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
4000
3500
3000
Millions $
2500
2000
1500
1000
500
0
Fiscal Year
6
CA Budget Crisis

What is happening to the CA economy?
• CA personal income
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
5
86
-8
7
88
-8
9
90
-9
1
92
-9
3
94
-9
5
96
-9
7
98
-9
9
00
-0
1
02
-0
3
Billions $
California Personal Income in Billions
1400
1200
1000
800
600
400
200
0
Fiscal Year
8
CA Budget Crisis

How is UC faring relative to the CA
economy?
UC Budget Vs. CA Personal Income, 1968-69 through 2003-04
4
3.5
UC Budget, $B
3
2.5
2
1.5
1
0.5
0
0
200
400
600
800
CA Personal Income, $B
1000
1200
1400
10
CA Budget Crisis

What is happening to CA state
Government?
• General Fund Expenditures?
CA State Government General Fund Expenditures
90000
80000
70000
50000
40000
30000
20000
10000
0
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
5
86
-8
7
88
-8
9
90
-9
1
92
-9
3
94
-9
5
96
-9
7
98
-9
9
00
-0
1
02
-0
3
Millions $
60000
Fiscal Year
12
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
CA General Fund Expenditure $B
90
80
70
60
50
40
30
20
10
0
0
200
400
600
800
CA Personal Income $ B
1000
1200
1400
14
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
What has happened to UC’s
Share of CA General Fund
Expenditures?

15
UC Budget Share = (UC Budget/CA Gen
Fnd Exp)
UC's Share of the California General Fund Budget
8.00%
7.00%
6.00%
4.00%
3.00%
2.00%
1.00%
0.00%
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
5
86
-8
7
88
-8
9
90
-9
1
92
-9
3
94
-9
5
96
-9
7
98
-9
9
00
-0
1
02
-0
3
Percent
5.00%
Fiscal Year
17
CA Budget Crisis

Estimate of UC’s Budget Share for 200304: 4.25 % or 4.85%
• will the legislature lower UC’s share?
What has happened to the size18of
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
8.00%
7.00%
6.00%
4.00%
3.00%
2.00%
1.00%
0.00%
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
5
86
-8
7
88
-8
9
90
-9
1
92
-9
3
94
-9
5
96
-9
7
98
-9
9
00
-0
1
02
-0
3
Percent
5.00%
Fiscal Year
20
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?
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
5
86
-8
7
88
-8
9
90
-9
1
92
-9
3
94
-9
5
96
-9
7
98
-9
9
00
-0
1
02
-0
3
Millions $
UC Budget
4000
3500
3000
2500
2000
1500
1000
500
0
Fiscal Year
25
Econometric Estimates



Logarithmic (exponential trend)
lnUCBUD = a + b*t +e(t)
simple exponential trend will over-estimate
UC Budget
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
5
86
-8
7
88
-8
9
90
-9
1
92
-9
3
94
-9
5
96
-9
7
98
-9
9
00
-0
1
02
-0
3
Millions $
UC Budget
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Fiscal Year
27
28
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 200304
UC Budget Vs. CA Personal Income, 1967-68 through 2003-04
4
3.5
UC Budget, $B
3
2.5
2
1.5
1
0.5
0
0
200
400
600
800
CA Personal Income, $B
1000
1200
1400
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
31
32
33
34
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
35
36
37
38
39
40
41
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
Orthogonal residuals from ARONE Model for dlncapy 43
44
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
45
46
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)
47
Dlnucbud c dlncapy dlncapy(-1)
48
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
50
51
52
53
54
Distributed lag Model


dlnucbud(t) = h0 *dlncapy(t) + h1
*dlncapy(t-1) + dummy (1992-93) + resid(t)
SER = 0.0459
55
56
Fitted fractional change in UC Budget is 0.0102 versus57
Governor’s proposal of -0.0477
Correlogram of the residuals
ducbud c dlncapy dlncapy(-1) dummy
58
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)
SER = 0.0567
60
Residuals from dlnucbud c dlncapy(-1) dummy
61
62
Distributed Lag Model


Try modeling the residual with an ar(7)
Try modeling the residual with an ma(7)
SER = 0.0537
63
SER = 0.0474
64
Correlogram of residuals from dlnucbud c dlncapy(-1) 65
dummy ma(7)
Fitted fractional change in UC Budget is -0.0159 versus
66
Governor’s proposal of -0.0477
Conclusions



67
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
lnucbud
0.5
0
-0.5
-1
Fitted through 91-92
lnucbud
-1.5
Fiscal Year
dlucbud c dlncapy(-1) dummy for 1992-93 dummy2 69
for 2003-04 ma(7)
dlnucbud c dlncapy dummy for 1992-93 dummy2
for 2003-04
70