The Budget as Seen by LAO

Usually in November, the Legislative Analyst's Office (LAO) produces a budget outlook presentation. Essentially, LAO assumes that there are no changes in basic fiscal policy (taxes, spending) and looks at what would happen in the next fiscal year. Note that the governor, under the state constitution, must produce a budget proposal for that year in January.

This year, however, the publication was delayed due to the fact that revenues from last year, which usually could be reasonably estimated by now, were obscured by a delay for most Californians in the due date for income taxes. So the budget outlook was released this week. You have probably seen the scary headlines about the "deficit."

As we have noted umpteen times on this blog, California-speak for fiscal affairs uses such words as "surplus" and "deficit" differently from their common English usage. Most people think of a deficit in a budget as a gap between spending and revenues (mainly taxes). So yours truly has rearranged the budget numbers from LAO to correspond to that usage.

Typically, when we talk about surpluses and deficits, we are talking about the state's General Fund which can be thought of as its checking account from which ongoing expenditures are drawn and to which tax revenue is deposited. However, in the California case, we have savings accounts associated with the General Fund. One is the Budget Stabilization Account (BSA) popularly known as the rainy day fund. Another account is the Safety Net Reserve. There is also an account for the public schools which LAO doesn't include in its analysis but the governor and his Dept. of Finance typically do.

What will happen if the balance in the General Fund is drawn into negative territory is that there will be transfers from the savings accounts to keep the General Fund positive. What the LAO is telling us in the table above is that such transfers will be needed along with other adjustments.

When we look at last fiscal year (July 2022 to June 2023), with revenues from its first half (the second half of calendar 2022) are now largely in, it appears that substantially less revenue came in that originally anticipated to the tune of around $53 billion - last year's deficit in common English. There were reserves around to handle the drawing down (thank you, Jerry Brown!). But in the current year we have a continued drawing down of over $32 billion and there isn't enough in the bank to deal with that deficit. Next year, yet more drawing down of about $29 billion will occur. In short, absent changes in policy either to cut spending relative to current policy, or bring in more revenue relative to current policy, there will be a budget problem. Clearly, resolving that problem could involve UC's piece of the state budget.

The state is sitting on a lot of cash - we should get an estimate from the state controller for November by next week. Some of that cash is outside the general fund and its associated savings accounts, but is available for internal borrowing.

We will know in January what the governor proposes. Of course, what he proposes is not the same as what eventually will be enacted by the legislature by June 2024.

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The table above is drawn from https://lao.ca.gov/reports/2023/4819/2024-25-Fiscal-Outlook-120723.pdf. The BSA balance from last year is from https://ebudget.ca.gov/2023-24/pdf/Enacted/BudgetSummary/SummaryCharts.pdf.