State Budget Overview

Governor Newsom presented his budget for 2021-22, the fiscal year that begins this July 1. Some analysis of the general outline of the budget is found below. Keep in mind that there is a long way to go between now and July. A budget is based on an economic forecast and there is considerable uncertainty about the near-term economy, given its dependence in part on the ongoing coronavirus crisis. The governor got considerable questioning on the pace of vaccine rollout. 

Higher education at UC was only briefly mentioned. The governor said he did not favor a tuition increase at this time. More on that below.

As in past budget presentations, the governor was loquacious, reeling off numbers, etc., for an extended period of well over two hours (after which he turned the meeting over to his budget director). As is always the case with budget discussions, words such as balance, surplus, and deficit were used with uncertain and flexible definitions.

The presentation below uses consistent terminology. Surplus (deficit) means that more (less) revenue is expected to come in than is proposed to be spent. Surpluses and deficits are flow concepts that occur over time, a fiscal year in this case. Reserves are stocks at a particular point in time, typically the beginning and end of the fiscal year. The governor noted in passing that it appears the budget might hit the "Gann limit," a limit enacted by voters decades ago and later modified which puts a ceiling on revenue and requires refunds to taxpayers if it is hit. Such an event last occurred in the late 1980s. If the limit were to be hit, the net effect would be somewhat less revenue available than projected.

$ millions	2020-21	2021-22
-----------------------------	---------	--------
Start GF reserve	5359	12203
Revenue & transfers	162742	158370
Expenditures	155898	164515
End GF reserve	12203	6058
Surplus/deficit	6844	-6145
Start Safety Net reserve	900	450
End Safety Net reserve	450	450
Surplus/deficit	-450	0
Start BSA (rainy day)	16116	12536
End BSA (rainy day)	12536	15574
Surplus/deficit	-3580	3038
Start Public School reserve	524	747
End Public School reserve	747	2988
Surplus/deficit	223	2241
Start all reserves	22899	25936
End all reserves	25936	25070
Surplus/deficit	3037	-866

Note: The starting BSA figure for 2020-21 comes from the enacted budget for 2020-21. The starting Public School reserve for 2020-21 comes from the January 2020 budget proposal. Reserves fall from about 17% of spending at the end of this year to about 15% at the end of next fiscal year. Spending rises by 5.5% from this fiscal year to the next (well above anticipated inflation rate).

The table above focuses on the general fund (GF). As it turned out, although at the time the budget was enacted the economic outlook looked grim, when you look at all of the reserves connected with the general fund, the state is now projected to run a budget surplus of about $3 billion during the current fiscal year. There are four reserves related to the general fund because of voter enactments and other processes. There is a basic reserve of the general fund, a Safety Net reserve, a rainy day fund (Budget Stabilization Act, BSA, reserve), and a Public School reserve. Although money may be transferred around, the net effect of more revenue coming in than going out is to make reserves grow by that net amount. The net effect of less revenue coming in than going out is to make reserves fall by that net amount. The table above sums all of the reserves to come up with the bottom line surplus or deficit. For the upcoming fiscal year, a small deficit is projected of under $1 billion. An amount of $1 billion may seem like a lot of money, but in overall budget forecasts it is in the noise range.

The surplus for the current year was achieved partly with federal support but also because the recovery has been stronger than projected and because conservative estimates were made when the budget was enacted, which held down spending. In addition, we experienced a "K-shaped recovery" with more affluent individuals (who account for much of income tax receipts) less affected by the downturn than lower-income folks. It is quite likely that the legislature, when it starts on the budget, will push for more spending, given these past and projected results.

When it comes to the UC budget, the governor in his presentation blended UC and CSU together and was more focused on other programs. But the budget document he presented does break out UC. The governor tends to divvy up allocations to UC into "ongoing" vs. "one-time." The distinction is essentially meaningless; a dollar is a dollar. So when you add the two categories together, you find that in 2019-20 (the fiscal year before the pandemic), UC got $3.9 billion in general fund revenue from the state. During this current year, that amount was cut to $3.5 billion. Next year the governor proposes $3.8 billion, i.e., less than a year ago (and, as noted above, no tuition increase). These figures are in nominal terms with no adjustment for inflation. We will see what the legislature does.

The budget proposal can be found at http://www.ebudget.ca.gov/FullBudgetSummary.pdf.

You can see the governor's presentation at https://archive.org/details/newsom-1-4-21/newsom+1-8-21+budget.mp4. (The presentation starts at minute 8:25.)