Gov.-elect Gavin Newsom will craft California's next budget with the help of a $14.5 billion surplus.
“It is difficult to overstate how good the budget’s condition is today,” Mac Taylor, the state’s legislative analyst, wrote in the
As Jerry Brown reaches the end of his term, pundits have been weighing whether Newsom will continue Brown's tight rein on spending with the coffers overflowing.
The state’s constitutional reserve would reach $14.5 billion by the end of 2019-20 and the Legislature will have an additional $14.8 billion in resources to allocate in the 2019-20 budget process, according to the LAO’s estimates of revenue and spending.
Though Newsom does not officially take the reins until January, H.D. Palmer, a Department of Finance spokesman, said “all of the fundamental policy decisions for the January budget will be made by the governor-elect and his team.”
Rating agencies and the Legislative Analyst’s Office in its report have warned that the state could easily eat through this surplus in a downturn. The state’s dependence on capital gains from high-net-worth residents has introduced volatility in its revenue structure and tied the state’s fortune to the stock markets.
“Eight years of strong budget management simultaneous with a growing economy, a booming stock market, and for six years, a tax increase on the state’s high-income taxpayers have dramatically improved California’s budget position,” S&P Analysts Gabriel Petek and David Hitchcock wrote in an August report.
But the state’s tendency to experience fiscal volatility means budget management plays a particularly important role in its credit profile, S&P analysts wrote.
“The current administration’s consistent emphasis on structural budget alignment has been integral to the state’s fiscal recovery,” analysts wrote. “But as the governor’s term in office enters its final months, a continuation of the current administration’s approach to budget management is not ensured.”
The state’s resilience to more stressful economic conditions — and its prospects for a higher rating — depend on the recent structural orientation to its fiscal policy enduring through the transition to a new administration,” S&P analysts wrote.
S&P rates California AA-minus with a stable outlook.
The state’s budget condition can change quickly, according to the LAO report.
The LAO report noted that in 2001-02, the state had a $10.3 billion surplus, but when the dot-com bust hit, state revenues fell and the following year the state had a $12.4 billion deficit.
The state would have enough reserves to cover its deficits if a recession hits in 2020-21, but that assumes the Legislature makes no new commitments, such as spending increases or tax reductions in 2019-20, according to the report. If the state maintains reserves, rather than increasing spending, the state would hit a total reserve level of $30 billion by the end of 2019-20.
State revenues missed the forecast for October by $803 million, but still came in ahead of forecasts by $214 million for the first four months of the fiscal year, according to the Department of Finance’s monthly report.
“The timing of the nearly $1.5 million in receipts lowered the month’s total and will be reflected in the next month’s bulletin,” Palmer said.
