I'd like to introduce Mac Taylor. Mac is the ah, fifth, I believe,
legislative analyst ah, in ah, our state's history. He's had that title since October
of 2008. And ah, the report that came out in November, I think, generally has pretty
good news for education and for the community colleges thanks to Proposition 30 and ah,
ah, without further ado, I'll hand it over to Mac for his ah, presentation today. Welcome.
[JANUARY 2013 BOG DAY 2]00:02:11 MAC TAYLOR Thank you, Dan. Mr. Chairman, members. It's
a pleasure to come before you today and chat with you for a few minutes about our document.
We put it out in November as Dan said. And what I've done is taken some key charts from
that document. I thought it'd be a little easier for you if we, as we flip through.
And, and I'd just like to go through and kind of tell you kind of where we've been and sets
up ah, where we may be going in the next few years. Um, I, I like presenting to small groups
like this because we can have more of a conversation. I would welcome as we go along your questions,
your interruptions, your comments, your dissenting views. So please, just jump in ah, if you
have things that you'd ah, like to chat about as we go along. I think it'd be much more
fun for all of us. [JANUARY 2013 BOG DAY 2]00:02:52 MAC TAYLOR
(CONTINUED) Ah, starting on page one, ah, this chart to
me says a lot about why we've been in such problems over the last four years. Ah, it's
a little bit complicated but it has two stories. And what it shows is our job losses in this
recession and the past recession. And if you look at the dark blue line at the bottom,
those represent the job losses from the current recession as compared with the prior ones.
And you see going down the page that's the percentage of our, our workforce that we lost
in the recession. And you can see it was about nine percent of all jobs. And that's about
two or three times as much as in the prior three recessions. That tells you how deep
recession's effect was on California. [JANUARY 2013 BOG DAY 2]00:03:39 MAC TAYLOR
Now going across the page that tells you how many years we project it will take before
the level of jobs returns to its pre-recession peak. That is when do we get back to where
we were before all of this mess started? And you can, for past recessions it was two, three,
four, five years. This one we're projecting seven and a half years. That'll be in like
probably the end of 2015 we will finally recover those job losses. So again, it just tells
you the impact of the recession on our economy. Why we lost so much of our revenue and why
it's taking us so long to get back into sort of a fiscally stable situation.
[JANUARY 2013 BOG DAY 2]00:04:22 MAC TAYLOR (CONTINUED)
Ah, if you turn to the next page, I'm sorry this is a mass of numbers but I want to focus
on just a couple of things. These are our forecasts for general fund revenues. Not the
special funds and everything else but what really affects your budget for the most part.
How much general fund revenues do we have? And ah, I, I really want to point out two
things. And one is not real obvious. You have to kind of take the top line personal income
taxes and compare it with the bottom line total revenues and transfers. But if you were
to do those calculations you would see that it's about, it's almost two thirds of our
revenue is coming from the personal income tax. Now the implications of that ah, will
become more obvious once we get to the next page. But let me just note that with the passage
of Prop. 30 we've become more dependent on personal income taxes.
[JANUARY 2013 BOG DAY 2]00:05:16 MAC TAYLOR (CONTINUED)
The other thing I want to point again, it's not real obvious 'cause we didn't have the
change numbers. But if you looked at that bottom line of how revenues are growing, we're
forecasting that they're gonna grow about six percent a year. Which is kind of an historical
average. Revenues tend to grow roughly with the personal income and over a long period
of time, a business cycle say, you would expect revenues to grow about that much. But keep
that figure in mind when we compare our forecast for expenditures. Okay? So, take those, keep
those two things in mind. [JANUARY 2013 BOG DAY 2]00:05:46 MAC TAYLOR
(CONTINUED) Now let's go to the next page. These are capital
gains, both historical and projected. Capital gains or net capital gains are basically when
people sell property, they sell their stocks, they realize ah, an (CLEARS THROAT) excuse
me, an increase in the value of those gains. And they're important because we have, they're
a much more dominant part of our, our total personal income taxes. Taxes we get from capital
gains. Um, and, of course, property, gains from property sales. When we have our housing
bubbles they're also very prominent. But I just want you to look in the, in the early
'90s do you see where capital gains were roughly in the 20 billion dollar range? And look what
happened in the year 2000. Six-fold increase. That was the dot-com boom. And then look two
years later they're back down closer to their historical levels. That's the dot-com bust.
