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Tuesday, January 10, 2017

A State Budget Overview

As blog readers will know, the state budget comes in steps. Under the state constitution, the governor must present a proposal in early January, which he did today, along with his budget director, Michael Cohen. The fiscal year in California begins each July 1. Hence, the January budget proposal involves a projection of revenue and expenditures over a period of almost a year and a half. 

Governor Brown has been pointing to a decrease in revenues for the current year (2016-17) compared to the projections made when the budget was put together last June. That observation underlies the budget.

Back when Arnold Schwarzenegger was governor, the state created what Governor Brown likes to call a rainy-day fund. But the Schwarzenegger-era rainy-day fund never amounted to much in practice. It was basically an account on paper only. Governor Brown – via initiative – created a formula system by which revenue would be taken off the top and diverted to the rainy-day fund. In addition, the legislature – if it desires (and is prodded by the governor) – can add money to the rainy-day fund beyond the formulas. In addition to the rainy-day fund, there was and is a reserve in the general fund – which is supposed to be kept positive, at least by the end of the fiscal year. So you can think of the state as having a checking account for ongoing expenses. Money flows in and out. And there is a balance in the account. The state also has a savings account (the rainy-day fund).

To get a sense of what is happening, you need to look at the sum of the two accounts. If the balance in the combination of the two accounts goes up in a fiscal year (more money comes in than goes out), that is termed – or should be termed – a surplus. If the opposite occurs and the combined balance falls during a fiscal year, that is termed – or should be termed - a deficit. (In practice, the state is often sloppy in what it terms surpluses and deficits, sometimes mixing up stocks and flows and sometimes combining years.)

OK. The table below summarizes the current budget and the proposed budget for next year. Keep in mind that even the current budget involves a forecast since over 5 months remain and projections of revenues and spending may change. Also, keep in mind that given the uncertainties of what Washington may do under President Trump, there could be big impacts on the state budget, especially the budget for 2017-18. The budget projections made so far do not reflect any assumptions about what may happen to federal policy.

$ Millions            2016-17    2017-18
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General Fund (GF)

Regular Balance
Beginning of Year      $5,023     $1,027 

Revenues &
Transfers            $118,765   $124,027 

Expenditures        -$122,761  -$122,520  

Surplus or
Deficit               -$3,996    +$1,507  

Regular Balance
End of Year            $1,027     $2,534
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Rainy-Day Fund

Balance at
Start of Year         $3,529      $6,713

Surplus or
Deficit              +$3,184     +$1,156

Balance at
End of Year           $6,713      $7,869
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Combination
of Both Funds

Balance at
Start of Year         $8,552      $7,740

Surplus or
Deficit                -$812     +$2,663

Balance at
End of Year           $7,740     $10,403
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So what do we learn from the table above? The General Fund this year ran a deficit and the Rainy-Day Fund ran a surplus that failed to offset it. The combination of the two thus produced a deficit of $812 million. If you go back to last June’s budget projections, we were supposed to run a combined surplus of $1,136 million. So there was a swing of almost $2 billion, a combination of less revenue than projected (mainly) and more spending than projected. If you compare total reserves projected for the end of 2017-18 with projected expenditures, the ratio is about 8.5%. A recession – if one came along – would burn through the reserves pretty quickly. You might get a year to adjust

What will the legislature do with this proposal? The legislative leaders might prefer to take a more optimistic view of projected revenues. But the process is that hearings will be held in in May the governor will release his "May Revise" proposal, which will incorporate more information on revenues, more information on what is going on in Washington, DC, and some political appraisal of what the legislature wants. 

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