California Gov. Gavin Newsom will begin work on next year’s budget with a $31 billion surplus in hand and
This represents a fundamental shift from the years when Gov. Jerry Brown was in office and each budget reveal involved Brown displaying posters urging continued spending controls over fears the state could return to the red in out years.
The state’s reserves are so robust that the 1979 Gann Limit, which forces the state to return money to taxpayers or spend it on education or infrastructure if it hits a surplus ceiling, could come into play, said Legislative Analyst Gabriel Petek during a Wednesday press conference.
The Gann Limit prohibits the state from spending more tax dollars per Californian than it did in 1978, once adjusted for inflation, but allows for spending above that limit in certain areas. That could represent a windfall for taxpayers and schools, though the dated law has sowed some confusion among lawmakers as how best to interpret it.
Based on having a $31 billion surplus, an estimated $14 billion of it would have to go to those categories, according to the LAO's report.
“This year is a little different in that we are taking a look at how does the state appropriation limit affect the Legislature’s appropriation choices,” Petek said. “The Gann Limit will likely be a major consideration in the upcoming budget process.”
During a separate press conference at the Port of Los Angeles Wednesday, Newsom said that he plans to continue the path of fiscal prudence even with the windfall.
He pointed to how the state handled last year's
"We had the largest tax rebate of any state in U.S. history — $12 billion," he said. "We paid down an unprecedented amount — committed, over a three-year period, $11.3 billion to pay down pension obligations. We used money for grant programs for small businesses. We doubled our earned income tax credit, expanded supports and services like child care and addressed the social safety net. I think that's the approach — fiscally disciplined, recognizing it's not a permanent state, recognizing the one-time nature of most of these dollars and continuing to bank dollars in a disciplined manner."
He added that he doesn't know whether the state will be in the position of handing out further tax rebates in the upcoming budget. But he does plan to put money toward repairing and building the state's infrastructure.
"We will look forward in January to announcing our approach," Newsom said. "I am very proud of the historic tax rebate last year and I look forward to making the decision which I think is in the best interest of 40 million Californians in January — with the support, critical support of our legislative leaders."
The state has $222 billion of revenues for the current fiscal year and a surplus of $31 billion, Petek said.
The rosy forecast means the state has the capacity to handle new and ongoing commitments, because the multi-year outlook is also indicating there will be surpluses of $3 billion to $8 billion annually, Petek said. It will, however, depend on whether future revenues hit performance expectations, he said.
For the 12-month period ending 2021, revenues grew by 31%, the fastest they have grown in the last three decades, Petek said.
And this time, capital gains from the stock market, and therefore income taxes paid by high-income residents, are not the only factor, he said.
“It’s fairly broad-based strength across the state’s revenue base,” Petek said. “We do assume these trends will moderate.”
“The higher income folks are still a big part of the story,” said Brian Uhler, a deputy legislative analyst. “There’s the fact the stock market has doubled, though it kind of hit bottom in the spring, and investments in tech start-ups. Those are similar stories as in past years, and those have intensified. What makes it more broad-based is that retail spending has grown by double digits this year.”
The increase in retail spending is partly “a reflection of the federal and state stimulus checks that were sent out,” Petek said. “It probably helps that people across income distributions have a bit more buying power than they normally would.”