And remember, these are, these are gains that are typically paid by high-income people so
they're at the highest tax bracket. So you're getting almost a tenth of tax revenues for
this amount. Every 10 billion in capital gains gets you almost a billion dollars in revenues.
So when these go up and down like this, this is much of the cause of our budgetary volatility.
Capital gains. [JANUARY 2013 BOG DAY 2]00:07:09 MAC TAYLOR
(CONTINUED) And you can see they went back up to the kind
of dot-com levels in the mid-part of the decade and then they fell once again back down in
2009 to 29 billion. This is the roller coaster that we've been on in the last 10 to 12 years.
And Proposition 30 again, by adding those top marginal tax brackets, you now have people
paying 13.3 percent. And the very wealthy, of course, is where you have most of your
flexibility and volatility because they have much more control of how they do their taxes.
[JANUARY 2013 BOG DAY 2]00:07:45 MAC TAYLOR (CONTINUED)
So, we have a very volatile revenue structure. We had it before Prop 30, Prop 30 made it
a little bit more volatile. But what that means is that when we talk about our forecast
and I get to some numbers a little later on, we typically will forecast a more stable growth
pattern for revenues. As you saw in that prior chart, they tend to grow five, six, seven
percent a year. That's not the way it will happen. What will happen is you'll get some
spikes, and when that happens it's very good for Prop 98 because it tags along with the
growth and general fund revenues. And then you'll get sharp declines. And then you have
to deal with test three years and deferrals and all sorts of things because we have to
somehow make our budget balance. [JANUARY 2013 BOG DAY 2]00:08:29 MAC TAYLOR
(CONTINUED) So one pa-part of the problem of doing fiscal
forecast is that nobody can call those ups and downs very well. Certainly we can't. And
I don't know of any economic fore-forecaster who can. So even though we forecast rather
stable growth, that's not what you're going to experience. And it, it has implications
for you as a board on how you think about your budget. It certainly has implications
for the legislature and me as an advisor to them on how they should deal with that volatility.
The single best thing that they can do in my view is have a very large reserve. Now
you can imagine though the forces that work on the legislature as we get more money and
if we continue to grow and we don't have problems with the economy, we don't have a down turn,
we don't hit the fiscal cliff, do you think people are going to want to sock money away
in the reserve? Or are they going to want to restore some of the cuts that have been
made over the last four years? [JANUARY 2013 BOG DAY 2]00:09:26 MAC TAYLOR
(CONTINUED) And so I think you just need to appreciate
the pressure that's on the legislature on those kind of demands that will be made on
them and what they need to do to prepare themselves for the next time that revenues turn south.
Let's go to the next page. These were our forecasts for the various expenditure programs.
Again, they're not our predictions of what we think, of what will actually happen. It
takes current practices, what's now our commitments that are in place and what would happen if
you just played those out over the next five years.
[JANUARY 2013 BOG DAY 2]00:10:03 MAC TAYLOR (CONTINUED)
And let me just make two points from this. Go to the bottom of the page. The very lower
right corner and this is the annual average growth that we're forecasting for expenditures
for the next five years. And you see it's 3.6 percent. Well that's, that's not very
much. And one reason for that is because there's a lot of areas in both universities, judiciary,
where we forecast basically no growth over the entire period. And why did we do that?
Well, the legislature in statue has a practice for not having automatic adjustments to university
judiciary, other state operations. Doesn't mean that they won't give inflation adjustments,
but we kind of went off that statutory language that not to plug in inflation adjustments.
[JANUARY 2013 BOG DAY 2]00:10:46 MAC TAYLOR (CONTINUED)
For the universities the other main driver is what's happening in your college- age education
cohort. Your college-going group. It's not growing over the next four years. In fact,
it's going to be declining at the end of our forecast period. Now, do we think then that
there's not going to be any growth in the universities budgets? Well, no, that's again,
that's not a prediction of what will happen, it's just, that's the basis for our forecast.
[JANUARY 2013 BOG DAY 2]00:11:10 MAC TAYLOR (CONTINUED)
But anyway, so you have 3.6 percent annual growth. Well, remember what our revenue number
growing was? It was six percent a year. So, that will be obvious when we get to the next
page. The other, the other thing I want to focus on since, obviously, this is the community
colleges. The top line, our Prop 98 forecast, and you see it growing 3.9 percent. Now that
is not the 98, that's the general fund share of 98. And so you obviously should be more
concerned with the total including property taxes. But for our forecast purposes, this
is just the general fund share. And you can see it's growing almost four percent a year.
