1. Econ 240 C Lecture 13

2. 2 Part I. CA Budget Crisis

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

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

5. UC Budget, 1968-69 through 2003-04 0 500 1000 1500 2000 2500 3000 3500 4000 68-6970-7172-7374-7576-7778-7980-8182-8384-8586-8788-8990-9192-9394-9596-9798-9900-0102-03 Fiscal Year Millions $

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

8. 8 CA Budget Crisis w How is UC faring relative to the CA economy?

9. UC Budget Vs. CA Personal Income, 1968-69 through 2003-04 0 0.5 1 1.5 2 2.5 3 3.5 4 0200400600800100012001400 CA Personal Income, $B UC Budget, $B

10. 10 CA Budget Crisis w What is happening to CA state Government? General Fund Expenditures?

12. 12 CA Budget Crisis w How is CA state government General Fund expenditure faring relative to the CA economy?

13. CA Size of Government Vs. CA Economy, 1968-69 through 2003-04 0 10 20 30 40 50 60 70 80 90 0200400600800100012001400 CA Personal Income $ B CA General Fund Expenditure $B

14. 14 Long Run Pattern Analysis w Make use of definitions: w UCBudget = (UCBudget/CA Gen Fnd Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

15. 15 What has happened to UC’s Share of CA General Fund Expenditures? w UC Budget Share = (UC Budget/CA Gen Fnd Exp)

17. 17 CA Budget Crisis w Estimate of UC’s Budget Share for 2003- 04: 4.25 % or 4.85% will the legislature lower UC’s share?

18. 18 What has happened to the size of California Government Expenditure Relative to Personal Income? w Relative Size of CA Government = (CA Gen Fnd Exp/CA Pers Inc)

20. 20 California Political History w 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 w Gann Inititiative (Prop 4) In November 1979, the Gann initiative was passed by the voters, limit real per capita egovernment expenditures

21. 21 CA Budget Crisis w Estimate of the relative size of the CA government: 6.75% vs. 5.35 %?

22. 22 CA Budget Crisis: Pattern Estimate of UCBudget w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc w Midpoint estimate: w UC Budget = 0.0455*.0605*1176.4 $B =$ 3.24 B estimate w Governor’s proposal in January: $ 3.04 B w So, $ 3.24 B is probably too optimistic

23. 23 Econometric Estimates w Linear Trend Estimate w UCBUD(t) = a + b*t +e(t) about same as Governor’s January proposed $ 3.04 B Lucky?

25. 25 Econometric Estimates w Logarithmic (exponential trend) w lnUCBUD = a + b*t +e(t) w simple exponential trend will over-estimate UC Budget

27. 27

28. 28 Econometric Estimate w Dependence of UC Budget on CA Personal Income w UCBUD(t) = a + b*CAPY(t) + e(t) w looks like a linear dependence on income will overestimate the UC Budget for 2003- 04

30. 30 Econometric Estimates w How about a log-log relationship w lnUCBUD(t) = a + b*lnCAPY(t) + e(t) w autocorrelated residual w fitted lnUCBUD(2003-04) = 1.18630 $3.27 B w actual (Governor’s Proposal) = 1.11142 $3.04B

31. 31

32. 32

33. 33

34. 34 Econometric Estimates w 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

35. 35

36. 36

37. 37

38. 38

39. 39

40. 40

41. 41 Estimate ARONE Model for dlncapy(t) w Orthogonalize dlncapy and save residual w need to do transform dlnucbud w dlnucbud(t) = h(Z)*dlncapy(y) + resid(t) w dlncapy(t) = 0.732*dlncapy(t-1) + N(t) w [1 - 0.732Z]*dlnucbud(t) = h(Z)* [1 - 0.732Z]*dlncapy(t) + [1 - 0.732Z]*resid(t) w i.e. w(t) = h(Z)*N(t) + residw(t)

42. 42

43. 43Orthogonal residuals from ARONE Model for dlncapy

44. 44 Distributed Lag Model w Having saved resid as res[N(t)] from ARONE model for dlncapy w and having correspondingly transformed dlnucbud to w w cross-correlate w and res

45. 45

46. 46 Distributed lag model w There is contemporary correlation and maybe something at lag one w specify dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + resid(t)

47. 47

48. 48 Dlnucbud c dlncapy dlncapy(-1)

49. 49 w Try a dummy for 1992-93, the last recession, this is the once and for all decline in UCBudget mentioned by Granfield w There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem w Look at the same regression in differences

50. 50

51. 51

52. 52

53. 53

54. 54 Distributed lag Model w dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + dummy (1992-93) + resid(t) w

55. 55 SER = 0.0459

56. 56

57. 57Fitted fractional change in UC Budget is 0.0102 versus Governor’s proposal of -0.0477

58. 58 Correlogram of the residuals ducbud c dlncapy dlncapy(-1) dummy

59. 59 Distributed lag Model w Modify the specification; drop dlncapy(t) to get a forecasting model w dlnucbud(t) = h 1 *dlncapy(t-1) + dummy (1992-93) + resid(t)

60. 60 SER = 0.0567

61. 61 Residuals from dlnucbud c dlncapy(-1) dummy

62. 62 Distributed Lag Model w Try modeling the residual with an ar(7) w Try modeling the residual with an ma(7)

63. 63 SER = 0.0537

64. 64 SER = 0.0474

65. 65Correlogram of residuals from dlnucbud c dlncapy(-1) dummy ma(7)

66. 66 Fitted fractional change in UC Budget is -0.0159 versus Governor’s proposal of -0.0477

67. 67 Conclusions w Governors proposed cut in UC Budget of 4.8% is greater than expected from various models w The UC Budget growth path ratcheted down in the recession beginning July 1990 w The UC Budget growth path may be ratcheting down again in the recession beginning March 2001 it may be too early to tell

68. Fitted through 91-92 lnucbud

69. 69 dlucbud c dlncapy(-1) dummy for 1992-93 dummy2 for 2003-04 ma(7)

70. 70 dlnucbud c dlncapy dummy for 1992-93 dummy2 for 2003-04