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Econ 240 C. Lecture 13. Part I. CA Budget Crisis. CA Budget Crisis. What is Happening to UC? UC Budget from the state General Fund. UC Budget. Econ 240A Lab Four New data for Fiscal Year 2003-04 Governor’s Budget Summary 2003-04 released January 2003 http://www.dof.ca.gov/.

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Econ 240 C


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    1. Econ 240 C Lecture 13

    2. Part I. CA Budget Crisis

    3. CA Budget Crisis • What is Happening to UC? • UC Budget from the state General Fund

    4. UC Budget • Econ 240A Lab Four • New data for Fiscal Year 2003-04 • Governor’s Budget Summary 2003-04 • released January 2003 • http://www.dof.ca.gov/

    5. UC Budget, 1968-69 through 2003-04 4000 3500 3000 2500 Millions $ 2000 1500 1000 500 0 68-69 70-71 72-73 74-75 76-77 78-79 80-81 82-83 84-85 86-87 88-89 90-91 92-93 94-95 96-97 98-99 00-01 02-03 Fiscal Year

    6. CA Budget Crisis • What is happening to the CA economy? • CA personal income

    7. CA Budget Crisis • How is UC faring relative to the CA economy?

    8. UC Budget Vs. CA Personal Income, 1968-69 through 2003-04 4 3.5 3 2.5 UC Budget, $B 2 1.5 1 0.5 0 0 200 400 600 800 1000 1200 1400 CA Personal Income, $B

    9. CA Budget Crisis • What is happening to CA state Government? • General Fund Expenditures?

    10. CA Budget Crisis • How is CA state government General Fund expenditure faring relative to the CA economy?

    11. CA Size of Government Vs. CA Economy, 1968-69 through 2003-04 90 80 70 60 CA General Fund Expenditure $B 50 40 30 20 10 0 0 200 400 600 800 1000 1200 1400 CA Personal Income $ B

    12. Long Run Pattern Analysis • Make use of definitions: • UCBudget = (UCBudget/CA Gen Fnd Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc • UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

    13. What has happened to UC’s Share of CA General Fund Expenditures? • UC Budget Share = (UC Budget/CA Gen Fnd Exp)

    14. CA Budget Crisis • Estimate of UC’s Budget Share for 2003-04: 4.25 % or 4.85% • will the legislature lower UC’s share?

    15. What has happened to the size of California Government Expenditure Relative to Personal Income? • Relative Size of CA Government = (CA Gen Fnd Exp/CA Pers Inc)

    16. California Political History • Proposition 13 • approximately 2/3 of CA voters passed Prop. 13 on June 6, 1978 reducing property tax and shifting fiscal responsibility from the local to state level • Gann Inititiative (Prop 4) • In November 1979, the Gann initiative was passed by the voters, limit real per capita egovernment expenditures

    17. CA Budget Crisis • Estimate of the relative size of the CA government: 6.75% vs. 5.35 %?

    18. CA Budget Crisis: Pattern Estimate of UCBudget • UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc • Midpoint estimate: • UC Budget = 0.0455*.0605*1176.4 $B =$ 3.24 B estimate • Governor’s proposal in January: $ 3.04 B • So, $ 3.24 B is probably too optimistic

    19. Econometric Estimates • Linear Trend Estimate • UCBUD(t) = a + b*t +e(t) • about same as Governor’s January proposed $ 3.04 B • Lucky?

    20. Econometric Estimates • Logarithmic (exponential trend) • lnUCBUD = a + b*t +e(t) • simple exponential trend will over-estimate UC Budget

    21. Econometric Estimate • Dependence of UC Budget on CA Personal Income • UCBUD(t) = a + b*CAPY(t) + e(t) • looks like a linear dependence on income will overestimate the UC Budget for 2003-04

    22. Econometric Estimates • How about a log-log relationship • lnUCBUD(t) = a + b*lnCAPY(t) + e(t) • autocorrelated residual • fitted lnUCBUD(2003-04) = 1.18630 • $3.27 B • actual (Governor’s Proposal) = 1.11142 • $3.04B

    23. Econometric Estimates • Try a distributed lag Model of lnUCBUD(t) on lnCAPY(t) • clearly lnUCBUD(t) is trended (evolutionary) so difference to get fractional changes in UC Budget • likewise, need to difference the log of personal income

    24. Estimate ARONE Model for dlncapy(t) • Orthogonalize dlncapy and save residual • need to do transform dlnucbud • dlnucbud(t) = h(Z)*dlncapy(y) + resid(t) • dlncapy(t) = 0.732*dlncapy(t-1) + N(t) • [1 - 0.732Z]*dlnucbud(t) = h(Z)* [1 - 0.732Z]*dlncapy(t) + [1 - 0.732Z]*resid(t) • i.e. w(t) = h(Z)*N(t) + residw(t)

    25. Orthogonal residuals from ARONE Model for dlncapy

    26. Distributed Lag Model • Having saved resid as res[N(t)] from ARONE model for dlncapy • and having correspondingly transformed dlnucbud to w • cross-correlate w and res

    27. Distributed lag model • There is contemporary correlation and maybe something at lag one • specify dlnucbud(t) = h0 *dlncapy(t) + h1 *dlncapy(t-1) + resid(t)

    28. Dlnucbud c dlncapy dlncapy(-1)

    29. Try a dummy for 1992-93, the last recession, this is the once and for all decline in UCBudget mentioned by Granfield • There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem • Look at the same regression in differences