[JANUARY 2013 BOG DAY 2]00:11:48 MAC TAYLOR (CONTINUED)
Ah, let's turn now to the next page. So putting those two numbers together for the average
annual growth rate for revenues, and for spending. And obviously, if that's true and your budget
starts roughly in balance, you're going to have growing surpluses. Because revenues are
growing faster than expenditures. Now we start in 13-14, ah, we forecast a very small deficit,
about two billion dollars. Ah, that turns into a very small surplus in 14-15. So I think
roughly the way to think about it for the next two years, we're kind of just in balance.
Just barely in balance. Not a lot of surplus or anything. And what that suggests to me
is that you could continue to fund what you've been funding but you can't do too much more.
And if you want to do more, you have to cut something else. You either have to, if you
want to over appropriate 98, you have to cut something else. If you want to restore some
health and social service-services that have been reduced, you have to cut something else.
Or you have to add additional revenues on top of what was added under Prop 30.
[JANUARY 2013 BOG DAY 2]00:12:53 MAC TAYLOR (CONTINUED)
So kind of, I think about it in the next two, three years, pretty much tight budgets. Now
98 is different, of course, because we have built into our projections what the, what
98 will grow by under the constitution. So we'll get to 98 in just a second. But for
the rest of the budget, it's kind of like a, a baseline sort of spending levels. Those
surpluses do grow though. And they get up to nine billion if you just continue to do
exactly what you're doing now. Again, we're not predicting that will happen, and there
for a lot of reasons we think you should be cautious about what those out-year surpluses
mean. But these are just the numbers. It's interesting all of the sort of motives and
intent that people have ascribed to us in putting out these numbers. They're just the
numbers. And what you do with them obviously is up to the legislature.
[JANUARY 2013 BOG DAY 2]00:13:47 MAC TAYLOR (CONTINUED)
Now the next page is probably the most interesting in a way because right after we put out those
numbers we gave all sorts of caveats as to why you needed to be careful. And I do want
to spend some time on these because there are a lot of very important caveats. The first
and foremost are risk to the, to the revenue forecast. Now we put out the November report
before action at the federal level on the fiscal cliff. We didn't go over the first
part of the fiscal cliff because they extended most of the tax cuts. We still have important
aspects of that cliff in two months from now when they'll have to deal with the sequestration
and ah, the debt ceiling. So we're, we're not past those kind of ah, risks to the forecast
that ah, could be very severe. And should, should there not be resolution, should there
be a slowdown in the economy, the numbers from the prior page you can just throw away.
'Cause we'll be in a very different situation. [JANUARY 2013 BOG DAY 2]00:14:44 MAC TAYLOR
(CONTINUED) Obviously even independent of the fiscal cliff
you always have lots of ups and downs and uncertainty regarding our revenue forecast.
Ah, I don't know of a time in my ah, stint in the office where there's been as great
an uncertainty over how to do revenue forecasting as there is currently. We have made changes
to our revenue structure. We've made changes to the way people, in-individuals pay their
taxes. We have talk about tax increases at the federal level which affects people's behavior
on whether they're going, whether they accelerated payments from January into December. Right
now revenues looked very good for December. Was that just because people in anticipation
of higher federal tax rates moved income from 2013 back into 2012? Likely that's true. So
if you're to see good news about whoa, what the revenues are really coming in, again,
you should have great caution about that. It may just mean that all we're doing is moving
money that would have been realized by the state in 13-14 and we're accelerating it in
12-13. We may seem like we're better off now and we could be worse off in the future.
[JANUARY 2013 BOG DAY 2]00:15:53 MAC TAYLOR (CONTINUED)
So very difficult times for forecasters given all of the changes we made in our tax structure,
and because of all the uncertainty at both the state and the federal level over tax policy,
ah, the forecast assumed no transfers to the reserve. Ah, some of you will remember back
in 2004 we actually passed Proposition 58 which requires us to set aside three percent
of revenues every year ah, unless the governor waives that or suspends that transfer. So
ah, if we were to do those transfers which we should be doing as soon as our, our budget
is back in balance, that takes like three billion off the table. Those big blue surplus
lines you saw on the prior page, just reduce them by three billion a year. Because we should
be rebuilding our reserve. [JANUARY 2013 BOG DAY 2]00:16:40 MAC TAYLOR
(CONTINUED) It doesn't allow for any cost of living adjustments.
