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Thursday, May 14, 2020

The Grim May Revise

Our previous post looked just at the UC component of the governor’s May Revise proposal. Below we look at the overall state budget. The budget is based on an economic projection that assumes that while calendar 2020 will be “bad” a relatively rapid recovery occurs thereafter so that after a couple of years we will be back to some kind of normal. 

Of course, there is much uncertainty about the macro outlook with some forecasters predicting a relatively robust snapback and others a prolonged slog. Much depends on the vagaries of the coronavirus and the timing of a vaccine. The state’s Legislative Analyst’s Office (LAO) will most likely come up with its own analysis, possibly with a different underlying forecast. It’s not known at this point where the LAO stands on the snapback vs. prolonged slog spectrum.

In any case, below I will present an overview of the May Revise budget proposal:  ($millions)

                  2019-20         2020-21     Surplus/Deficit
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General
Fund
Reserve
End of June       $11,280          $1,619

Revenue &
Transfers         136,836         137,417**

Expenditures      146,497         133,901

General
Fund
Surplus/
Deficit            -9,661          +3,516

General
Fund
Reserve
Beginning
of July             1,619           5,135           +3,516

Safety Net
Reserve               900             450             -450

Rainy-Day
Fund (BSA)         16,156           8,350           -7,806

Prop 98
Reserve*              524               0             -524

Total
Reserves           19,199          13,935           -5,264
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*Mentioned in governor’s oral presentation but not reported in the budget document.
**Includes transfer of $7,806 million from rainy day fund and possibly close to another $1 billion from the other reserves. Treatment of transfers from other funds is unclear from the budget document. In fact, there is an increase in the “other” revenue category of about $10 billion which is not defined but is probably a reflection of the CARES Act federal funding.

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Budget director Keely Bosler
The table above tells you some things but hides others. Spending is cut next year relative to this year by about 9%. But relative to what was forecast for this year back in January, the cut is around 11%. The overall deficit in the general fund (the decline in all reserves combined) is about $5 billion, assuming the legislature enacts those cuts. Revenue is way down. Compared to what was forecast for this year back in January, revenue from taxes (not counting what comes in from the feds or the pulling down of reserves) for next year declines by about a fifth.***

Whatever the happens, you can expect push-back from the legislature. There have already been suggestions from the legislature for plans that appear to involve a kind of borrowing from future taxes. The governor made vague reference to legislative proposals in his presentation.

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***Revenue for the general fund from taxes back in January for this year was forecast to be about $148 billion. For next year, it is about $118 billion. (I have removed “other” from projected revenue in both cases to focus on taxes.) While the Dept. of Finance projects the personal income and sales taxes to be down next year compared to what was projected back in January for this year, mysteriously, the corporate tax is expected to be up. Is this some kind of Amazon, streaming services, windfall the state hopes to get? There is some language in the document indicating the proposal suspends certain tax benefits for larger firms, presumably explaining the projected corporate tax rise. The January proposal/projections can be found at http://www.ebudget.ca.gov/2020-21/pdf/BudgetSummary/SummaryCharts.pdf.

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You can see the May Revise presentation at:
https://archive.org/details/newsom-5-1-20/newsom+5-14-20.mp4

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