1) The document analyzes the 2016-2017 budget summaries from the State of California. It finds that while the state is claiming to have balanced its budget, this is likely temporary due to reliance on volatile income tax revenues. 2) A major reason for the balanced budget was paying down debt, including $1.3 billion in pension obligations. However, overall spending increased by 6% and education/housing spending are slated to rise further. 3) The governor acknowledges the budget will be difficult to balance long-term given past patterns of short surplus periods followed by large deficits. The document concludes another recession will likely cause a major debt crisis for California in the next decade.

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
California Dreaming: An Economic and Financial Analysis
on the 2016-2017
State of California Budget
Frank A. Cusumano
Hillsdale College ‘17

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
The news that I received about the State of California came to me as a complete surprise.
As many know, the State of California has never really been well known as a State with a
budget that doesn’t run into the red every year, and is often times referred to as an
example of an upside down Christmas tree in terms of its debt and financial obligations.
It was commonly known for years that the state has had extreme economic trouble in
several sectors, stemming from the large, long-term drought that has plagued the state in
more recent years, and the combination of the fallout from the 2007-2008 Great
Recession housing bust greatly multiplied the many issues already being encountered.
There has been a great exodus from California, with many people relocating to
neighboring states with lower cost of living, taxes, and economic freedom. However,
despite these large setbacks, the State has wished to remain optimistic the future of
California and has released summaries that mirror that opinion.
Many should ask “How can a state that has allegedly maintained all of their recent state
benefits and services been able to balance a ballooning budget with decreasing tax base?”
This analysis is based on the most recent 2016-2017 State of California budgets that are
openly available on the State website. The budget documents are from the State
summary, one is a May revision of the previous summary, and the final report is directly
from the Governor of California.
The main goal of this report is to draw conclusions of these financial documents, as well
as dive into some economic forecasting based on the future plans of the State of
California. Due to the complexity of financial documents, I wish to present factual
information as clearly as possible, and I will attempt, to the best of my abilities, to
translate the material without misinformation.
I hope that this report helps those who wish to understand how such a feat was possible
and to determine if the results are actual in their nature.
Frank Cusumano
Hillsdale College ‘17

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
The State of California states in their main budget intro that they are attempting to get the
debt burden down. The State had many issues during the Great Recession and took on
huge amounts of debt due to the economic turmoil. As a precaution, which is slightly
foreboding, the state is attempting to get a fund together to mitigate the large effects of
the next recession.
Overall, there are several points that are needed to be emphasized in the primary budget.
In the original budget given, hereby known as “Budget 1”, we will go through the major
points of the budget release.
A major issue of the budget is the amount of Projected Benefit Obligations, which are
also known as PBO’s. These entail the entirety of pension plans, retirement packages,
medical plans, among other things that were promised during employment on behalf of
the state. PBO’s are adjusted for the concept known as time value of money, which is the
assumption that a dollar given today is worth more than a dollar given in the future due to
things like inflation, prices for certain necessary products increasing, and the interest that
the dollar could have earned if it were invested over being held inactive. The limiting
factors on PBO’s are done by actuarial information, and are limited by the lifespan of the
employee, the retirement age, and whether or not there are survivor benefits.
As you can probably tell, the amount of work that goes into calculating these PBO’s is
massive, and the maintenance of pension plans and the funding thereof is very important.

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
As shown in this example, the State
of California outlines the amount of
Debt Liability that is already taken
on, and the attempted pay-down
that is occurring
The total debt reduction that
is shown for paying down the
PBO’s is about $1,300
million. This computes to
around a 5.57% reduction,
which is impressive at a government level. However, we must notice that loan
repayments make up 65.3% of the pay downs. The pension pay downs are only at State
and University of California levels. This is one of the main reasons that California was
able to balance out their budgets.
In order to make up the massive deficits that were made in the past, the State of
California logically has to make massive revenues as well as cuts. The governor states in
his revised budgetary plan that almost 69.5% of the state’s income revolves around
income taxes, of which are comparatively oppressive capital gains taxes. Due to the huge
surges in the market during the 2016 year, it is not surprising that the state is seeing huge
spikes in revenue. It should be said very clearly, however, that due to the possibility of
another upcoming recession these revenues should be seen as a temporary case.
Another issue that one may notice is that the State of California is still increasing expenditures.
As shown above in Figure 2 although there are drastic decreases in some of these departments,
overall there are increases in spending.

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
Government operation expenditures have actually increased from the two fiscal budgets
by 130.7%, with overall General fund expenditures increasing 6%.
The overall increases in spending, especially in departments such as education and
housing, show the current trends in overall California spending. California is proposing to
do further increases in the near future in both of these departments.
However, the most pressing issue is the much reported “budget balancing” that has hit the
media with multiple news sources stating that California is now a model for other states.
According to many sources, California has solved their financial difficulties and is on the
way to fixing their debt burdens. Yet, there is a different reality that is occurring to the
State of California. Despite what the data states, there are many issues that are hidden in
the State budget.
The Governor Jerry Brown states in his personal statement in his Governor’s Budget
Summary “that 69.5 percent of our General Fund revenues come from the volatile
personal income tax which, as history shows us, drops precipitously in time of recession”
(Governor’s Full Summary).

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
According to the Governor’s Budget summary, oftentimes the State of California has a
large budget deficit very soon after having a budget balance as shown in this quote:
“The fiscal stability from a balanced budget and a recovering state economy has
been a welcome reprieve from the prior decade’s budget deficits. Yet, maintaining a
balanced budget for the long term will be an ongoing challenge—requiring fiscal
restraint and prudence.As shown in Figure INT-01, since 2000, the state’s short periods
of balanced budgets have been followed by massive budget shortfalls. In fact, the sum of
all the deficits during this period is seven times greater than the sumof all the
surpluses.”
(Governor’s Budget Summary – pg. 8)
The main argument behind California’s budget surpluses is that the State will be able to
maintain this perpetually. On the other hand, even the governor mentions the historical
economic data as having that proposition to be quite impossible. The recommendation is
that one steer clear of major investments in the State of California, especially those of
short term nature due to the current economic climate being quite overdue for another
recessionary contraction.

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Figure INT-01: Page 2, Full Budget Summary 1
Figure SUM-02, Figure SUM-03: Page 9, Full Budget Summary 1
As figure INT-01 shows, the current budget surpluses are nothing really new, and
concurrent economic data shows the same trend. Very soon after having budget surpluses
and balanced budgets, the State of California has extremely deep deficits that tack on to
the already $400 billion in California State debt.
In conclusion, the state of California is for all intents and purposes celebrating the fact
that the storm clouds haven’t rained on the picnic yet. I would expect that a major debt
crisis will eventually occur in the next decade, ceteras parabas.