Again, because that's what the statute calls for. Now, again, Prop 98 is different because
you have your own constitutional requirements. Those are built-in. Ah, the forecast does
not account for the repayment of many obligations. Ah, Governor Brown likes to refer to as the
wall of debt. We still have lots in both the education area and the non-education area
where we need to pay off past special fund loans, mandate ah, obligations, etc. So we
still have a lot to get our budget back in order. And the budget does not account for
all of those over the forecast period. [JANUARY 2013 BOG DAY 2]00:17:15 MAC TAYLOR
(CONTINUED) Ah, we've talked about the revenue volatility
and the Proposition 98 maintenance factor the legislature adopted, a proposal by the
governor on the way that we would pay back the maintenance factor. It's a rather technical
issue but what it will do is add to the volatility in both Prop 98 spending ah, and means more
ups and downs. It has a good upside for Prop 98 but it also has a downside for the rest
of the budget. And remember, our forecast period goes to the end of 2016-17. What happens
the next year? Prop 30 tax increases start going off. And so by the end of that period,
you would like to be in a situation where your budget is balanced, you have a reserve
and you've paid off these past obligations and budgetary debts that you've accumulated
over the last four years. [JANUARY 2013 BOG DAY 2]00:18:05 MAC TAYLOR
(CONTINUED) So we felt after giving them the good news
that wow, things are a lot better than they have been for the last four years, ah, there's
still a lot of work to be done. And I think as we'll see in just a second, the news for
Prop 98 is particularly good. The rest of the budget maybe there's a lot more caution
about what is possible. Again, absent any additional revenues that the legislature would
want to consider, there's not going to be a lot of room, room for growth. So it could
be in this position where 98 is seeing good annual growth, the rest of the budget is pretty
tight. And you can imagine what that, the pressures that that will place on many of
the members of the legislature. [JANUARY 2013 BOG DAY 2]00:18:52 MAC TAYLOR
(CONTINUED) So let's um, well, the next page is just ah,
really just shows you how those surpluses can drop if you were just to do two things.
Make your reserve requirement, your payment into the reserve and provide cost-of-living
adjustments. And you can see the top line, three lines down where you have operating
surplus, those were the ones, the number's reflected in the chart of two pages ago. The
big blue surplus bars. And then if you go to the bottom of the page, you can see that
those are reduced substantially if you just do those two things. Surpluses at the end
of the year goes from just over nine billion all the way back down to 3.7. Which is still
good. I mean this is still positive news but just a few different assumptions and those
numbers could look very, very different. [JANUARY 2013 BOG DAY 2]00:19:38 MAC TAYLOR
(CONTINUED) Okay, now let's get to 98. This combines both
the general fund forecast and property tax forecast. We have property tax growing ah,
faster than, than the guarantee, so the general fund portion actually doesn't have to grow
as fast. If you go down about four or five lines, the year-to-year change in the guarantee,
this is really what I think is most important to you. And you can see after the big jump
in 12-13 because of the passage of 30, you can see that the amount, the growth of, over
the prior year tends to be in the two to three billion dollar range every year. And that
equates to a four and a half, five percent on average growth a year.
[JANUARY 2013 BOG DAY 2]00:20:25 MAC TAYLOR (CONTINUED)
Now, that's even more powerful than it suggests because for K-12, which is obviously 90 percent
of this guarantee, there is no enrollment growth over the period. Actually declines
a little bit. So you're not having to spend some of that money just to pay for new kids,
it's available for either cost-of-living adjustments, or for actual growth in program. So two to
three billion even after cost-of-living, you're talking about a billion, billion and a half
in new program growth for the community colleges and the K-12 system. That's very good news
compared with where we've been obviously in the last four years.
[JANUARY 2013 BOG DAY 2]00:21:09 MAC TAYLOR (CONTINUED)
Um, there is also built-in to your current year base, a two billion dollar payment that
was used to pay off deferrals. That's available in subsequent years if we continue to use
that two billion, each year we could pay down all of those deferrals over the forecast period.
