State Budget Outlook

The Legislative Analyst’s Office (LAO) has produced its annual November budget outlook publication.* Essentially, this publication looks at what is sometimes called a workload budget, what the California state budget would look like absent changes that could be enacted by the legislature. It ostensibly aims at telling the legislature what amount is available to spend above and beyond that budget.

There are two problems with this premise, especially in the current period of high reserves. First, the legislature could spend more or less than the LAO says, depending on its (the legislature’s) target for total reserves, or for total reserves relative to expenditures. So, there is no magic number “available” to be spent. There is a wide range of alternatives. (The LAO now says there is a $31 billion “surplus,” an amount equal to the projected reserves in the general fund at the end of fiscal year 2022-23. Even that is arbitrary because the reserves in the general fund are in fact higher – but an arbitrary amount is listed as an encumbrance which the LAO subtracts to get the $31 billion figure.)

Second, LAO continues the unfortunate practice of loose definitions of fiscal terms. It terms what it thinks is “available” as a “surplus” as noted above. In fact, a surplus (or deficit) is a flow concept: the difference between inflows and outflows. That difference is also equivalent to the change in reserves over the fiscal year. However, there are reserves associated with the general fund beyond what is in the general fund: the BSA (budget stabilization account) and the Safety Net. (There is also a Public School reserve which LAO chooses to omit, although the governor typically includes it.) You need to look at the combined growth or decline of total reserves to calculate the surplus or deficit.

It might be noted that the LAO projects state spending on UC to drop from about $4.7 billion this year to $4.3 billion next year on a workload basis, a decrease of about 8%. There will surely be resistance from UC and the Regents to that outcome. In addition, LAO notes that the increase in revenue we have been experiencing is bringing the budget into collision with what is sometimes referred to as the Gann Limit. That limit is based on a formula enacted by voters in 1979 (Prop 4) and subsequently modified by voters. When the limit is hit, taxes can be reduced and/or money diverted into certain specified purposes. Thus, the Gann Limit this coming budget cycle will make budgeting more complicated than in the past.

We have rearranged the LAO’s figures in the table below. As can be seen, in 2020-21, when it was assumed that the pandemic would drastically cut revenue, expenditures were cut substantially below the actual revenue that did arrive. The result was that total reserves rose by over $22 billion. Expenditures were substantially raised when it turned out that revenue did not fall in the following fiscal year, i.e., the current 2021-22 fiscal year. The current fiscal year is projected to show a small surplus of $1.8 billion (revenue > expenditures). LAO’s workload budget has total reserves rising by well over $9 billion next year. So, that amount would be the “surplus” if the legislature makes no changes. Of course, it will make changes. The Dept. of Finance and the governor are looking at figures like these and will undoubtedly produce another Good Times budget proposal in January 2022 for the legislature to consider for fiscal 2022-23.

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*https://lao.ca.gov/reports/2021/4472/fiscal-outlook-111721.pdf.

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