The 2023-24 Budget

The Administration’s SAL Estimates

Introduction

In recent years, the state appropriations limit (SAL) has placed considerable limitations on how the Legislature can use revenues that exceed a specific threshold. Mainly due to lower revenues, the SAL is less likely to be a significant constraint in this year’s budget process. Nonetheless, given the importance of the SAL in recent years, this post provides a brief summary of the administration’s SAL-related estimates under the Governor’s budget. (For background information on how the SAL works and its impact on recent budgets see our reports: The State Appropriations Limit and The 2022-23 Budget: State Appropriations Limit Implications.)

State Has $7 Billion in Room Across 2020-21 and 2021-22

Figure 1 shows the administration’s SAL estimates for 2020-21 and 2021-22. The estimate for 2020-21 is final as of the June 2022 budget, meaning there will be no further revisions to those figures. The $17 billion in “negative room” is fixed. The estimate for 2021-22 is current from the Governor’s budget and will be updated again for the final budget act. Under the Governor’s budget, 2021-22 would end with $24 billion in room. (As we described in this report, this room reflects a number of actions taken by the Legislature in last year’s budget to reduce appropriations subject to the limit.) This means that, across the two years, the state would have net room of nearly $7 billion, meaning further actions (such as taxpayer rebates) would not be required.

Budget Has Room in 2021-22, 2022-23, and 2023-24

Figure 2 shows the administration’s SAL estimates for the budget window: 2021-22, 2022-23, and 2023-24. As the figure shows, the state is expected to have room in every year of the budget window, including $14 billion in room in 2022-23 and $15 billion in 2023-24.

Lower Revenues Would Result in More Room (but Also Larger Budget Problem). Our recent estimates suggest there is an 80 percent chance that revenues will be lower than Governor’s budget projections in 2022-23. Lower revenues in 2022-23 also likely would mean lower revenue projections for 2023-24. If future estimates of revenues are lower, there will be even more room under the limit in these two years. (However, lower revenues also results in a larger budget problem than currently projected by the administration.)

Feasible to Address the Larger Budget Problem by Reducing SAL Exclusions. The Governor’s budget identifies one possible set of budget solutions, largely focusing on spending reductions. Some of these spending reductions include excluded spending, largely in the form of capital outlay. A larger budget problem would necessitate identifying additional budget solutions, such as spending reductions. One concern is whether or not the state can reduce additional excluded spending in order to address the budget problem without incurring a SAL requirement. The administration’s estimates suggest the Legislature could reduce some additional excluded spending in 2022-23 or 2023-24. In order to avoid a SAL requirement that would contribute to an even larger budget problem, we advise maintaining at least several billion dollars in room in each year. However, the Legislature does have the flexibility to identify its own set of solutions, as well as address a possibly larger budget problem, by reducing excluded spending without additional SAL requirements.

Conclusion

In a 2022 report, we noted that, over the long term, the Legislature faces a fundamental trade-off regarding SAL. Specifically, while the state might have more room in years when revenue growth is lower than historical averages—such as this year—over the long term, we expect the state to continue to reach the limit. We still expect this long-term dynamic will hold. In fact, under our estimates of the Governor’s budget revenue projections, room under the limit would decline to nearly zero in the coming years. As such, we continue to expect the SAL to be a long-term budget consideration for the Legislature.