That would be a very good thing in my view. We should be paying schools for the cost in
the year in which they are incurred. So in addition to these growth numbers, you do have
an amount that's already built into the budget that could be used for in effect these onetime
annually these payments that could lower your deferrals. That would be an excellent thing
in my view. [JANUARY 2013 BOG DAY 2]00:21:54 MAC TAYLOR
(CONTINUED) Ah, so overall, very good news. Now, again,
remember this is based on a forecast that's fairly stable. It assumes moderate growth
over the entire period. It doesn't take into account jumps up that we've historically,
you know, realized in the past or reductions. Both of which are just as likely to occur
at some point over the forecast period. [JANUARY 2013 BOG DAY 2]00:22:19 MAC TAYLOR
(CONTINUED) On the last page, ah, just a reminder about
these one-time obligations. These are actually debts that we owe. This doesn't. I'm not talking
about the maintenance factor or deficit factor. Those are also funding pressures but they're
not, they're not debts. They're not things you have to go back and pay off. What we would
like to see paid off are things like the deferrals, education mandates that we owe, both you and
the schools, and an emergency repair program, it's a K-12 program. So these are like 13
billion dollars in one-time payments that would be nice to make a huge dent in over
the forecast period. So with that Mr. Chairman, I'm happy to answer any questions the board
members might have. [JANUARY 2013 BOG DAY 2]00:23:03 DANNY HAWKINS
Members? Member MacDougall. [JANUARY 2013 BOG DAY 2]00:23:07 PETER MACDOUGALL
Yes, I wanted to ask on the, on the first chart and the, you know, the number of years
that it takes to get back to the average, do you have any analysis of the general conditions
in California in terms of its viability? You know, the industrial base, etcetera that is
affecting this either positively or negatively and might have an impact on the future.
[JANUARY 2013 BOG DAY 2]00:23:35 MAC TAYLOR Well, I think for California we were obviously
one of several states that we especially hard hit by the housing bubble and the drop in
housing prices. And that's why in large part it's taken so long as we're still working
out of that and prices have stabilized. They're starting to grow. And so there's no reason
to think that the forecast return um, isn't very likely and possible. But if you're saying,
if you're asking me, well, is there anything else fundamentally different about our ability
to either go down in the future? Um, I guess that would depend on what happens with housing
prices. But maybe I'm not getting to your question.
[JANUARY 2013 BOG DAY 2]00:24:15 PETER MACDOUGALL But that's the only variable that. What I'm
getting at. You hear a lot about California being inhospitable to business and businesses
therefore moving out of the state. So I guess my question is oriented toward that consideration
and, and in your analysis I would assume that that big picture is examined. Ah, you did
point out the importance of housing prices 'cause it's been such a critical ah, factor
in California with the great increases that occurred over a few decades. And that is probably
going to stabilize and ah, now we've suffered the worst of the adjustment. But ah, is there
anything else or? [JANUARY 2013 BOG DAY 2]00:24:58 MAC TAYLOR
Well, certainly there's a lot of concern about manufacturing in the state. Ah, those numbers
do not look good. We're a high cost state, we have high land cost, we have, we're a strong
regulatory state. So if you're asking me is this, is this a state in which manufacturing
is likely to do extremely well in the future? I would say, well, no. That doesn't mean though
the state doesn't have strengths in other areas. Professional and technical services.
Exports, clearly agriculture. So ah, it may just be that we are morphing into a different
type of state where manufacturing is not going to be ah, perhaps one of our strengths for
the reasons that were mentioned but that other areas hopefully will compensate.
[JANUARY 2013 BOG DAY 2]00:25:41 MAC TAYLOR (CONTINUED)
But I would look at housing as if prices are returning. If they go up too fast, if they
re-inflate and cause another bubble, that's what I would be more concerned about. And
you also need to kind of watch the stock market. If you have ah, you know, another rapid rise
in, in stock prices and other assets, that can just set you up for a fall again. Because
we just don't know, when, when housing prices are going up, when, when the markets are going
up, the financial markets are going up, we don't know what's ongoing and what's one time.
We didn't, if you go back to that capital gains chart, when we were growing from 20
billion to a 120 billion, we had no clue what was one time and what was ongoing. And we
probably should have been more cautious back then in the way we made commitments. And I
would say to you the same thing would happen if you see the stock market going back up
to 16,000 and housing prices are re-inflating, getting back up to the, the peak that they
were in the middle-part of the decade, you should be cautious about the spending commitments
that we're making because we won't be able to sustain those.
