The State Budget Outlook

The Legislative Analyst’s Office (LAO) has produced its annual budget outlook.* It projects what is sometimes called a “workload” budget – essentially what would happen next fiscal year (2021-22) – if tax and spending policies were to remain unchanged. LAO notes there is much uncertainty and as it projects beyond 2021-22, the range of possibilities is very wide.

Besides that notable bottom line, there is another: Despite fears of much more drastic outcomes for the state’s budgetary conditions due to the economic effects of the crisis, in fact revenues are stronger than expected and “welfare”-type expenditures are less. The LAO suggests that a “windfall” of $26 billion has resulted. Its calculation of the so-called windfall is not particularly helpful. 

To get a picture of the overall condition of the general fund, it is best to add up the various reserves related to the general fund, i.e., the balance in that fund and changes in the Budget Stabilization Account - BSA (“rainy day fund”) and another Safety Net Fund. Both of these are essentially legacies of former Governor Jerry Brown. You can then look at the change in total reserves from the start of a fiscal year (end of the previous year) to the end.

In the table below, I have rearranged the LAO’s figures to make that calculation.

End-of-Year Reserves/Within-Year Surpluses and Deficits**

($millions)

                                                   Workload

Fiscal Year        2018-19    2019-20    2020-21    2021-22

­-------------------------------------------------------------

General fund       $11,280     $5,550    $32,159    $29,523***

BSA                 13,996**   16,489      8,683     10,871

Safety Net             900        450        450        450

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Total Reserves      26,176     22,489     41,292     40,844

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Change in

Total reserve =

Surplus/deficit         ~~     -3,687    +18,803       -448

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**Estimate of BSA for end of 2018-19 from http://www.ebudget.ca.gov/2020-21/pdf/Enacted/BudgetSummary/BS_SCH1.pdf. Other data from LAO at https://lao.ca.gov/reports/2020/4297/fiscal-outlook-111820.pdf.

***Sum of SFEU and encumbrance.

What the table tells us is that in 2019-20 (Gov. Newsom’s first budget), the state ran a deficit of something under $4 billion. But in the crisis year, because the state erred on the side of caution fearing huge revenue declines, it is projected to run a surplus of something like $19 billion. And, if no policy changes occurred next fiscal year, the budget would be roughly balanced. It is again important to note the wide range of uncertainty entailed in these LAO projections.

As we have noted in other postings, these calculations are based on reserves associated with the state’s general fund only, but in fact the state has significant cash tucked away in many other funds outside the general fund. Thus, the kind of budget crisis faced by the state in the aftermath of the Great Recession of 2008 is very unlikely to occur in the foreseeable future. Budget aficionados will recall that in the summer of 2009, the state issued IOUs for some liabilities when it ran out of cash. We are in no way close to anything like that now.

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*https://lao.ca.gov/reports/2020/4297/fiscal-outlook-111820.pdf.