From the Legislative Analyst's Office (LAO):
Gabriel Petek
Legislative Analyst
Given the persistent strength in state tax collections, it may come as a surprise that California’s General Fund likely faces a budget problem in the coming years. Yet this is the key takeaway from a recent fiscal analysis of 10,000 possible revenue scenarios conducted by our office. In 95 percent of our simulations, the state encountered a budget problem by 2025-26. Notably, the likelihood of a budget problem largely is impervious to the future trajectory of state tax revenues. That is, whether revenues trend upward or downward from here, the state likely faces budget deficits. The central implication of our findings is stark and suggests that in the interest of fiscal resilience, the Legislature should consider rejecting a substantial portion of the Governor’s January spending proposals.
How Can Strong Revenue Trends Present a Budget Risk?
In the brief associated with our analysis, we described how continued revenue growth could increase the state’s constitutional funding obligations enough to cause large recurring budget deficits. Having essentially reached the Proposition 4 (1979) state appropriations limit (SAL), each additional dollar of revenue must be allocated consistent with SAL requirements, generally making them unavailable to fund baseline expenditures. Additionally, the state also must continue to spend required amounts on schools and community colleges and reserve and debt payments, pursuant to Propositions 98 (1988) and 2 (2014), respectively. Together, we estimate that for every dollar of tax revenue above the SAL, the state faces approximately $1.60 in constitutional funding obligations. Based on our scenario analyses, if revenues exceed median expected growth, SAL requirements very plausibly could reach $20 billion to $45 billion by 2025-26. Counterintuitively, therefore, each additional dollar of revenue above the limit worsens the state’s budget outlook.*
Given This Conundrum, How Should the Legislature Consider Responding?
In our brief, we identified several short- and long-term options, with particular focus on the atypical budget risk stemming from upside revenue performance. In the near term, the most jarring of the options is probably the one most conducive to preserving state fiscal resilience.
We recommended that the Legislature consider rejecting the lion’s share of the Governor’s $10 billion in non-SAL-excludable budget proposals. Further, we note that rejecting the proposed spending alone—even in favor of SAL-excludable outlays—likely would be insufficient since constitutional obligations would accumulate faster than incoming revenue in future years. In addition, therefore, we suggest that the Legislature hold the unspent funds in reserve to help pay for the state’s anticipated SAL-related obligations. Longer term, state policymakers still likely will need to weigh fundamental questions about the size of state government and whether to seek a voter-approved amendment to Proposition 4...
Full story at https://lao.ca.gov/Publications/Report/4590.
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Whether the legislature will follow the above recommendations is unclear, since nothing terrible happens immediately. The governor's May Revise budget in an election year - even though the governor essentially has no viable rivals - seems unlikely to comply. If that is the political fiscal environment, UC would do well to get whatever it can now since it is always in the discretionary part of the budget. (The May Revise is scheduled to be unveiled on May 13th.)
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*Essentially, Prop 4 siphons off "excess" revenue and put it into rebates and other uses. But the revenue nonetheless drives spending obligations on K-14.
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