[JANUARY 2013 BOG DAY 2]00:26:54 UNIDENTIFIED MAN
So following up on that ah, question um, I don't see property taxes reflected in this
ah, piece here on the general fund and education protection account. Is it imbedded somewhere
in those categories? [JANUARY 2013 BOG DAY 2]00:27:05 MAC TAYLOR
On the revenues? [JANUARY 2013 BOG DAY 2]00:27:07 UNIDENTIFIED
MAN On revenues.
[JANUARY 2013 BOG DAY 2]00:27:07 MAC TAYLOR Yeah, since it's not a state revenue, it wouldn't
show up on that. But it is in effect, captured on the expenditure side in which we have to
forecast property tax revenues because of the implications for school spending under
Prop 98. [JANUARY 2013 BOG DAY 2]00:27:20 UNIDENTIFIED
MAN That's why I'm asking, yeah.
[JANUARY 2013 BOG DAY 2]00:27:20 MAC TAYLOR Yeah. And so we do forecast it but it's, it's
shown more indirectly. [JANUARY 2013 BOG DAY 2]00:27:24 UNIDENTIFIED
MAN Can you comment a little bit more specifically
on what you would anticipate in terms of a trend line on property taxes?
[JANUARY 2013 BOG DAY 2]00:27:29 MAC TAYLOR Yeah, I'm sorry I don't have, I don't remember
the exact numbers but, you know, we've been. [JANUARY 2013 BOG DAY 2]00:27:31 UNIDENTIFIED
MAN No, no worries if you don't have it.
[JANUARY 2013 BOG DAY 2]00:27:32 MAC TAYLOR We've been kind of flat almost on, on growth
and we, we expect it to start resuming and I think it gets up to five percent a year
ah, growth in assessed valuation towards the end of the period. That's still relatively
low by state standards but ah, in fact it may be a little bit more than that but ah,
we've recovered. Dan may have a number. [JANUARY 2013 BOG DAY 2]00:27:52 DANNY HAWKINS
I was going to say I think I recall from your forecast you said about six percent of it
is (WORD?) [JANUARY 2013 BOG DAY 2]00:27:56 MAC TAYLOR
So we're moving from being rather flat back up to at least more historically normal levels.
[JANUARY 2013 BOG DAY 2]00:28:02 UNIDENTIFIED MAN
Thank you. [JANUARY 2013 BOG DAY 2]00:28:02 UNIDENTIFIED
MAN Slow steady growth is ah, good thing.
[JANUARY 2013 BOG DAY 2]00:28:05 MAC TAYLOR Oh, absolutely and especially for the state
budget. [JANUARY 2013 BOG DAY 2]00:28:10 UNIDENTIFIED
MAN You know, in predicting ah, how something
like Prop 30 ah, impacts on revenues, how, how, how confident. I think you responded
to that with a manufacturing ah, response. Um, how confident are you in terms of, or,
in predicting the, the, the actual ah, revenues? [JANUARY 2013 BOG DAY 2]00:28:31 MAC TAYLOR
Not very confident. [JANUARY 2013 BOG DAY 2]00:28:31 UNIDENTIFIED
MAN Not very confident.
[JANUARY 2013 BOG DAY 2]00:28:33 MAC TAYLOR You know, when we give a forecast for general
fund revenues it's about a $100 billion. It can easily be four billion up or down from
that number. It may even be more that confidence interval may even be greater than that now
in a year-to-year basis because of the changes that we made to tax, the tax code and because
of what's happening at the federal level. Ah, the estimates on Prop 30 there's even
more variability around them because it's all concentrated in the top one percent of
tax payers. Who have the most variability ah, in their payments because they have the
most control over them in the way that they recognize gains, and realize gains, take income.
And in the actual fluctuation in their realization of income. And so these are, these are rough
ballpark estimates that can be wrong by billions. [JANUARY 2013 BOG DAY 2]00:29:22 UNIDENTIFIED
MAN But after time passes a year or so ah, you
can reflect back and see the actual and you can define it.
[JANUARY 2013 BOG DAY 2]00:29:28 MAC TAYLOR Yes, but again it doesn't help you for the
future because you may, we may have been right on. Spot on, on where we were in the revenues,
it doesn't necessarily mean anything about the coming years revenue estimates.
[JANUARY 2013 BOG DAY 2]00:29:38 DANNY HAWKINS Vice President Baum?
