The Governor's Budget Proposal

Governor Newsom unveiled his budget proposal for fiscal year 2022-23 which begins this coming July 1. As usual, the governor conducted a marathon news conference presenting the budget which he essentially memorizes. He was on camera for about two hours and fifty minutes (!) before turning the podium over to his budget director. That was, I think, a record, even by Newsom standards.

What was not unusual was the fuzzy budget language used to describe the budget. As the image shows, he describes the budget as "balanced." If you take "balanced" in its common English usage of inflows (revenues) equal outflows, the budget is not balanced. It is in deficit.

Nonetheless, he describes the budget as being in "surplus" when - as noted - it is in deficit. He spends little time on the UC component. But it might be noted that UC gets a cut from what it received this current fiscal year.

All of that said, the state can run an imbalanced and deficit budget and yet not be in bad shape for two reasons.

First, the prior governor Jerry Brown left a relatively large reserve as a legacy when he left office in early 2019. Second, when the pandemic hit, it was assumed that the accompanying economic downturn would slash state revenues and thus budget expenditures were suppressed. However, it turned out that the downturn did not have the negative effect on revenues that it had on the general economy. The combined effect of having revenue substantially above projections in fiscal 2020-21 and suppressed expenditures pushed up reserves. In effect those built-up reserves are now available - at least for a time - to be spent. So we can have an unbalanced deficit budget (falling reserves) without a problem. Of course, reserves cannot fall forever without some corrective action. But for now, the governor can fund various new programs and enhance old ones.

I will come back to UC below. But let's first look at what is being projected and proposed, as summarized in the table above.

The state's day-to-day activities are financed by the General Fund. Generally, when you hear about surpluses and deficit, it is in the general fund. There are many funds outside the General Fund which are earmarked for special purposes. The most notable involved transportation, funded by the gas tax and other motor vehicle fees.

If you look at the table above, you will see that reserves related to the General Fund are split among various accounts. The General Fund has a balance, analogous to the balance in your checking account. But revenues can also be diverted from the General Fund and put into various associated savings accounts. These include the Budget Stabilization Account - sometimes referred to as the "rainy day" fund - the Public School Account, and the Safety Net Account. These accounts can be summed with the General Fund balance to determine the total reserves of the state. If total reserves rise, it must be because inflows are greater than outflows, i.e., a surplus. If total reserves fall, it must be because outflows are greater than inflows, i.e., a deficit.

Total reserves by the end of the current year are estimated to rise to $50.5 billion, up from $28.3 billion that was projected when the current year's budget was enacted last summer. If the governor's projections and plans work out exactly as proposed, by the end next year, reserves will decline by $12.8 billion (a deficit of that amount next year), but still be $37.7 billion, more than we had at the beginning of this year.

Why the big jump in projected reserves this year? Both revenues and expenditures rose above originally-projected levels, but the latter more than the former so the General Fund balance increased relative to projections. The Public School and Budget Stabilization Accounts also rose relative to original estimates.  

That's the Big Picture. Now the usual process of legislative hearings will begin.

What about UC? The table below shows what is proposed by the governor for UC:

Back in 2020-21, when slashed revenues were anticipated (but did not occur), UC got about $3.5 billion from the state. When the outlook improved in the following year, the state provided a big jump in revenue to UC, about $4.8 billion. But for the coming year, the state's allocation for UC will fall (during a period of inflation) to $4.6 billion. 

The governor makes much of a distinction between "ongoing" allocations and "one-time" allocations. In fact, a dollar is a dollar. As the image above shows, the chart produced by the governor mixes apples and oranges and then sums them. The $308 million is the change in what he terms "ongoing" allocations. But the $295 million is the absolute amount allocated for "one-time" uses. Summing them makes no sense.

Surely, the Regents will (should?) be pushing for more from the legislature over the next few months.

The next time we will hear from the governor will be in mid-May for the "May Revise" proposal. At that point, the legislature will enact something that typically is close to the May Revise numbers but which may adjust the details.