States like California that are flush with cash from unexpected revenues and have federal stimulus money coming will have some hard decisions to make.
Analysts and government organizations are cautioning state and local lawmakers to establish a concrete plan and advising against creating new programs with one-time money.
“The difference between public finance entities wasting versus maximizing this opportunity could be as simple as having a plan with measurable goal markers,” said Tom Kozlik, head of strategy and credit at Hilltop Securities.
California Assemblymember Phil Ting, D-San Francisco, who chairs the Assembly’s budget committee, is mindful of the significance of the moment. And he's not ready to limit California to one-time plans.
After California Gov. Gavin Newsom announced Monday what he called a $75.7 billion budget surplus, in addition to $26 billion expected from the federal government’s America Rescue Plan Act of 2021, Ting said the surplus will enable lawmakers to create a budget “that will build not just the California of next year, but for the next 100 years.”
Ting said in an interview Wednesday that he was thinking specifically of university and K-12 capital projects, but he also supports a tenet in the Assembly Democrat’s budget blueprint, which is being re-crafted to incorporate ARP money, that would expand Medi-Cal, the state’s healthcare program for low income residents, to undocumented immigrants.
He frames the expansion of Medi-Cal, a long-term spending commitment, as not being in conflict with advice against spending one-time money on ongoing programs. He says the Legislative Analyst’s Office, which provides non-partisan budget and economic advice to lawmakers, has indicated that the state will have the revenues to support an expanded baseline budget.
In the long run expanding Medi-Cal will save the state money in reduced healthcare costs, because residents will be healthier, Ting said.
“There are a number of other areas we can invest in,” Ting said. “This is a great opportunity as we come out of COVID to not just recover, but to lay the foundation for the future.”
For instance, Newsom has proposed $8 billion for programs to combat homelessness, but the Legislature has proposed a $20 billion plan, he said.
The governor
After Newsom formally releases the entirety of his changes at the end of this week, the Legislature will have until June 15 approve a budget.
While the LAO urged judiciousness, its analysts also told state lawmakers that the state’s baseline budget could safely be $183 billion, a $30 billion structural increase from current spending, Ting said. He noted that the budget had been hovering around $140 billion for the last couple years, and then was cut to $138 billion in fiscal 2021, but is proposed at $150 billion for the upcoming fiscal year.
Ting deferred to the LAO’s office on whether the $30 billion increased baseline represents growth in the California economy. LAO analyst Ann Hollingshead, who concentrates on the state’s budget and economy, couldn’t immediately be reached for comment.
Legislative Analyst Gabriel Petek is among those cautioning that the state take its time in crafting a plan on how best to deploy the money.
“Given the significant direct assistance already provided by the federal government to individuals, businesses, and local governments, we recommend the Legislature take time to develop a plan for the allocation of fiscal recovery funds,” Petek wrote in a May 4 fiscal perspective. “Importantly, we note there is no requirement for the state to allocate all of its recovery funds as part of this year’s budget process.”
Under the ARP, the state has until the end of 2024 to spend the aid money, which gives the Legislature some time to define its vision for how to use a portion of the funds to address long-standing challenges, Petek wrote.
A measured response would also enable California to consider how the state’s plan would interact with the Biden administration’s infrastructure proposal, Petek said.
“I am looking forward to hearing President Joe Biden’s infrastructure plan, which could be more robust than former President Barack Obama’s because President Biden won’t have to try to push the agenda through a Republican Congress,” Ting said.
One reason for the caution around spending — and why Kozlik thinks the federal government is giving states until 2024 to spend the money — is that many unknowns remain about what the post-pandemic world will look like.
“One of the things I am trying to figure out is what a return to work will look like,” Kozlik said.
If office workers continue to work from home, it could affect property taxes from office buildings, or sales tax from sandwich shops that close because their customers don't work nearby anymore, he said.
New Jersey, another state that has benefited from the so-called K-shaped recovery, where relatively high earning employees have done well, is also set to have a record-breaking surplus of $6.4 billion in fiscal 2021.
That compares to last fall when the state was anticipating a shortfall of $10 billion, Michael Kanef, director of New Jersey’s Office of Public Finance, said Wednesday during a panel at the National Federation of Municipal Officers online national conference.
“In New Jersey, because the tax code is progressive and individuals below a certain threshold pay less taxes, the hardship they have felt has not affected the state’s income tax,” Kanef said.
Unlike California, New Jersey has struggled financially for the past several years.
“There is a joint effort by the Legislature and the Administration to figure out how to apply the ARP funds to individuals and businesses in the state that have been impacted,” Kanef said. “It is also a high priority to try to use the funds to improve the state’s fiscal condition.”
The Treasury’s 151-page guidance released Tuesday on how state, local and tribal governments can use their share of the $350 billion of ARP funds prohibits putting the funds toward pension contributions to reduce unfunded liabilities, to fund tax cuts, bolster reserve funds or repay principal and interest on government debt. It can be used to fund water, sewer and broadband, but not general infrastructure.
Though the document included some questions that could be fleshed out in some areas later, Emily Brock, director of the Government Finance Officer Association’s Federal Liaison Center, said Treasury was pretty clear in saying the money could not be used to bolster reserves or pay down debt.
Treasury wants the money spent on items that “directly impact citizens,” Brock said.
“They can’t use it to build up rainy day funds, but there are things in other categories disrupted by COVID-19 you can spend the money on,” Brock said.
Though some cities and state are feeling hamstrung by Treasury’s
California has enough in its general fund that it won’t be hamstrung by federal aid restrictions, Ting said.
“We don’t have to worry about being boxed in by the federal government, because state general fund money can go to reserves,” Ting said. “We are fortunate to be in this fiscal situation.”
That is not the case for Chicago and Illinois,
“I was surprised to see in Treasury’s guidance that the money cannot be used to redeem debt,” Kanef said. “We will have to see how that develops, because that is something that is on the table for us.”