[JANUARY 2013 BOG DAY 2]00:29:40 GEOFFREY L. BAUM
First off, thank you so much for this report. It's very helpful and I appreciate your analysis
from a distance when I'm reading in the press you're always a voice of reason on ah, on
what's happening in the state. And so I appreciate the work you do. My concern, I have, I have
a couple of questions about the ah, the charts. [JANUARY 2013 BOG DAY 2]00:29:58 MAC TAYLOR
Sure. [JANUARY 2013 BOG DAY 2]00:29:58 GEOFFREY
L. BAUM Um, the first one though, which gives me a
lot of anxiety it looks like for the last 20 years and in-into the future we may be
almost in a state of permanent recession. Except for the tech bubble, you know, if you
go from '90 to '95, there was the tech bubble. And then from 2001 there's to 2005 and then
there was a brief kind of ah, are we really? Are we in a state of permanent recession actually
in the state of California? [JANUARY 2013 BOG DAY 2]00:30:23 MAC TAYLOR
Well, that's a tough one. Ah, if you go back even the last 20 years, there have been very
different causes for our downturns. In the early '90s we had a complete collapse of the
defense industry, right? We lost most of our defense, defense industry in Southern California
and California had a much tougher time than the rest of the nation because of that. Then
you had the dot.com bust which was magnified certainly in California because again, our
reliance on personal income taxes. And then the recent recession has been something unlike
what we've seen since the great depression. So it's kind of hard to know whether your
answer is are we, is this signaling ah, historically that we're, we're in for more boom and bust
times. Shorter cycles. [JANUARY 2013 BOG DAY 2]00:31:05 GEOFFREY
L. BAUM We're in a, realigned our whole economy down
and um, and we'll see where the, where the growth. And this is where I want to get to
the point of, where the community college system can fit in. But then also the next
page we, you project out the ah, ah, general fund accounts and, and there's some signs
of encouragement but just for perspective, where were we four years ago on the general
fund revenues? Ah, so we're at 86 billion this past year, where were we in '08-'09 or
'07-'08? [JANUARY 2013 BOG DAY 2]00:31:37 MAC TAYLOR
We had about 100, 104 billion. [JANUARY 2013 BOG DAY 2]00:31:38 GEOFFREY
L. BAUM Yeah, so we're, we're still significantly
behind in and we don't get to those ah, those levels for another couple of years.
[JANUARY 2013 BOG DAY 2]00:31:46 MAC TAYLOR Right. Although again, I think it's a valid
point. That shows you again the depth of how much we fell. But remember, we've made other
major changes in our fiscal structure. Realignment in effect took about six, five, six billion
dollars off the table. It's no longer counted as general fund that we shifted to county.
So it's hard to do apples to apples. [JANUARY 2013 BOG DAY 2]00:32:05 GEOFFREY
L. BAUM Okay. I see what you're saying.
[JANUARY 2013 BOG DAY 2]00:32:07 MAC TAYLOR But the point is still fair. It was incredibly
deep recession and particularly in California. And you're right, we don't get back up to
there until probably, you know, the following year.
[JANUARY 2013 BOG DAY 2]00:32:16 GEOFFREY L. BAUM
Right. And so then where, where I sit, you've given us some good advice about to, to get
throughout the system about managing our budgets in the coming years due to the fluctuations.
But looking more globally statewide, where can the community college system from where
you sit also help be that engine of economic growth in California with the ah, kind of
the collapse obviously of manufacturing and ah, the defense industry and others. Ah, have
you, have you taken a look and do you see a role for the community colleges in helping
ah, maintain a more stable economic future for the state of California?
[JANUARY 2013 BOG DAY 2]00:32:54 MAC TAYLOR Well, yeah, I think that the community colleges
have a crucial role. And I think actions that this board has taken and the legislature's
taken on transfer and student success are excellent steps in the right direction. Um,
I think we haven't always focused our resources as wisely as we could. And I think some of
the actions that you've taken are trying to do that. To make sure that we're, we're, that
students are prepared to take the classes for which they're signing up. That they know
a pathway to get to where they want to get. That we offer the courses they need and the
time that they want to take them. So I think some of the actions and the, and the steps
that you've gone down in, in recent years are crucial in my view. And there's probably
more that we can do. And so I think we need to keep having that discussion of how do we
make sure that community colleges um, are taking care of, you know, kids that maybe
didn't do what they should have done in their first years in school. But also that you're
doing that transfer function. That you're doing that voc-ed function. Ah, I, I think
you have a crucial role. Ah, as far as the budget though, I think it's a little bit different.
