Understanding Uncertainty About the State Budget

Budgeting is both a plan and a forecast. As a plan, the state budget expresses a set of priorities. But revenues, and to some extent spending, are forecasts about what will happen during the course of a fiscal year that has not yet occurred.

As noted in prior posts, forecasting is difficult, especially now. The UCLA Anderson Forecast, as we have reported, has been providing two scenarios: one with a recession and one without.

State budgeting at this time of year normally takes place with a pretty good idea of revenue collections for the year that is ending. This time around, however, the date income taxes are due for most Californians has been pushed back to October due to wildfires. So, actual cash receipts from that tax - with a large dollop normally due in April - have been delayed. The incentives, particularly with higher interest rates, are for those who expect to have a tax liability in April to delay payment. For those due refunds, of course, the incentives are to file early.

In addition, revenue from capital gains in the stock market is likely down, as the market has reacted to the increased interest rates of the Federal Reserve and to other developments. As the table below shows, based on cash receipts through May, last June when the current fiscal year's budget was enacted, state revenues were expected to be about $180 billion for the first eleven months of the year. But by the time of the May Revise proposal, the projection had dropped to $146 billion, about what actually has come in. Note that even the projection from last June was below the actual level for the prior year (2021-22), as state forecasters projected a slowdown. 

Instead of originally-forecast receipts from all taxes of $42 billion last April, we received $13 billion.

In past episodes, when state cash receipts dropped dramatically, the state has had to go into external financial markets to borrow by floating revenue anticipation notes (RANs). But this time, the state is sitting on a mountain of cash in its regular reserves for the general fund and in other funds. So, it can handle the drop in receipts by internal borrowing. There is certainly no crisis. But what receipts that were normally due in April will be is when they finally arrive is unknown, and is a complicating factor in the ongoing budget negotiations between the governor and state legislative leaders (all Democrats). The legislature has enacted an interim placeholder budget, as we have noted in prior posts, to meet constitutional deadlines. But we await an agreement between the negotiators which will largely emerge before July 1 and then - in more detail - over the summer.