Friday, May 14, 2021

Initial Analysis of Governor's May Revise Budget Proposal

Governor Newsom presents the May Revise

The governor has presented his May Revise budget for the upcoming fiscal year 2021-22 that begins on July 1. Of course, the May Revise is a proposal to the legislature which must enact a budget by mid-June. You will read all kinds of news accounts with vague statements about "surpluses" without much definition. Example below:

$76 billion or $38 billion - and what do they mean by a surplus?

If we start with the simple notion that surplus means revenue minus expenditure (and deficit is the opposite), and if we forget the headlines, the budget becomes easier to understand. When people talk about "the budget," they typically refer to the general fund which you can think of as the state's checking account for operating activities. As with a checking account, at any point in time there is some money in the account as revenue flows in and spending flows out. If more goes out than goes in (deficit), the amount in the account will go down. If more comes in than goes out (surplus), the amount in the account will go up. 

Over the years, the state has also developed savings accounts apart from what is in the general fund. Some revenue is diverted into these savings accounts known as the Public School, Safety Net, and Budget Stabilization accounts. To get a full sense of what the trend is in the budget, you need to sum these accounts and the general fund reserve to see what is happening to the overall budget surplus or deficit. 

Below is a table that summarizes the basic numbers (all taken from the Dept. of Finance website):


Note: The July 1, 2020 estimates for the Safety Net and Budget Stabilization accounts are from the enacted budget estimates for 2020-21. The July 1, 2020 estimate for the Public School account is from the January 2020 estimate for 2020-21. All other data are from the May Revise. The figures are all at: 


As can be seen above, there is a surplus in the current year's budget of around $19 billion. In the next year, if the May Revise were enacted exactly as proposed, and if the underlying economic assumptions came true, we would run a deficit of something around $15 billion. So, the net of the two years is about +$5 billion. Total reserves at the end of the period (June 30, 2022) would be about 16% of expenditures. Still, there is a lot of revenue that may not be available in outer years as a number of reporters at the governor's news conference pointed out. As we have pointed out, from the narrow viewpoint of UC, this is the year to ask for "more."

So, what is the May Revise proposal for UC:

The last budget for UC that was enacted before the pandemic was 2019-20 (enacted in June 2019). The next budget for UC (and the state) was enacted in June 2020 when it was assumed the state would experience a major revenue decline (that turned out not to occur). And now we have the May Revise (which may be changed as the legislature works on the budget). If you add what the governor terms ongoing in the UC budget and what he terms "one-time," you get $3.9 billion in the first year (2019-20), $3.5 billion in the second, and $4.3 billion in the third. The drop between the second and first year was about 12%. The May Revise jumps by about 23% from the middle year. From the first to the third year, the net growth is 8.5% (although there is the revenue loss in the middle). So, UC is doing OK. The question is whether it might do still better.


You can see the May Revise news conference at: (News conference begins at minute 4:16.)

Note: The governor followed his standard practice of talking for about an hour and 25 minutes nonstop. Then he answered reporters' questions. There was then a brief Q&A with the budget director.

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