It's almost a different answer. [JANUARY 2013 BOG DAY 2]00:34:03 GEOFFREY
L. BAUM Sure.
[JANUARY 2013 BOG DAY 2]00:34:03 MAC TAYLOR If you're asking well, how do we ensure some
sort of stability? Well, unfortunately you've kind of hitched your ride to a very volatile
wagon. That's called 98. And 98 is hitched to a very volatile revenue structure. So if
you're asking me what can the board do as far as, you know, providing some stability...
[JANUARY 2013 BOG DAY 2]00:34:21 GEOFFREY L. BAUM
I've actually been more thinking though, we're, we're going to certainly make the system more
efficient and we'll be able to manage the budgets accordingly. But our charge for the
system is how do we make California's economy continue to grow? Are we providing the skilled
training so that the, that we produce more laborers who are going to contribute to the
economic growth of the state? But that's a broader issue that ah, that because I'd like
to see these numbers continue to grow even if Prop 30 is not ah, renewed in such a way
so that the state's economy is growing because that we're providing the labor needs of the
businesses and other ah, employers that ah, will actually generate more revenue for the
state of California. That's all I... [JANUARY 2013 BOG DAY 2]00:35:08 DANNY HAWKINS
Member Izumi? [JANUARY 2013 BOG DAY 2]00:35:10 LANCE T.
IZUMI I want to ah, thank you very much ah, Mr.
(WORD?) said the analyst for presenting the report. It was very informative. Ah, I just
want to ah, get a little bit more specific about in terms of the economic modeling to
ah, you, you've mentioned that manufacturing isn't going to be the source of economic growth
in the future for California. And you did mention some of these other potential areas.
I mean, ah, I mean, ah, do those, the ec-economic forecasts say that there's going to be growth
in some of these, like agriculture or professional, technical services. I mean, is that, is that
what they're saying right now? And that's why there, we can, you know, then maybe growth
in revenue? [JANUARY 2013 BOG DAY 2]00:35:52 MAC TAYLOR
Well, again we do forecast and economic models do forecast by certain sectors. And again,
I don't want to suggest manufacturing's still not important. It's just that I think the
prospects for growth are not as great as, as in the past. Clearly one of the biggest
strengths in the economy has been in like professional and technical services. And that
includes, you know, our high-tech services. Um, and, and yet I think across the board
we just need to make sure and it gets to, I think, Mr. Baum's question about how do
we just make sure that people have the skills they need to find jobs. That California is
a good place to work. A good place for businesses to come.
[JANUARY 2013 BOG DAY 2]00:36:34 MAC TAYLOR (CONTINUED)
And if we're going to be a state, and I think we are, that values the quality of our resources,
our environment, we are going to be a strong regulatory state. Relative to others, some
employers are going to look at that as being a disadvantage and to overcome those disadvantages
of being both high land cost, high housing prices, big, large regulatory burdens on,
on businesses, we need to make sure that we can have a skilled workforce that makes employers
still want to be here. [JANUARY 2013 BOG DAY 2]00:37:06 MAC TAYLOR
(CONTINUED) And that's why I think your question, Mr.
Baum, it's I think again the community colleges have a crucial role along with the universities
in making sure that we have the type of people that employers need and want because we are
working, you know, kind of against the flow a little bit. Other states especially western
states have much lower tax burdens. Several have no income tax. They don't have the same
type of regulatory um, pressures that employers will face in this state. So we need to make
sure that we maintain those other advantages we have in addition to our climate and our
physical resources, our people. We need to make sure they have the skills that employers
need and want. And, and I think that's a crucial challenge for this body.
[JANUARY 2013 BOG DAY 2]00:37:57 DANNY HAWKINS Any other comments? Okay, well, Mr. Taylor,
Vice Chancellor, um, thank you very much for joining us this afternoon.
[JANUARY 2013 BOG DAY 2]00:38:10 MAC TAYLOR Thank you.
[JANUARY 2013 BOG DAY 2]00:38:11 DANNY HAWKINS Again, excellent.
[JANUARY 2013 BOG DAY 2]00:38:13 MAC TAYLOR Thank you.