March madness is ending with revenues flowing into state coffers at a good pace. Based on preliminary estimates through March 28, tax receipts from California’s three major revenue sources have totaled $5.8 billion, exceeding estimates for the total month by over $100 million. This will represent the close for the month because of the upcoming weekend and the Cesar Chavez State Holiday on Monday. The March number could be revised significantly when released on Tuesday after any corrections are made and auditing is completed. Looking at the fiscal year-to-date, numbers through March show that total revenues are ahead of Budget projections by about $1.3 billion or 2.2%. This is a nice margin to have if it lasts.
Budget projections are difficult to make. Keep in mind that current projections contained in the Governor’s new budget presented early this year were based on actual data that was already available for about half the fiscal year. When the focus shifts to Fiscal Year 2014-15, with the release of the May Revision of the Budget, revenue numbers will solely reflect projections.
How precise are General Fund revenue estimates? Given the range of variables that affect revenues—including the economy, the weather, and changes in federal law or taxpayer behavior—the estimating error can easily rise. One study found that if the estimators could control for variations in the economy, the estimating error would hover around 5.0 percent. The consequences for this built-in error rate can have a big effect on budget planning, deficits, and the health of the General Fund.
By way of comparison, the 2013 American League batting champion, Miguel Cabrera, got on base 1.7 percent more often than did the National League’s champion, Michael Cuddyer. If budget projections could be limited to just that much difference between estimates and actuals, even then the revenue swing would be nearly $2 billion. A $2 billion “windfall” is a happy, healthy gain. A $2 billion “shortfall” can have immediate and long-term consequences to many programs supported by the General Fund.