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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/. - PowerPoint PPT Presentation
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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/
UC Budget, 1968-69 through 2003-04
0
500
1000
1500
2000
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3000
3500
4000
68-6
9
70-7
1
72-7
3
74-7
5
76-7
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78-7
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80-8
1
82-8
3
84-8
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86-8
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88-8
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90-9
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92-9
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94-9
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96-9
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98-9
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00-0
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02-0
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Fiscal Year
Mill
ion
s $
6
CA Budget Crisis
What is happening to the CA economy?• CA personal income
California Personal Income in Billions
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68-6
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Fiscal Year
Bill
ion
s $
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CA Budget Crisis
How is UC faring relative to the CA economy?
UC Budget Vs. CA Personal Income, 1968-69 through 2003-04
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0.5
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1.5
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2.5
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3.5
4
0 200 400 600 800 1000 1200 1400
CA Personal Income, $B
UC
Bu
dg
et,
$B
10
CA Budget Crisis
What is happening to CA state Government?• General Fund Expenditures?
CA State Government General Fund Expenditures
0
10000
20000
30000
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50000
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90000
68-6
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Fiscal Year
Mill
ion
s $
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CA Budget Crisis
How is CA state government General Fund expenditure faring relative to the CA economy?
CA Size of Government Vs. CA Economy, 1968-69 through 2003-04
0
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90
0 200 400 600 800 1000 1200 1400
CA Personal Income $ B
CA
Gen
eral
Fu
nd
Exp
end
itu
re $
B
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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
15What has happened to UC’s Share of CA General Fund
Expenditures? UC Budget Share = (UC Budget/CA Gen
Fnd Exp)
UC's Share of the California General Fund Budget
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
68-6
9
70-7
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72-7
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74-7
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76-7
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78-7
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80-8
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00-0
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Fiscal Year
Per
cen
t
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CA Budget Crisis
Estimate of UC’s Budget Share for 2003-04: 4.25 % or 4.85%• will the legislature lower UC’s share?
18What 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)
The Size of California Government Relative to the Economy
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
68-6
9
70-7
1
72-7
3
74-7
5
76-7
7
78-7
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80-8
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90-9
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Fiscal Year
Per
cen
t
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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
21
CA Budget Crisis
Estimate of the relative size of the CA government: 6.75% vs. 5.35 %?
22
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
23
Econometric Estimates
Linear Trend Estimate UCBUD(t) = a + b*t +e(t)
• about same as Governor’s January proposed $ 3.04 B
• Lucky?
UC Budget
0
500
1000
1500
2000
2500
3000
3500
4000
68-6
9
70-7
1
72-7
3
74-7
5
76-7
7
78-7
9
80-8
1
82-8
3
84-8
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00-0
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02-0
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Fiscal Year
Mil
lio
ns
$
25
Econometric Estimates
Logarithmic (exponential trend) lnUCBUD = a + b*t +e(t) simple exponential trend will over-estimate
UC Budget
UC Budget
0
500
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68-6
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70-7
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Fiscal Year
Mil
lio
ns
$
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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
UC Budget Vs. CA Personal Income, 1967-68 through 2003-04
0
0.5
1
1.5
2
2.5
3
3.5
4
0 200 400 600 800 1000 1200 1400
CA Personal Income, $B
UC
Bu
dg
et,
$B
30
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
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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
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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)
42
43Orthogonal residuals from ARONE Model for dlncapy
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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
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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)
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48Dlnucbud c dlncapy dlncapy(-1)
49
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
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Distributed lag Model
dlnucbud(t) = h0 *dlncapy(t) + h1
*dlncapy(t-1) + dummy (1992-93) + resid(t)
55SER = 0.0459
56
57Fitted fractional change in UC Budget is 0.0102 versusGovernor’s proposal of -0.0477
58Correlogram of the residuals ducbud c dlncapy dlncapy(-1) dummy
59
Distributed lag Model
Modify the specification; drop dlncapy(t) to get a forecasting model
dlnucbud(t) = h1 *dlncapy(t-1) + dummy (1992-93) + resid(t)
60SER = 0.0567
61Residuals from dlnucbud c dlncapy(-1) dummy
62
Distributed Lag Model
Try modeling the residual with an ar(7) Try modeling the residual with an ma(7)
63SER = 0.0537
64SER = 0.0474
65Correlogram of residuals from dlnucbud c dlncapy(-1) dummy ma(7)
66Fitted fractional change in UC Budget is -0.0159 versusGovernor’s proposal of -0.0477
67
Conclusions Governors proposed cut in UC Budget of
4.8% is greater than expected from various models
The UC Budget growth path ratcheted down in the recession beginning July 1990
The UC Budget growth path may be ratcheting down again in the recession beginning March 2001 • it may be too early to tell
Logarithm of UC Budget, Changes in Growth Paths
-1.5
-1
-0.5
0
0.5
1
1.5
68-6
9
70-7
1
72-7
3
74-7
5
76-7
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78-7
9
80-8
1
82-8
3
84-8
5
86-8
7
88-8
9
90-9
1
92-9
3
94-9
5
96-9
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98-9
9
00-0
1
02-0
3
Fiscal Year
lnu
cbu
d
Fitted through 91-92
lnucbud
69dlucbud c dlncapy(-1) dummy for 1992-93 dummy2for 2003-04 ma(7)
70dlnucbud c dlncapy dummy for 1992-93 dummy2for 2003-04
